Taiwan Funeral Group to Expand With Designer Urns, Body Spa

Taiwan Funeral Group to Expand With Designer Urns, Body Spa

Top Singapore firms see margins crimped Profit growth lags surge in revenue amid talent crunch and higher rents

PUBLISHED JANUARY 24, 2014

Top Singapore firms see margins crimped

Profit growth lags surge in revenue amid talent crunch and higher rents

JAMIE LEE LEEJAMIE@SPH.COM.SG

Amit Sujan, CEO of IT firm Itcan Pte Ltd, said that while costs have been increasing across most developed markets such as Singapore, he is seeing high local-staff turnover, and a general shortage of labour – PHOTO: SPH

How the profit margins compare

[SINGAPORE] Higher costs are gnawing away at the profit margins of the top 1,000 companies based in Singapore, fresh figures from DP Information Group yesterday indicated – a further suggestion that the tightening of foreign-labour inflows has not yet translated into higher productivity.

With an ongoing push to make foreign labour more expensive, a talent crunch, and higher rent costs, the growth in profit is lagging the surge in turnover, according to data from this year’s Singapore-1000 list, which ranks Singapore-based companies in order of their sales.

The total revenue of Singapore’s top 1,000 firms for the period between June 1, 2012, and May 31, 2013, rose 13.9 per cent over the year to $2.75 trillion. But combined profits for these firms were up just 2.1 per cent to $150 billion, compared to the same period a year ago.

The healthier bottom line was effectively lifted by strong performances in the services sector, given that eight of 11 main sectors in Singapore registered lower combined earnings.

Profits in the services sector jumped 62.6 per cent to $11.5 billion in this year’s ranking. This was driven mostly by the healthcare sector, which has taken advantage of the pressing needs of a “silver generation” in Singapore, and the demands of affluent patients from the region, said Chen Yew Nah, managing director of DP Information, at a press briefing yesterday.

Overall profit margin for the Singapore-1000 companies ranked this year fell to 5.09 per cent, down from 5.78 per cent a year ago.

The margin pressures have also been felt among smaller firms, as shown in the ranking for the top 1,000 SMEs (small and medium enterprises) this year. While combined revenue rose 5.5 per cent for the period to $31.1 billion over the year, overall profit was up just 1.5 per cent to $3.4 billion compared to the same period a year ago.

These figures come as the government tries to wean companies off a dependence on foreign labour. Since 2010, the government has raised, and revised, foreign-worker levies. It has also put out stricter foreign-worker quotas.

But in a KPMG survey released this week, about 45 per cent of polled companies saw manpower costs increasing at a faster clip than productivity gains.

Companies in the IT sector have been particularly hit, with profit margins nearly halved to 8 per cent, data from DP Information showed.

Amit Sujan, CEO of IT firm Itcan Pte Ltd, said that while costs have been increasing across most developed markets such as Singapore, he is seeing high local-staff turnover, and a general shortage of labour.

“In the last one year, I’ve been declining at least $1 million worth of work every month. Straightaway, we tell the clients: We do not have people,” he said, adding that these lost clients are hiring IT firms in Hong Kong and Malaysia, instead.

Singapore-based companies still have a strong credit standing overall, though the growth in the number of companies rated DP1 – a rating that reflects a default probability of less than 0.1 per cent – has eased for the first time in the post-crisis period. The proportion of DP1 companies has been on the rise since 2008, but it came down to 19.8 per cent (or 198 companies out of 1,000) this year, from 20.9 per cent in 2013.

About three quarters of the Singapore-1000 companies have investment-grade ratings this year, though the exact percentage of 75.9 per cent has also come off slightly from 76.6 per cent a year ago.

Head of commercial banking at ANZ Banking Group, Ng Wee Lee, said Singapore companies are still operating in a liquid environment. But she cautioned that some companies may be hesitant in hedging against the likelihood of higher interest rates, with the tapering of quantitative easing.

“Because we’ve enjoyed a low interest rate environment, people might have taken it for granted,” said Ms Ng, adding that some companies might be looking to pass on some of the borrowing costs to clients instead. Companies could consider locking in loans at fixed rates for the next two to three years, and watch for currency risks, she said.

Rigor and risk in India central bank reform push

Rigor and risk in India central bank reform push

Wed, Jan 22 2014

By Tony Munroe and Suvashree Dey

Choudhury

MUMBAI (Reuters) – The biggest overhaul of India’s monetary policy in 15 years aims to tackle the nagging inflation that pushes up credit costs and stifles investment, but the changes risk imperiling already weak economic growth in the absence of broader reforms.

A central bank panel recommended sweeping changes to how the central bank runs policy, including setting a long-term inflation target of 4 percent, with wiggle room of 2 percent in either direction.

Critics say the ideas would bring a western-style rigor to an economy with emerging market problems; supply bottlenecks, unpredictable monsoon rains and politically sensitive subsidy spending that drives up food prices.

Monetary decisions would be set by a committee – they are now made by the governor – putting the Reserve Bank of India (RBI) in line with the practice at most major central banks.

The arrangement, described by Standard Chartered Bank in India as “one of the most important steps” in at least the last 15 years, may not suit India, some argue.

“I think we need to have a strong decision-maker at this stage given the peculiarities of the macro-economic situation,” said Abheek Barua, chief economist at HDFC Bank.

“And I think this kind of aping of some of the western central banks does us no good. There are huge constraints on the supply side,” he said.

One of the biggest sources of inflation pressure in India is a bottleneck in food production and distribution. One-third of fresh food perishes before it reaches shops and unpredictable weather often adds to supply pressures. That helps explain why consumer prices are rising around 10 percent over year-earlier levels.

“Inflation targeting is done in countries which have more stable kind of pricing,” Economic Affairs Secretary Arvind Mayaram said in an interview with the ETNow TV channel.

Government incentives to grow rice and wheat as part of a subsidized food program for the poor also keep prices high. Another cost pressure is widespread pilfering in government food schemes.

Reducing 10 percent consumer inflation to 4 percent would require politically difficult moves to curtail food prices that have been rising by double-digits for years.

“Even if inflation is higher, it does not mean that people will start eating less just because the interest rates are higher,” Mayaram said.

“There are other structural issues that need to be addressed if we need to control food inflation,” the official said, adding that the panel’s proposal to use consumer prices to anchor inflation was “a little premature”.

The current CPI measure was launched in 2012.

SHORT-TERM PAIN

While switching to the CPI as the key inflation measure would put the RBI in sync with most central banks, it would also mean current policy interest rates of 7.75 percent would likely remain high, a prospect that pushed up government bond yields by 10 basis points on Wednesday.

“These recommendations clearly carry hawkish implications,” wrote Credit Suisse economist Robert Prior-Wandesforde.

Under the recommendations of the panel, set up by RBI Governor Raghuram Rajan, managing inflation would be made the primary policy goal of the RBI, ahead of growth and financial stability.

While some of the recommendations announced Tuesday would need legislative approval, most could be implemented by the central bank.

Rajan, a high-profile former chief economist at the International Monetary Fund who took office on September 4 in the midst of a currency crisis, has in the past spoken in favour of setting monetary policy by committee and establishing an inflation target using the CPI.

READY OR NOT?

The government of Prime Minister Manmohan Singh has struggled to implement reforms or remove bureaucratic hurdles that would attract investment to ease the country’s inherent inflation pressures.

A 2012 decision to allow entry to foreign supermarkets, intended to reduce widespread wastage due to a lack of facilities such as refrigeration, has generated little interest because of stiff local sourcing requirements. The UK’s Tesco Plc (TSCO.L: Quote, Profile, Research, Stock Buzz) recently became the first such chain to invest, albeit with a relatively modest $110 million commitment.

Singh’s government has been paralyzed by corruption scandals that have stifled reform efforts. It faces an election by May, the outcome of which is uncertain.

“The question is whether there is political support for bringing down inflation. If the new government undertakes reforms to reduce subsidies and bring down food inflation, the headline CPI inflation can come down fast,” said A. Prasanna, economist at ICICI Securities Primary Dealership.

The RBI’s current mixed mandate of managing inflation, economic growth and financial stability all in one gives it flexibility but has also led to often-shifting priorities. Critics say that has stifled growth – Asia’s third-largest economy is expanding at its slowest pace in a decade – without bringing inflation under control.

“It’s a big positive for India’s macro policy framework if they can get this implemented, because it will basically help I think better anchor monetary policy by establishing a clear objective,” said HSBC economist Leif Eskesen, echoing the sentiments of many economists.

The challenge is fitting rigid inflation management into an often-messy political reality.

Rajan’s predecessor at the RBI, Duvvuri Subbarao, repeatedly called on New Delhi to implement reforms to ease investment rules, clear infrastructure bottlenecks and cut government subsidies, but with little success.

The new policy set-up would raise the stakes for the government to act – a tall order, especially if another fragmented coalition emerges from the upcoming elections.

Indian governments have tended towards promoting growth and putting pressure on the central bank to keep monetary policy loose. The Mumbai-based RBI is not technically independent – the governor and his deputies are appointed by the government – although it generally enjoys latitude in policymaking.

Setting a CPI target of 4 percent over the long-term would remove some of the discretion in policymaking and at the same time strengthen the central bank’s independence by insulating it from pressures from New Delhi.

Argentina Devaluation Sends Currency Tumbling Most in 12 Years

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Gundlach Counting Rotting Homes Makes Subprime Bear: Mortgages

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Korea Craft Beers Get Boost in Challenge to $1.3 Billion Duopoly

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Hard-to-Sell Junk Debt Lures Oaktree to JPMorgan: Credit Markets

Hard-to-Sell Junk Debt Lures Oaktree to JPMorgan: Credit Markets

American Vitality Depends on Whether You Believe Harvard or Yale

American Vitality Depends on Whether You Believe Harvard or Yale

Merger Bonanza Hits Finland as Economic Pain Becomes Asset

Merger Bonanza Hits Finland as Economic Pain Becomes Asset

Finland, reeling from a slump in its two main industries, is finding that a weak economy has turned a number of its businesses into attractive acquisition targets.

Competitors from the U.S., Sweden, the U.K. and Japan are circling in to snap up cheap assets in the northernmost euro nation, including a $1.56 billion takeover offer for steelmaker Rautaruukki Oyj (RTRKS) by Sweden’s SSAB. The risk of job cuts brought by the deals is worth it for an economy in need of transformation, according to Mika Maliranta, research director at the Research Institute of the Finnish Economy ETLA.

It’s “an essential part of economic growth in the long term,” Maliranta said. “This is how the economy becomes profitable and competitive, again producing the prerequisites for the creation of new jobs.”

The export-led economy, which has suffered two recessions in four years, is reeling from a structural shift in its main industries — paper makers and the Nokia Oyj-led technology cluster. In September, Microsoft Corp. announced a deal to buy Nokia’s mobile-phone unit after it succumbed to competition in smartphones. Ship-engine maker Waertsilae said this month it ended takeover talks initiated by Rolls-Royce Holdings Plc.

Finance Minister Jutta Urpilainen has warned that the nation faces “historic” challenges as its biggest industries suffer. Prime Minister Jyrki Katainen said last week his government can’t afford stimulus measures as he targets policies designed to bring about an export-based recovery.

Depressed Economy

Finland is in a “depressed” state, Nobel Laureate Paul Krugman said this month during a Nordic tour, blaming the Katainen administration for peddling austerity that has undermined demand. The nation is one of eight in the 18-member euro area that saw its economy contract in both 2012 and 2013, according to the European Commission. The economy will grow 0.8 percent this year and 1.8 percent in 2015, the Finance Ministry forecasts.

The government, which in November hammered out details on a 9 billion-euro ($12.2 billion) plan comprising structural measures to tackle costs from an aging population, welcomed the purchase of Rautaruukki.

“This arrangement ensures production continues in Finland,” Labor Minister Lauri Ihalainen said in a statement. Rautaruukki would have faced a “rocky path,” had it continued independently, he said.

Job Cuts

SSAB offered to buy Rautaruukki for 10.1 billion kronor ($1.56 billion) to cut costs amid falling steel prices and over capacity. The company will be based in Stockholm and target annual cost savings of 1.4 billion kronor within three years.

The companies said they will need to cut about 5 percent of the combined 17,400 jobs over three years. That comes on top of at least 25,000 job cuts by Nokia as it struggled to regain profitability after losing the smartphone battle to Apple Inc. and devices using Google Inc.’s Android platform.

Nokia today reported a loss of 25 million euros in the fourth quarter, compared with a profit of 193 million euros a year earlier, as sales at its network-equipment division fell.

Finland is at least half a decade behind Spain and Portugal in matching pay with productivity as it drops behind southern Europe in boosting exports, ETLA said in August.

Shutting Units

Unemployment rate was 7.9 percent in December, up 1 percentage point from a year earlier, and 137,000 people didn’t even seek work actively last month.

Still, some politicians say it’s far from clear Finland will benefit from the takeover.

The new company is more likely to shut small units and cut jobs in Finland than in Sweden, Risto Kalliorinne, a member of parliament for the Left Alliance, said by e-mail. The local economy in northern Finland will shrivel and Finland lose taxes as the headquarters move to Sweden, he said.

According to Maliranta, the takeovers are a positive sign and will help in the long run.

“For a wealthy nation, multinational ownership is something to strive for,” he said. “In a best-case scenario, the Finnish technological know-how combines with commercial knowledge from elsewhere.”

Finland is also finding new areas of growth as a thriving startup scene fills the gap left by Nokia. In mobile gaming, “Angry Birds” maker Rovio Entertainment Oy and Supercell Oy, which was valued at $3 billion in a deal with Japan’s Softbank Corp, have ascended from obscurity to worldwide fame as online distribution channels lowered barriers of entry.

More than 30,000 new companies have been created each year since 2006, according to Statistics Finland. That’s partly as a result of the thousands of positions eliminated by the country’s technology cornerstone Nokia.

The recent deals “show there are attractive acquisition targets and good companies in Finland,” said Anssi Rantala, chief economist at Aktia Bank Oyj. “The question is — should we be more worried if there was no interest in Finnish companies?”

To contact the reporter on this story: Kasper Viita in Helsinki at kviita1@bloomberg.net

Iceland Traps Hedge Funds in Refusal to Discuss Bank Claims

Iceland Traps Hedge Funds in Refusal to Discuss Bank Claims

More than five years after its biggest banks defaulted on $85 billion, Iceland’s government is refusing to speak to the hedge funds and other creditors that are still trying to get their claims paid out.

The island, which the International Monetary Fund has held up as a model for crisis management, says addressing the needs of bond investors in Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf isn’t its concern. Instead, Prime Minister Sigmundur D. Gunnlaugsson says he’ll fight to ensure any steps taken protect the nation’s financial markets.

Creditors, represented through winding-up committees, want the government to let them sidestep currency controls that were created back in 2008, when Iceland was hemorrhaging capital. Gunnlaugsson says such a settlement isn’t viable.

“Because these actors have such huge funds in the agreement, or will have, if such an agreement is reached, it will affect whether or not, and when, we can lift the capital controls,” Gunnlaugsson said yesterday in an interview in Reykjavik. “It’s in everyone’s interest to create a situation which would allow for the lifting of controls.”

The winding-up committee of Glitnir, the first of Iceland’s three biggest banks to fail in October 2008, said its efforts to get a reply from the central bank have also fallen on deaf ears.

‘Vast, Complicated’

“We’ve gotten no feedback from the bank on whether, or when, they will respond,” Steinunn Gudbjartsdottir, head of Glitnir’s committee, said in an interview.

Stefan Stefansson, the central bank’s spokesman, said it has held “several meetings,” including with representatives of the winding-up committees and creditors, and is conducting “various probes” on what “kind of solutions will harmonize with stability, as anticipated in law.”

Reaching a settlement is taking time because “the matter is vast and complicated,” Stefansson said.

A number of the creditors waiting to get their money back are hedge funds that had bet on a faster resolution of Iceland’s banks. Firms including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP bought claims on the lenders’ assets at prices well below face value.

“It seems they’ve been waiting to see whether the government would somehow step into the process,” Gunnlaugsson said. “But this is not a project for the government. The only role of the government here is to assess whether they come up with a solution which allows for the lifting of the controls.”

No Talks

The creditors in question “are just private entities trying to reach an agreement regarding a private debt,” he said. “So the state — the government — has nothing to do with that. We’re not in talks with those creditors and we won’t be. Never were going to be.”

Gunnlaugsson and Finance Minister Bjarni Benediktsson both say that failure to arrive at a viable settlement could prompt the government to amend Iceland’s bankruptcy act. If that happens, all foreign-currency holdings at the failed banks could be converted into kronur before being paid out to creditors.

The banking failure in 2008 triggered Iceland’s worst recession in six decades and forced the government to seek an international bailout to stay afloat. Backing the banks’ liabilities was never an option as claims dwarfed Iceland’s $14 billion gross domestic product, former Finance Minister Steingrimur J. Sigfusson has said.

$4 Billion

Since the crash, the estates of the banks have been run by winding-up committees, which have sought to get about $4 billion through Iceland’s capital controls. In total, the krona restrictions are blocking about $7.2 billion, according to a central bank estimate.

The krona has appreciated 9 percent against the euro over the past 12 months. Still, today’s rate of about 157 per euro compares with an average of 88 in 2007, a year before the island’s financial collapse.

Though the IMF has praised Iceland’s recovery trajectory, the fund warns that failure to end currency restrictions threatens to delay foreign investment needed to bring about a full recovery.

The economy will expand 2.7 percent this year, according to the Organization for Economic Cooperation and Development. That’s better than the average for the OECD-area as a whole, which will grow 2.3 percent, the Paris-based group estimates.

Keeping Krona

Gunnlaugsson said Iceland’s economic recovery is bound up with the krona. The government last year put talks to join the European Union on hold amid growing opposition to joining the bloc.

“When we see that long term stability is in place, then we will be free to make a decision on the future of the currency,” he said. “But for now we’re sticking with the krona and when I say ‘for now’ I’m talking about the foreseeable future.”

He argues that the bank creditors will gain the most if in the end they come up with a plan that allows them to complete settlements without disrupting the island’s economy.

“These investors — most of them came in after the economic collapse — then they could cash in on their investment and in many cases multiply their investment,” he said. That would allow “the government to lift the controls and they could then cash in, so to speak.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at valdimarsson@bloomberg.net

Swiss Raise Bank-Capital Buffer to Cool Property Market

Swiss Raise Bank-Capital Buffer to Cool Property Market

Switzerland is raising the amount of capital banks must hold as a buffer to guard against mortgage writedowns as the country finds itself in the throes of its biggest property boom in two decades.

The government in Bern has agreed to the Swiss National Bank’s request to raise the buffer, to 2 percent from 1 percent of risk-weighted positions secured by residential real estate, according to a statement today. The deadline for banks to comply is June 30.

The SNB’s policy of zero interest rates has kept mortgages cheap, causing residential property prices to climb to a level last reached in 1989, shortly before a slump in values that hurt Switzerland’s economy for years. The government introduced the initial buffer in February and can boost it to as much as 2.5 percent.

“There was a further increase in imbalances on the mortgage and real estate markets,” the SNB said in a separate statement. “In an environment of persistently low interest rates, coupled with banks’ continued appetite for risk, the danger that imbalances will build up even more unless additional countermeasures are taken is considerable.”

No Restrictions

The increase of the buffer aims at making mortgage-lending less attractive, SNB President Thomas Jordan told Swiss public broadcaster SRF in Davos today.

The buffer will most affect Raiffeisen Schweiz and cantonal and regional lenders, according to Andreas Venditti, an analyst at Vontobel in Zurich. He sees “no major impact” on UBS AG and Credit Suisse Group AG, he said in a note to customers.

Raiffeisen “already fulfills these new requirements,” Franz Wuerth, a spokesman for the St. Gallen-based bank, said by telephone. Raiffeisen has granted 140 billion francs ($155 billion) in mortgages and about 75 percent are with private customers, he said. “Mortgages are still our core business and we will continue to seek growth there,” Wuerth said

Zuercher Kantonalbank, the country’s largest state-owned regional bank, also won’t restrict its “already cautious” mortgage policy, according to a statement from the Zurich-based company. The buffer will increase ZKB’s capital requirements by about 0.4 percent, or 250 million francs, it said. The bank had 69 billion francs in mortgage liabilities at the end of June.

Housing Costs

The Swiss Bankers Association said it’s disappointed by today’s decision to increase the buffer.

“The SBA remains convinced that this is not an effective means of controlling property prices: among other considerations, its impact is much too broad and it has not been tested in reality,” lobby group said in a statement.

The decision will increase mortgage interest rates and in turn housing costs, the Swiss association of house owners said in a statement. The organization said that while it understood the need for the measure, it found it regrettable.

Swiss mortgage lending has grown at a faster pace than the economy. Since 2008, mortgages outstanding to Swiss private households have increased 25 percent and apartment prices have risen 27 percent.

Today’s measure was predicted by Bloomberg’s monthly economic survey published earlier this week, in which 71 percent of economists expected the buffer to be raised, and more than half of those predicted an increase before the end of March. The median estimate was for the measure to be boosted to 2 percent.

At its most recent policy review, in December, SNB President Thomas Jordan implied further steps might be imminent. “We recognize that at the moment, the dynamic on the mortgage market hasn’t been tempered enough yet,” he said.

To contact the reporters on this story: Catherine Bosley in Davos, Switzerland at cbosley1@bloomberg.net; Carolyn Bandel in Zurich at cbandel@bloomberg.net

Investors Meet ICBC Officials on Concern of Trust Default

Investors Meet ICBC Officials on Concern of Trust Default

Investors in a troubled trust product distributed by Industrial & Commercial Bank of China Ltd. met with the lender’s officials at a private-banking branch in Shanghai, demanding their money amid concern of a default.

Individuals were asked to sink at least 3 million yuan ($496,000) in the 3 billion-yuan Credit Equals Gold No. 1 product amid guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went into the branch. The product, which comes due on Jan. 31, raised funds for a coal mining company that collapsed after its owner was arrested.

“ICBC is taking advantage of their private banking customers,” said Alex Ke, 45, before joining his fellow investors in the meeting. “We’re victims in this. This is a shocking scam.”

ICBC, the trust’s issuer and the government may bail out the product, Time-Weekly reported today. A default would shake investors’ faith in the implicit guarantees offered by trust companies to draw funds from wealthy investors. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flows outside the formal banking system.

China Credit Trust Co., based in Beijing, created the product, which raised funds for Shanxi Zhenfu Energy Group. Wang Zhenning, an ICBC spokesman, declined to comment when contacted by telephone today. Two phone calls to the office of China Credit Trust Board Secretary Wei Qing went unanswered.

Raised Voices

Raised voices were heard periodically from inside the ICBC branch where Fang, Ke and the other investors had been meeting bank officials since around 11:15 a.m. Shanghai time. Credit Equals Goal No. 1, which has a tenure of three years, promised an expected annual return of 10 percent, according to information on China Credit’s website.

“If they don’t settle this by Jan. 31, we’ll meet in Beijing,” Chen, a Shanghai investor aged about 50 who declined to give his full name, said before the meeting. “In Beijing, there’ll be more people. We know that investors from Guangzhou will also gather there for this.”

ICBC and China Credit may each take responsibility for 25 percent of payments for the product, while the government of Shanxi province, where the failed coal miner was based, may take responsibility for the remainder, Guangzhou city-based Time-Weekly reported on its website today.

Bailout Plan

The final version of the bailout plan may only be known next week, according to Guangzhou city-based Time-Weekly, which is owned by Guangdong Provincial Publishing Group.

ICBC had rejected calls to bail out the product it distributed for China Credit, a bank official with knowledge of the matter said Jan. 17. Shanxi Zhenfu’s owner, Wang Pingyan, was arrested in 2012 for taking deposits illegally, according to the Shanghai Securities News.

ICBC won’t assume primary responsibility for the product, according to the executive, who asked not be identified while negotiations continue.

“It’s a problem with the sales and marketing of these products,” Liu Mingkang, former head of the China Banking Regulatory Commission, said in an interview from the World Economic Forum in Davos, Switzerland. “They should have made clear that the return rate is not guaranteed and what kind of risks are involved. There shouldn’t be an ironclad guarantee at all.” China’s banking watchdog regulates trusts.

A project backed by the product obtained a new mining license, the Securities Times reported yesterday, citing a statement from China Credit. Another coal mine project has won support from local authorities and the community, it said. Obtaining licenses will permit the mines to start operating and produce coal for sale.

Biggest Shareholder

State-owned People’s Insurance Company (Group) of China Ltd. is China Credit’s largest shareholder with a 32.9 percent stake, according to the credit firm’s website.

China should allow defaults of some wealth-management and trust products to reduce incentives for financial institutions to sell risky products and maintain stability in the financial system, Ma Jun, Deutsche Bank AG’s chief China economist, wrote in a report this week.

Trusts, along with banks’ wealth-management products and private lending among individuals, make up China’s shadow-banking system, which JPMorgan Chase & Co. estimated in May to be worth $6 trillion. The figure is equivalent to 69 percent of the nation’s 2012 gross domestic product.

Shadow Banking

China’s trust industry is now larger than the insurance and mutual fund sectors, McKinsey & Co. and Ping An Trust Co. wrote in a report in November.

The State Council, China’s Cabinet, has taken steps to rein in shadow lending, National Development and Reform Commission spokesman Li Pumin said Jan. 22, according to a briefing transcript posted on China.com.cn, a government-run website. The commission will actively participate and promote the measures, Li said, without elaborating.

The State Council imposed new controls on shadow banking that include a ban on using third parties to evade restrictions on lending directly to certain borrowers, three people familiar with the matter said this month.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at asoo4@bloomberg.net; Alexandra Ho in Shanghai at aho113@bloomberg.net

Aberdeen Cheers Crackdown as NSE Readies Fines: Corporate India

Aberdeen Cheers Crackdown as NSE Readies Fines: Corporate India

India’s stock exchanges are stepping up pressure on listed companies to improve shareholder disclosures as foreign institutional investors boost holdings in Asia’s fifth-largest equity market to an all-time high.

The National Stock Exchange of India Ltd. has asked at least 54 companies, including Reliance Industries Ltd. (RIL) and Bharti Airtel Ltd., to provide more information or explain unusual share-price swings since Nov. 18, when the securities regulator compelled bourses to tighten oversight and levy fines for lax disclosures. That compares with 42 requests in the previous 11 months, data compiled by Bloomberg show.

Overseas money managers who bought $45 billion of Indian shares in the past two years are seeking more information from companies, while local mutual funds cite a lack of transparency as one reason they pulled $3.42 billion from equities in 2013.

“Greater scrutiny of companies is generally a positive,” Hugh Young, a Singapore-based managing director at Aberdeen Asset Management Plc (ADN), which oversees about $319 billion worldwide, said in an e-mailed interview on Jan. 20. “India’s disclosure standards are not great compared with developed markets.”

The Securities and Exchange Board of India plans to announce new corporate governance rules next month as policy makers seek to prevent repeats of the payment default at the National Spot Exchange of India.

Penalties

Regulators globally are expanding scrutiny of markets from metals to currencies, tightening rules on capital buffers and cracking down on crimes from money laundering to interest-rate rigging. Global fines linked to the manipulation of the London Interbank Offered Rate, or Libor, have reached $6 billion.

India’s National Stock Exchange will soon start imposing penalties on non-compliant companies, Senior Vice President Ravi Varanasi said in an interview on Jan. 21. Rival BSE Ltd., the nation’s oldest bourse, has also increased scrutiny, according to V. Balasubramaniam, its chief business officer.

Fines can reach 10,000 rupees ($161) a day in case of delays in submitting financial results, according to Sebi’s website. An additional penalty of 0.1 percent of the equity capital or 10 million rupees, whichever is less, will be levied on companies that fail to comply for more than 15 days.

In a note dated Nov. 18, the Sebi cited an International Monetary Fund report saying Indian exchanges “have not acted as vigorously as necessary in enforcing compliance” by issuers with the reporting rules.

Corporate Governance

“Stock exchanges must own up responsibility for improving corporate governance,” U.K. Sinha, chairman of SEBI, said in an Jan. 21 interview.

The S&P BSE Sensex (SENSEX) rose 9 percent in 2013, its best annual performance among the four-largest emerging markets, boosted by $20 billion of equity purchases by global investors last year, the most in Asia after Japan. Net purchases in 2012 were $24.6 billion, data compiled by Bloomberg show. The Sensex fell from a record today, losing 0.1 percent at 9:32 a.m.

There is a proposal to grant more sweeping powers to the regulator in search and seizure procedures, consent orders and prevention of insider trading, Sinha said.

“The NSEL fiasco and the new corporate governance rules have prompted this change,” Sandeep Parekh, founder of Finsec Law Advisors Ltd. and a former Sebi executive director, said in a phone interview on Jan. 15.

Petronas Stake

Trading on NSEL was suspended in July after the country’s largest spot exchange failed to settle about 56 billion rupees ($905 million) in dues to investors. The payment crisis led to shares of Financial Technologies (India) Ltd. (FTECH), which owns the bourse, sinking 84 percent in 2013.

When the NSE sought clarification from billionaire Mukesh Ambani’s Reliance Industries regarding a newspaper report that the owner of the world’s largest refining complex was looking to buy a stake owned by Petroliam Nasional Bhd in a $20-billion Venezuela venture, the company said Jan. 15 “it continues to look for opportunities to grow its business internationally and cannot make any specific comment on the media report.”

Tushar Pania, Reliance’s spokesman in Mumbai, didn’t reply to an e-mail requesting comment.

The NSE asked Bharti Airtel Jan. 17 to verify a newspaper report that the country’s top mobile-phone carrier was buying a rival operator. Bharti said three days later that it frequently receives proposals for potential transaction and won’t comment on the “speculative news item.” The company added that it had not released any specific information. Ashutosh Sharma, a spokesman at Bharti, declined to comment.

In January 2013, Sebi called for comments on its proposed measures to limit the tenure of auditors and independent directors, establish whistle-blower policies and screen related-party trades. The regulator could delist errant companies, fine managements and bar founders from raising money for non-compliance. The feedback on the proposals is being examined by the regulator, Sinha said.

“Investors are seeking quality information from companies and failure to provide it may bring down investors’ trust,” Jagannadham Thunuguntla, chief strategist at New Delhi-based SMC Global Securities Ltd., said by phone yesterday.

To contact the reporters on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net; Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net

Billionaire Kotak Sees Balance-Sheet Challenges at Indian Banks

Billionaire Kotak Sees Balance-Sheet Challenges at Indian Banks

Billionaire Uday Kotak, the controlling shareholder of the Indian bank with the highest lending margins, said rising bad loans will pose challenges this year to lenders in Asia’s third-largest economy.

“Balance-sheet challenges for Indian banking will be a key issue for 2014,” Kotak, managing director of Mumbai-based Kotak Mahindra Bank Ltd. (KMB), said in a Bloomberg Television interview with Matthew Miller and Francine Lacqua from the World Economic Forum in Davos, Switzerland. “Indian banking, especially if some of the banks get under pressure, will require some amount of consolidation and strengthening.”

Slowing loan growth and a surge in soured debt is eroding profitability at Indian banks amid an economic slowdown. The central bank predicts the economy will expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest rate in a decade.

Indian lenders’ bad loans rose to 4.2 percent of total credit as of Sept. 30, the highest level in at least six years, according to a Dec. 30 report from the Reserve Bank of India. Profitability at the country’s banks, as measured by return on equity, fell to a six-year low of 10.2 percent in the year to Sept. 30, the report showed.

Kotak Mahindra, based in Mumbai, had a gross bad-loan ratio of 2 percent as of Dec. 31, up from 1.46 percent a year earlier, exchange filings showed. The bank avoided lending to sectors including airlines and the diamond industry to keep bad loans in check, Kotak said in the interview.

The lender had a net interest margin of 4.8 percent at the end of last year, the highest among 40 publicly traded banks in India, according to exchange filings.

Shares of Kotak Mahindra fell 0.7 percent to 705.30 rupees at the close in Mumbai. The stock gained 12 percent in 2013, making it the S&P BSE Bankex index’s best performer. The gauge of 12 lenders slumped 9.4 percent last year.

To contact the reporter on this story: Anto Antony in Mumbai at aantony1@bloomberg.net

Netafim to Build Largest India’s Drip-Irrigation Project

Jain Irrigation competes with Netafim.. A once-good company bogged down by over-indebtedness..
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Netafim to Build Largest India’s Drip-Irrigation Project

The Indian unit of Netafim Irrigation Inc., a smart-drip and micro-irrigation specialist for farmers, won a 3.81 billion-rupee ($62 million) water project contract in the southern state of Karnataka.

The company will build an automated water pipeline network to more efficiently drip-irrigate about 29,000 acres (11,800 hectares) of land in the Bagalkot area of Karnataka, its largest in India, Netafim Irrigation India Pvt. said.

The contract auctioned by state-owned Krishna Bhagya Jala Nigam Ltd. will help 6,000 farmers through a simultaneous release of water so growers even at the end of the network get the same amount of water as those closer to the supply source. Netafim said it will build the project with partner Megha Engineering and Infrastructure Ltd.

“This is our largest project in India,” Avinash Thakur, Netafim’s head of marketing, said today by phone from Vadodara. Netafim, present in seven Indian states, is an Israeli firm that started in the Negev desert in 1965.

The privately owned global seller of smart-drip and water-saving products originated in a kibbutz when members teamed with an engineer who discovered that a slow and balanced supply of water improved plant growth.

The Ramthal-Marol drip-irrigation project is India’s biggest such project. Only 32 percent of all farmland in the world’s second-most populous nation is irrigated, according to World Bank data.

To contact the reporter on this story: Archana Chaudhary in New Delhi at achaudhary2@bloomberg.net

Successful Chinese Hot Pot Chain Haidilao Stumbles In U.S. Expansion

Successful Chinese Hot Pot Chain Stumbles In U.S. Expansion

Christopher Marquis, Contributor
1/22/2014 @ 8:45AM |732 views

Last fall, the popular Sichuanese hot pot chain Haidilao opened its first outpost in America, to great anticipation, in the Southern Californian neighborhood of Arcadia. Aside from a few outposts in Singapore, the Arcadia location was the first Haidilao to open outside of China. Perhaps Zhang Yong, Haidilao’s personable founder and General Manager, counted on Arcadia’s large Chinese-American population to provide a soft landing, but the restaurant’s opening has been rocky.
Founded with 10,000 RMB in 1994 in the small city of Jianyang, Haidilao, whose name roughly translates to “scooping treasure from the bottom of the sea” has since become the dominant hot pot restaurant chain in a country obsessed with hot pot. From the beginning, the company’s culture was based on Zhang’s personal values of kindness, and personal empowerment. Employees are given remarkable decision-making capabilities under the latter while drilled on imbuing every element of customer service with the former. Some of the more famous services Haidilao has adopted over the years include free shoe shining and nail polishing for customers awaiting tables, protective baggies for cell phones, and impromptu employee song and dance performances.
While the reality is that the shoe shine and nail polish stations are too understaffed to serve more than, say, 1 in 30 customers, such flourishes work. The chain is legendary for its customer service in China, where good service is rarely found outside private dining rooms in formal banquet restaurants. Individual Haidilao locations dominate the 5-star echelons of Dianping.com, a review site similar to Yelp.com, in every city the company has a presence (which is most of them). Currently, the company remains privately owned and carefully managed, with all 80+ stores reporting directly to headquarters.
Zhang, who has stepped back from daily operations but still oversees Haidilao’s corporate strategy, is no doubt the driving force behind the US expansion. It seems that the man who once said of business, “Once you have positioned yourself, it’s clear what to do,” is still trying to find his US positioning. The Arcardia restaurant only has three out of five stars on Yelp.com. Reviewers complain that the restaurant is overpriced and overhyped, and worst of all, the service well intentioned but often inept. One customer notes, “the staff seemed utterly confused and ill trained to handle the crowd,” while another observes that prices should be relatively lower in America because diners are also expected to tip. There is even a salt-instead-of-sugar dessert disaster.
In truth, Haidilao’s troubles in America started before the restaurant had even opened. A local news outlet reported in July 2013 that a carpenter’s union was protesting the construction site with “Shame on Haidilao” signs for hiring a non-union company. For a brand well known for its decent treatment of employees, Haidilao has faced unexpected challenges translating its business principles to the US market.
As global ties become increasingly complex, recent examples of Chinese companies expanding overseas have shown that success in global markets requires nuanced localization.  With great service, quality food and strong employee relations, Haidilao seemed a natural fit for the US market.  The old narratives no longer hold: Haidilao’s stumbles were not caused by any “made in China” stigmas around quality, but rather the company’s own misjudgments.  On the flip side, foreign companies can no longer coast on simply being foreign: Apple and Fonterra’s troubles have shown that Chinese consumers no longer blindly buy imports.  Wherever they’re based, companies aiming to compete internationally today must demonstrate a sophisticated understanding of their target markets and engage many different sets of stakeholders accordingly.
Moreover, our research on CivilChina.org shows that US consumer sentiments about Chinese companies appear to be shifting.  For example, in our analysis of Twitter conversations about the Shineway-Smithfield deal, we found that American consumers had very little opinion on the acquisition of a venerable American company by a Chinese one, a far cry from the xenophobia traditional media on both sides like to emphasize.  We believe that this indicates increasing acceptance of Chinese companies by American consumers, which makes sophisticated localization strategies all the more important.
Consistency is requisite in any restaurant’s success, but Haidilao’s woes are not just the stumbles of a new restaurant trying to find its mark; some problems can be traced to differences in cultural style. The company has misjudged how the company’s selling points back home – freshness and service – should translate to a market where such qualities are taken for granted. Urban Chinese consumers may be increasingly willing to spend money on quality food, but in America, where Chinese food is still synonymous with cheap, many diners bristle at being charged for sauces and condiments. Certain ingredients that signal quality in China, such as the whole cloves and peppercorns dotting the spicy coup base, are unappetizing to American diners (one referred to their presence as “debris”). Moreover, good service in China borders on the obsequious, but some Haidilao Arcadia customers have found the constant attention intrusive. Flashy new elements like iPads for ordering come across as excessive when customers cite difficulties even communicating with the waitstaff in English.
One of the biggest drivers of Haidilao’s success in China is Zhang’s intuitive understanding that happy and loyal employees make happy and loyal customers. According to a Tsinghua University case study on the company, Haidilao offers a highly complex compensation package that rewards outstanding workers with wages comparable to white-collar jobs, free apartments, nannies, and even parental subsidies. In addition, there is a dedicated fund for helping employees with personal emergencies, a referral system to bring in friends and family that fit the company culture, and a strong tradition of promoting from within. Staff turnover rates in retail services are notoriously high even in the US, but China’s restaurant industry, which runs largely on migrant labor, is unstable even by those standards. Haidilao’s turnover rates are much lower than those of its competitors – almost zero at the management level.
Such a thorough vision for employee development shows Zhang’s nuanced understanding of stakeholder management, but the same incentive structures cannot be exported to the US. “Front of house” restaurant labor in the US is fundamentally different, more likely to be comprised of bored high school students looking to make quick cash rather than migrants seeking a steady income with the possibility of career advancement. Wages and benefits are negligible, and tips are capped by check sizes (Haidilao is “two dollar sign” restaurant on Yelp, meaning the average diner only spends between $11 and $30). Persisting service problems may be a sign that the company has not yet figured out how to train and motivate employees under the American system.
Zhang Yong has said of his American customers, “whatever they want is what I’ll give them.” No doubt Zhang and his team are doing their best to divine exactly that, and it will be interesting in the upcoming months to see if the company can communicate a more compelling value proposition to American diners. Haidilao’s American story is far from over, but it needs to dig deeper and develop a more targeted understanding of US consumers in order to find the treasure at the bottom.

Trying to deleverage China without blowing up the system

Trying to deleverage China without blowing up the system
By Ambrose Evans-Pritchard Economics Last updated: January 22nd, 2014
China is walking a tightrope without a net. There is an acute cash crunch. Credit at a viable cost is being fiercely rationed. Foreign buyers with money in hand can – and are – buying up nearly completed buildings from distressed developers for a song.
The shadow banking system has risen to 30pc of all lending from 20pc in barely more than a year. The growth generated by each extra yuan of credit has fallen by three quarters from 1.0 to 0.25 in five years, evidence of credit exhaustion.
That was the gist of a fascinating gathering on China at the World Economic Forum in Davos, including CITIC Chairman Zhang Yichen, the president of the Chinese Academy of Social Sciences Wang Weiguang, and Blackstone chairman Stephen Schwarzman, among others.
It was Chatham House rules so they cannot be quoted by name (except for one), but I pass on a few general thoughts to readers.
“They are trying to deleverage without blowing the whole thing up,” said CITIC’s Zhang Yichen.
“The M2 money supply is 120 trillion RMB but that is still not enough cash because velocity of money is very slow, and interest rates are going up.”
“My guess is that they will manage it. The US couldn’t contain Lehman contagion but in China all contracts can be renegotiated, so it is very hard to have a domino effect. We’ll see a slow deflating of the bubble,” he said.
“The stock market is not a true market. It is wholly controlled by the government. Even under the new reforms some of the rules are mind-boggling. They are trying so hard to contain speculation that they ended up causing more speculation. They are trying to control price of IPOs, to discourage the price going up. It is a perfect example why markets should be left alone.”
There was general agreement that there will be “no more stimulus” for now. President Xi Jinping is determined to tough it out.
The moment the Chinese authorities open up the capital account and make the RMB convertible there will be a rush of money abroad. That will unleash captive funds in property that have nowhere else to go, and could trigger a disorderly fall in real estate prices, and much else besides. So the government will not do it yet.
An ex-global regulator sitting next to me disputed the 30pc figure for the shadow banking sector, muttering out loud that it was really 50pc. Others agreed.
The authorities are alarmed at the mushrooming difficulties of the trust fund, especially the looming default of the China Credit Trust Co on $500m of debt. However, they will let some trusts go bust to teach a lesson in moral hazard. There will be haircuts, but not wipeouts.
US-China rivalry could become ugly. The West is in deep structural crisis, and will not face up to its own failures. It will blame China. Both Xi Jinping and Barack Obama are worried about this in the long-run. (To which I would say, why did China then impose an air identification control zone over a big chunk of the East China Sea, including the Senkaku Islands?)
Nothing said changes my mind that China is riding a $24 trillion credit tiger that it cannot really control. Loans have jumped from 120pc of GDP to around 220pc since the post-Lehman blitz (George Magnus from UBS says it may be 250pc by now).
As Fitch says, this is an unprecedented rise in the credit-GDP matrix in any large state in modern times. It will not end with a Western style banking crash because the financial system is an arm of the state. It will end in an entirely different way. Since Chinese credit now matches the entire US and Japanese banking systems combined in dollar worth, this is no longer a local Chinese story. It is part of our lives too now.
Now off to hear Shinzo Abe talk about Abenomics live and in person.

Zhou Risks Turmoil With Easing of China Rate Controls

Zhou Risks Turmoil With Easing of China Rate Controls

China central bank Governor Zhou Xiaochuan faces an obstacle in his efforts to tame financial market volatility: his own plans to free up interest rates.

The benchmark money-market rate remains above the average for January even after the People’s Bank of China this week injected more than $42 billion following the biggest jump since June. At the same time, Zhou’s planned removal of interest-rate controls may make volatility tougher to prevent, with Standard Chartered Plc economist Stephen Green saying that crisis is a “rule of financial liberalization.”

Zhou, reappointed last year to oversee China’s financial transformation, is working to free up rates to push the nation toward a more sustainable and market-driven model for economic growth. Moving too slowly raises dangers of a crisis from shadow banking outside of regulations, while mishandling liberalization risks sparking investment excesses and turmoil seen in nations from South Korea to Sweden and the U.S.

“China is facing a dilemma,” said Dong Tao, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. “If interest rates are not liberalized, shadow-banking activities spread like wildfire. If rates are freed up, it will worsen problems for existing debt.”

The seven-day repurchase rate dropped for a second day yesterday after the PBOC injected cash to relieve funding pressures ahead of the week-long Lunar New Year festival. The rate fell 19 basis points to 5.25 percent, according to a daily fixing compiled by the National Interbank Funding Center, compared with the month’s 4.61 percent average.

Markets’ Role

The decline has spurred market gains globally. The MSCI World Index of stocks has gained about 0.3 percent over the past two days, while the Standard & Poor’s 500 Index in the U.S. advanced 0.3 percent on Jan. 21.

Money-market rates in China typically rise before the week-long Lunar New Year break, which begins Jan. 31 this year and is a period in which cash gifts are made and families get together for celebratory feasts.

Allowing markets to set deposit and lending rates should be a top priority as part of efforts to generate new sources of growth and stop financial risks from building up, the International Monetary Fund said in its annual report on China in July.

Zhou, who turns 66 this month and has been PBOC chief for a record 11 years, wrote in a November article that China will “fully realize market-based interest rates” in the “medium term.” The Communist Party has pledged to give markets a “decisive” role in allocating resources as part of the broadest policy transformation since the 1990s.

Loosening Constraints

The PBOC in June 2012 let banks for the first time pay a premium over government-set deposit rates. Authorities in July 2013 scrapped a floor on borrowing costs while saying that further changes to deposit rules were the “most risky” part of liberalization. The PBOC’s next step, in December, was to authorize the trading of certificates of deposit on the interbank market.

Increasing competition for bank deposits may help curb shadow banking estimated by JPMorgan Chase & Co. at 69 percent of China’s 2012 gross domestic product. The industry encompasses entrusted loans, wealth-management products and other resources where borrowers can obtain funds unavailable through banks and depositors can get higher returns.

China’s rapid buildup of credit has evoked comparisons to Japan’s debt surge before its lost decade and to that in Thailand and Malaysia ahead of Asia’s financial crisis. China’s credit-to-GDP ratio rose to 187 percent in 2012 from 105 percent in 2000, compared with Japan’s increase to 176 percent in 1990 from 127 percent in 1980, JPMorgan said in a July report.

‘Fragile’ System

“The best sign of how fragile the system is, is what’s been happening in the interbank market,” said Charlene Chu, a former analyst at Fitch Ratings who warned that China’s debt could spark a crisis. Officials should “address the underlying fragility in the system” to minimize risks of turmoil from rate liberalization, Chu said in an interview yesterday.

Zhou and Chinese officials are trying to avoid repeating mistakes that fueled crises in other nations when rate controls were eased.

Finland, Norway and Sweden liberalized interest rates in the late 1970s and early 1980s without taking steps to regulate lending or tighten monetary policy, eventually resulting in a “full-blown banking crisis,” according to a 2009 paper by IMF researchers. The savings-and-loan crisis in the U.S. also stemmed from regulatory restraint after the government removed deposit-rate controls, the IMF study said.

South Korea

In South Korea, a partial loosening of limits on interest rates in the 1990s was followed by reckless investment by large companies and a financial crisis, according to the “China 2030” report published in 2012 by the World Bank and the State Council’s Development Research Center in China.

“The problem is deposit rates,” the economist Green said. “If you go up too quickly, everyone competes to justify the rising costs” and banks chase higher-yielding, and riskier loans, he said. While China is likely to need to re-capitalize its banks within the next five years, PBOC leaders are well aware of other countries’ experiences with interest-rate liberalization, he added.

One or two small Chinese banks may fail this year as they face pressure from their reliance on short-term borrowing, Fang Xinghai, a Communist Party economic official, said in November. Trusts and shadow banking will see defaults this year, which is a good thing, Zhang Ming, a researcher at the state-run Chinese Academy of Social Sciences, said this week.

“High and volatile interest rates and debt defaults are a sign of the stress that ails the financial system, but also a sign that the necessary medicine is being applied,” said David Loevinger, former U.S. Treasury Department senior coordinator for China affairs and now an analyst at TCW Group Inc. in Los Angeles. “Like a smoker trying to quit cigarettes, an economy addicted to cheap credit can’t avoid headaches as it deleverages.”

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

China crackdown on online video uploads

China crackdown on online video uploads
Updated 22 January 2014, 1:03 AEST
Chinese internet users will now be required to register their real names to upload content to Chinese online video sites, an official Communist Party body says.
Chinese internet users will now be required to register their real names to upload content to Chinese online video sites, an official Communist Party body says.
It’s the latest move by the Chinese government to tighten control of the Internet and media, and suppress anti-government sentiment.
The new rule has been implemented to “prevent vulgar content, base art forms, exaggerated violence and sexual content in internet video having a negative effect on society,” China’s State Administration of Press, Publication, Radio, Film and Television (SARFT) said on its website.
The rule is “aimed at online dramas, micro-films and other online audio-visual programmes”, the statement said.
It gave no further explanation.
Online video sites are often hubs for comment and critique on social issues in China, with users uploading videos documenting corruption, injustice and abuse carried out by government officials and authorities.
Online video sites are extremely popular in China, with 428 million users.
Those allowing user uploads include sites operated by Youku Tudou Inc and Renren Inc.
Youku Tudou declined to comment, while officials at Renren were not available for immediate comment.
Last year, the Communist Party began a campaign to control online discourse, threatening legal action against people whose perceived rumours on microblogs such as Sina Weibo are reposted more than 500 times or seen by more than 5,000 people.
Rights groups and dissidents criticised the latest crackdown as another tool for the ruling Communist Party to limit criticism of it and to further control freedom of expression.
China has attempted to implement similar real-name registration rules, including when buying SIM cards for mobile phones and signing up for Tencent’s WeChat mobile messaging app and microblogs.
However, these have proven difficult to implement and easy to avoid for China’s tech-savvy internet population.
China’s internet regulation system is mired in bureaucracy and overseen by a number of government agencies, including SARFT, the State Council and the Ministry of Industry and Information Technology, which can lead to conflicts of interest between these bodies.
Reuters

Organic Food: Not Just for Kids

Organic Food: Not Just for Kids
Companies Try to Push Organic Foods for Every Stage of Life
SARAH NASSAUER
Jan. 22, 2014 7:23 p.m. ET

Organic food is increasingly found in shopping carts everywhere. But for the majority of shoppers, organic food is only an occasional habit. Sarah Nassauer explains how companies are trying to break out of that cycle and win shoppers over for good. Photo: Late July Organic.
What will make people pay $3 more for frozen pizza that says “organic” when they’ve been eating non-organic pizza for years?
Organic food is increasingly found in shopping carts everywhere from urban grocery stores to rural Wal-Marts. But for the majority of shoppers, buying pricey, sometimes hard to find, organic food is only an occasional habit.
Marketers are working to turn these organic dabblers into consistent customers. Brands known for organic baby and toddler food are pushing products to appeal to older kids and adults. Some are adding organic versions of mainstream hits like boxed mac and cheese and tortilla chips to entice skeptics.
View Graphics

Illustration by James Gulliver Hancock; (L-r) Organic Valley, Horizon; Annie’s; Late July Organic Snacks; Earthbound Farm; Honest Tea
Many consumers don’t see a difference between “organic,” “natural” or other health claims, making it tricky to charge a premium for products labeled organic.
To be certified organic, food must meet U.S. Department of Agriculture regulations regarding how the animals are fed and treated and produce is grown.
About 64% of U.S. shoppers are “dabblers” or “temperates,” says Maryellen Molyneaux, president and managing partner of the Natural Marketing Institute, a consumer research consultancy focused on health and wellness.
Dabblers buy organic food haphazardly, perhaps drawn in by the label. Temperates are price sensitive and buy for isolated reasons, like milk for a toddler. “Devoteds,” the top buyers of organic food, make up about 20% of shoppers, she says.
Pitching organic food is a high-stakes effort. Coca-Cola Co. KO -0.05% , Campbell SoupCPB +0.52%
Co, Danone SA BN.FR +1.67% and other large food companies are buying up smaller organic food makers (Honest Tea, Plum Organics and Happy Family, respectively), hoping they will be a growth engine as customers curtail purchases of products they had consistently bought for decades like cereal, soup and soda. For the last four years, sales of organic food have grown about 11% a year, but sales growth appears to be hitting a plateau.
Annie’s Inc., a Berkeley, Calif.-based company that makes boxed macaroni and cheese, cheddar crackers shaped like bunnies and gummy fruit snacks made with organic ingredients has “been working on aging up our brand,” and bringing new people in, says Sarah Bird, its chief marketing officer.
“For some kids, bunnies aren’t so cool as they get older,” so last year they added cheddar squares to their product line, says Ms. Bird. To target older kids and family meals, they also started selling frozen pizza and microwavable mac and cheese that a college student could easily heat in a dorm room.
Simply adding an organic label to tasty food doesn’t always work. Annie’s last year discontinued a line of 100% organic box skillet meals (think organic Hamburger Helper) and replaced them with a version made with some organic ingredients to improve the taste. Cutting back on pricey organic ingredients enabled the company to add other, more expensive ingredients—a creamier cheese sauce and whole grain pasta—while keeping the consumer price reasonable, says Ms. Bird.
About 21% of baby food sold is organic versus less than 5% of food overall, according to data from the Organic Trade Association, which represents the industry. Becoming pregnant or having a baby is a entry point into buying organic food, a moment when parents are most protective of family eating, say companies and consumer research firms. Having serious health problems or knowing someone who does is another common trigger.
But most food shoppers are focused on “where is the highest level of quality for the lowest price,” says Laurie Demeritt, chief executive of the Hartman Group, Inc., a consumer research firm.
Organic milk and meat can be twice as much as non-organic, while organic bagged salad is only slightly more expensive.
When Earth’s Best added frozen fish and chicken nuggets aimed at older kids to its line of organic baby cereal and formula, it didn’t make them organic. “To do organic is cost-prohibitive,” about twice as expensive, says Maureen Putman, president of the grocery business at Hain Celestial US, a unit of Hain Celestial Group
Inc. HAIN -1.19% which owns Earth’s Best and other brands. When buying meat, moms care most that it is antibiotic free and low fat, she says.
“We can’t afford to do 100% organic, so I am just going off of what I believe is most important,” says Amber Bull, a 37-year-old mother of two and hairstylist who lives in Loveland, Colo. To stick to a $600-a-month food budget, she often buys organically raised meat but serves her family less of it, she says.
Ms. Bull looks for organic produce on sale, like apples and leafy greens, as she believes they have the most pesticide residue when raised conventionally. Some studies indicate apples, spinach, kale and other leafy greens have more pesticide residue than other produce.
Certified organic food costs more to produce because it must follow U.S. Department of Agriculture regulations. Animals are required to spend some time grazing on pasture, fed pricey organic feed and not given antibiotics or most hormones. Produce is grown without most synthetic fertilizers and pesticides. Genetically modified organisms can’t be used in organic products or given to animals.
In a survey last year, about 60% of people said food labeled “natural” has most of the same qualities as organic food, like being grown without pesticides, says Ms. Molyneaux of the Natural Marketing Institute. In fact, the government doesn’t define what the term natural on food labels means.
Organic yogurt maker Stonyfield Farm in August added “no toxic pesticides used here” next to the certified organic seal on its products “to get at the confusion,” says Gary Hirshberg, chairman of Stonyfield Farm, which is owned by Danone SA. “If a consumer can convince herself, ‘This is almost the same thing’ and there is a 30 cent price difference,” she will buy the cheaper, natural yogurt, he says.
Some foods trigger interest. Organic milk sales spike when families have toddlers, the age many pediatricians recommend babies first try cow’s milk.
Natural Marketing Institute data shows organic milk sales taper off when kids turn about 7 years old. Consuming organic yogurt, cereal bars, meat and poultry also becomes less common in families with older children, according to the data.
To appeal to young adults, Organic Valley is considering selling “grab and go,” milk in small bottles, says George Siemon, chief executive of the company, the largest cooperative of organic farmers in the country.
Sales of organic snacks from Barnstable, Mass.-based Late July have tripled since the company added multigrain chips in grown-up flavors like Red Hot Mojo and Sea Salt by the Seashore to its line of crackers and sandwich cookies, says Nicole Bernard Dawes, chief executive of the company.
Now people discover the brand when “looking for a chip for a Super Bowl party,” not just shopping for kids, she says

Yu E Bao Deals with the Pressure of Being No. 1

Yu E Bao Deals with the Pressure of Being No. 1

01.22.2014 18:39
The fund company behind the WeChat investment service must handle a huge amount of money every day, but one manager says risk control remains the top concern
By staff reporters Zhang Bing and Cao Wenjiao
(Beijing) – It took less than seven months for the fund company that manages Yu E Bao to become the country’s largest public funds manager, a place that China Asset Management Co. held for seven years.
As of January 15, Yu E Bao has more than 250 billion yuan in investment from over 49 million users, says Tian Hong Asset Management Co., the company that manages Yu E Bao. That makes it the 14th-largest money market fund in the world, data from Bloomberg shows. Combined with other investment funds, the amount managed by Tian Hong has exceeded 260 billion yuan.
Meanwhile, China AMC’s public funds were worth about 244.7 billion yuan at the end of last year and reportedly have not changed much in January. It has formed a partnership with social networking company Tencent Holdings to challenge Yu E Bao through a similar wealth management service embedded in the voice and text messaging app WeChat.
Wang Dengfeng, a Tian Hong fund manager who oversees the money market fund connected with Yu E Bao, said in a recent interview that controlling risk is his company’s biggest priority.
Yu E Bao limits its investments to just 29 banks on a safe list, he says, and prudence demands that, “We don’t venture outside the list.”
An excerpt of the interview follows.
Caixin: How do you allocate funds from Yu E Bao?
Wang: About 80 to 90 percent of the money from Yu E Bao accounts will go to interbank deposits and the rest to safe bonds. Interbank deposits are banks’ wholesale businesses with each other. The demands are vibrant.
We allocate investments and match maturities based on data analysis. At different stages a bank’s ability to take deposits varies. On one hand, there are banks that can only take, say, 10 billion yuan, but we have 11 billion yuan that needs to be taken care of. That is when we hit the limit of their deposit-taking ability. We can deal with other banks or lower the interest rates we charge. On the other hand, a larger size brings greater negotiating power. We can ask for higher interest rates.
We pay the most attention to liquidity management. So far, we have seen a net increase in Yu E Bao investment. That means we face the pressure of finding investment opportunities for new funds every day.
Do you often get higher interest rates from small banks?
That is generally the case, but large banks may offer higher rates if they are caught short of cash. This is a matter of less concern to Yu E Bao because we limit our investments to only 29 banks that are on our white list. We don’t venture outside the list. Most of those banks are state-owned or large joint-stock banks. We think it is not worth the risk dealing with small banks. It is not that we think they would actually default on loans. But we would like to avoid the risk altogether to be prudent.
There are many wealth management services similar to Yu E Bao. What is the strength of Yu E Bao?
First, the core value of our team is prudent wealth management. We have placed risk control in the highest place. Second, Yu E Bao operates on Alipay (the third-party payment service run by e-commerce giant Alibaba Group). It is connected to more than 49 million ordinary people and retail investors. That makes it particularly deep-rooted in society. Third, it brings the function of money market fund investment and payment together. The user experience is good. There are, of course, other funds being developed with a payment function. But we have been at the frontier.
What is the impact of interest rate changes on Yu E Bao? Some people say Yu E Bao’s yield will stop rising. What is your view?
The yield of Yu E Bao goes with the cost of capital in the market. In December, there was a rebound in money rates, and the yield of Yu E Bao also increased. When money rates were low, the yield of Yu E Bao was low as well.
We will try to repay investors with moderate returns on investment. If the money market goes weak, it is normal for our yields to fall. But it would not happen all of a sudden. Neither do we promise to deliver any rate of returns. Yields are not our primary concern. We are most concerned with risk control.
The U.S. payment company PayPal introduced a money market fund service in its second year. It shut it down in 2011 as investment shrank. Do you worry that this may be where Yu E Bao is headed?
We have been thinking about this since the first day Yu E Bao was launched. Now that we have grown, whether we will become a second PayPal is more of an issue. The puzzle is not only ours. It is true for the entire money market fund industry.
A big question is: If China has a zero interest rate like the United States, is there still a reason for money market funds to exist? This may not happen very quickly, judging by current conditions. For China to have zero interest rates for a long term, it has to have gone through a very large economic cycle.

Judge Suspends Chinese Units of Big Four Auditors; Ruling Bars Firms From Audit Work for Six Months

Judge Suspends Chinese Units of Big Four Auditors
Ruling Bars Firms From Audit Work for Six Months
MICHAEL RAPOPORT
Updated Jan. 22, 2014 8:47 p.m. ET
The Chinese units of the Big Four accounting firms should be suspended from auditing U.S.-traded companies for six months, a judge ruled, a move that could complicate the audits of dozens of Chinese companies and some U.S.-based multinationals.
The audit firms, plus a fifth China-based accounting firm, broke U.S. law when they refused to turn over documents about some of their clients to the Securities and Exchange Commission to aid the commission in investigating those U.S.-traded Chinese companies for possible fraud, ruled Cameron Elliot, an SEC administrative law judge.
Judge Elliot’s ruling Wednesday doesn’t take effect immediately, and the firms can appeal the ruling, first to the commission itself, then to the federal courts. But if the ruling stands, it could temporarily leave more than 100 Chinese companies that trade on U.S. markets without an auditor. It also could throw a monkey wrench into the audits of U.S. multinational companies that have significant operations in China, because the Chinese affiliates of the Big Four—PricewaterhouseCoopers, Deloitte Touche Tohmatsu, KPMG and Ernst & Young—often help their U.S. sister firms complete those audits.
Without audited financial statements, a company can’t sell securities in the U.S. or stay listed on U.S. exchanges.
“This is a body blow to the Big Four,” said Paul Gillis, a Beijing-based professor at Peking University’s Guanghua School of Management. “It’s really quite a harsh ruling.”
The ruling will be inconvenient for the companies those Chinese firms audit, said Jacob S. Frenkel, a former SEC enforcement attorney now in private practice. It is a middle ground, he said. The judge could have gone further and permanently barred the Chinese firms from issuing audit reports on U.S.-traded companies, as the SEC had requested and as the accounting industry had feared.
In a joint statement, the Big Four firms in China called the judge’s decision “regrettable” and said they would appeal. “In the meantime the firms can and will continue to serve all their clients without interruption.”
The SEC said it was gratified by the ruling and that it upholds the commission’s authority to obtain records that are “critical to our ability to investigate potential securities law violations and protect investors.”
The fifth firm, Dahua CPA, was censured by Judge Elliot but not suspended. Dahua was an affiliate of another large accounting firm, BDO, until last April, but the two are no longer affiliated.
The SEC had sought audit work papers from the firms to assist its investigations of some of the 130-plus Chinese companies trading on U.S. markets that have encountered accounting and disclosure questions in the past few years. Many of those companies have their independent audits performed by the Chinese affiliates of the Big Four, and the SEC had wanted to know more about what the auditors had found about the companies. (All the major accounting firms are international networks made up of individual, free-standing firms in each country in which they do business.)
But the Chinese firms refused to turn over the documents. They said their hands were tied, as Chinese law treats the information in such audit documents as akin to “state secrets.” The firms said their auditors could be thrown in jail if they cooperated with the SEC without the Chinese government’s blessing.
That led the SEC to file an administrative proceeding against the five firms in December 2012, arguing that U.S. law compels the firms to cooperate with such requests.
The judge agreed, saying the firms “have failed to recognize the wrongful nature of their conduct” and showed “gall” in complaining that complying with the SEC’s demands would hurt them. The firms knew when they registered with U.S. regulators and built their businesses in China that they might ultimately be put between a rock and a hard place in providing documents, the judge said.
The judge wasn’t deterred by an agreement last year between the U.S. and Chinese governments that somewhat alleviated the stalemate over documents, by allowing some documents from the audit firms to come to the U.S. after they were funneled through Chinese regulators. Since July, documents the SEC had sought relating to at least six companies have either been provided to U.S. regulators or were “in the pipeline” to be provided, the audit firms said in filings in November and December.
The five Chinese firms involved in the case have a total of 103 U.S.-traded companies that they audit or in which they played a substantial role in the audit, according to their 2013 annual reports filed with U.S. regulators. The companies might have to make other arrangements for audits if their firm is suspended during the period when their yearly audit is being performed.
The potential effect on U.S. multinationals is less clear, because most multinationals don’t specify when a Chinese affiliate or other foreign audit firm contributed to their audit, though a pending proposal from U.S. regulators would require them to do so. KPMG Huazhen, KPMG’s Chinese affiliate, indicated in its annual report with U.S. regulators that it had participated in the audits of U.S.-based companies like Yum Brands Inc. and SanminaCorp. SANM +0.44% by auditing Chinese subsidiaries of the companies. Yum and Sanmina couldn’t immediately be reached for comment.

How Caterpillar got bulldozed in China

How Caterpillar got bulldozed in China
Thursday, Jan 23, 2014
Reuters

ZHENGZHOU, China – Asia’s top mergers and acquisitions bankers gathered two years ago at the swanky Island Shangri La in Hong Kong to celebrate the top deals of 2012. As the transactions were being toasted, one was unravelling.
Advisers on Caterpillar Inc’s $677 million purchase of ERA Mining Machinery Ltd picked up an award for cross-border deal of the year. The purchase was billed as a coup for Caterpillar, the world’s top maker of tractors and excavators. ERA was the holding company for Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co Ltd, one of China’s biggest makers of hydraulic coal-mine roof supports. Siwei would help Caterpillar gain traction in the world’s largest coal industry.
“Siwei was going to be our Chinese business card,” said a person with direct knowledge of Caterpillar’s strategy.
The night of the awards on November 16 three Caterpillar lawyers were wrapping up an eight-hour grilling of Wang Fu, Siwei’s chairman. Major accounting problems had been unearthed at Siwei headquarters in the gritty Chinese city of Zhengzhou. Two months later, on January 18, 2013, Caterpillar said it had discovered “deliberate, multi-year, coordinated accounting misconduct” at Siwei.
Wang was sacked. Caterpillar took a non-cash goodwill impairment charge of $580 million – 86 per cent of the value of the deal. The company says it was caught unaware by the problems at Siwei and only discovered them in November 2012, five months after the deal closed.
A Reuters review of hundreds of pages of public documents, as well as interviews with former employees, board members, bankers and advisers, reveals a more complex story. Accounting problems were rampant at Siwei before Caterpillar bought it. Yet at multiple junctures, Caterpillar chose to ignore existing or potential problems and push ahead with the deal.
A year and a half after directors of the Peoria, Illinois-based company signed off on the deal, it has become a case study in how a foreign company with decades of experience in China can still flounder in that market. It also shows how willing some multinationals are to accept risks they might otherwise avoid to establish themselves in the world’s second-largest economy.
The deal has triggered legal action against Caterpillar. In May, Caterpillar announced it had settled a dispute with Siwei’s controlling shareholder, owned by an heir to the Crown Worldwide logistics company fortune and the former head of the American Chamber of Commerce in Beijing. Four shareholder suits filed in the United States in Caterpillar’s home state of Illinois are continuing.
Meanwhile, Siwei has foundered. Former employees told Reuters that as of September, the company had no new orders in 2013, and it had fired or furloughed about half of its workforce.
Siwei’s former CEO, Wang, says his books were a mess but he committed no wrongdoing.
“We were a legend in the industry,” Wang, 52, told Reuters, in his first media interview since the announcement of the write-off. Wang is now pursuing a second act: He has launched a new company with a nearly identical name in the same business. He has yet to build a factory, but says he can take Siwei’s old customers when he does.
BECOMING A CHINESE MANUFACTURER
When it bought Siwei, Caterpillar had been doing business in China for more than 30 years. It had amassed 20,000 China employees, dozens of manufacturing, research, logistics and parts centers and a broad dealer network. It had nine new facilities under construction, and had just completed the $8.8 billion purchase of Bucyrus, a mining and earth-moving company with significant China operations.
When former Chinese president Hu Jintao dined with a group of American businessmen in 2011, Caterpillar Chief Executive Doug Oberhelman was included.
But the company was slow to ramp up production of construction machinery in China and lost out on market share as a result, says Anthony Farmer, a former executive at Caterpillar. It didn’t want to make the same mistake in coal mining equipment.
China’s coal industry is the largest in the world, but it also insular. Local companies, particularly state-owned enterprises, prefer locally made products, said Farmer, now at construction and mining consultancy Millton Group.
Siwei was attractive. It once was state-owned, but no longer. That, and the fact that it was listed in Hong Kong – under the name of ERA – made it much easier for a foreign company to buy.
Moreover, the roof supports it made – spatula-like hydraulic arms that keep underground coal mines from collapsing – were lucrative, since 80 per cent of China’s mines are underground.
Siwei retained close ties to the government. In 2012 alone, it was visited twice by the Communist Party leader of Zhengzhou.
AMERICAN CONNECTIONS
Adding to the appeal, Siwei also had three high-profile investors with American ties.
Li Rubo, an American-trained mining engineer and an early Siwei investor, had arranged mining deals in Russia and Mongolia – sensitive undertakings that would have required political connections.
Emory Williams, an American business associate of Li, was a major shareholder and chairman of Siwei’s parent. He had invested in a Beijing concrete business back in the mid-1990s. The son of a former senior Sears executive, Williams had also served as chairman of the American Chamber of Commerce in Beijing. And along with Li, he had founded another Chinese mining company recently sold to another American mining equipment maker.
The third investor was Jimmy Thompson. He was Li Rubo’s son-in-law – and the son of billionaire Jim Thompson, who founded Crown Worldwide, the transport, relocation and storage giant.
Li and Williams were part of the reason Caterpillar felt comfortable with the acquisition, several people with direct knowledge of the situation said.
“They provided loans, they helped finance the company,” one of those people said.
Beyond that, their influence was limited. “The show was run out of Zhengzhou on a day-to-day basis. Unfortunately, they were further away from the business than I had expected,” that person said. “Our reliance on them was the blind leading the blind.”
Li, Thompson and Williams declined to comment for this story.
PROJECT SEQUOIA
Steve Wunning, the Peoria-based president of Caterpillar’s mining equipment division, Resource Industries, and then-Chief Financial Officer, Ed Rapp, pitched the idea of buying Siwei to the company’s board of directors in October 2011. It was codenamed “Project Sequoia.” The board expressed support for the strategy, according to court documents filed in the United States.
The first sign of trouble surfaced quickly. On November 7, 2011, the board received a two-page memo explaining that Siwei would need an immediate $50 million loan for working capital. Excerpts of the memo were contained in the court documents.
The memo explained that Siwei’s customers weren’t paying what they owed. It also noted Siwei hadn’t made overtime payments to its workers and didn’t hold operating permits required by Chinese regulations. Fixing these and other issues, the memo said, would cost CAT as much as $30 million.
The board was unfazed. That same day, the directors voted for the acquisition, authorising the purchase of Siwei for up to $964 million. It would be the biggest foreign machinery acquisition in Hong Kong or China since the country opened up for business in 1978. The board also authorised the loan for working capital.
Four months later, in March 2012, the board received another memo signalling trouble at Siwei, court documents showed. The company had missed its 2011 financial targets, and its parent company, ERA, was going to report a $2 million loss rather than a $16 million profit. Wunning also told the board that Siwei’s average receivables had grown to an extraordinary 371 days, according to filings in connection to the court case.
Corporate filings show the amount owed to Siwei by customers had risen 58 per cent per year since 2008, overtaking total sales in 2011. Some 90 per cent of those debts were overdue when Caterpillar launched its bid.
Mining equipment companies typically finance at least part of their customers’ purchases. However, once accounts are more than 90 days old, they are almost always disqualified from being counted as collateral for loans. At six months, they are widely recognised as needing to be turned over to a collection agency, or they are written off or reserved in full, according to one of the four shareholder suits filed in the United States. The complaint says the receivables issue rendered Siwei’s revenues and assets “highly suspicious and most likely wholly illusory.”
Unsold goods were also a problem for Siwei. At the end of 2010, the average number of days Siwei’s products sat in storage was 414, double what it was during China’s economic slowdown in 2009.
NO ‘RED FLAGS’
Caterpillar spokesman Jim Dugan said the company would not comment directly on matters of “pending litigation.”
But he said Siwei’s accounting problems were unrelated to the profit warning and other issues the company found during its due diligence of the acquisition.
“The Siwei accounting issues that led to the goodwill impairment charge involved Siwei’s falsification of its books,” Dugan said in an email. “Therefore, Siwei’s profit warning and failure to meet its 2011 targets, the $50 million working capital loan to Siwei, and other issues that came up in the course of Caterpillar’s diligence were not ‘red flags’ as to the accounting fraud.”
The news release announcing Caterpillar’s tender offer went out on June 6, 2012.
Documents produced for one of the Illinois court cases show that Caterpillar’s board of directors did not ask for the results of the due diligence investigation, which ran from about September 2011 until June 2012. The board also did not look into whether Siwei’s financial problems had been resolved. And it did not adjust the offer price, the documents indicate.
Siwei had been focused almost entirely on gaining market share. Getting customers to actually pay their bills came to seem like an afterthought, former executives told Reuters.
“They would take orders without down payments, so they had to finance the whole thing,” said a person with direct involvement with Siwei. The point “was to try to get market share.” This person added: “These were all things we felt we could fix once we were on board.”
Caterpillar was so bullish on China, it may have been willing to overlook some of Siwei’s problems, former insiders say.
“There was also a lot of euphoria. We were really going to dominate. Not only in mining but also in China,” the person said, and old China hands Williams, Li and Thompson would help. “Obviously it was too much, and we got burned.”
LEGEND IN THE INDUSTRY
At first, Wang Fu was equally exuberant about the deal. Siwei’s former CEO is a native of the northeastern Chinese province of Liaoning with nearly 30 years experience in the machinery industry. His first job out of college in 1984 was with the state-owned company from which Siwei would eventually be spun out in 2003.
In Siwei’s first year of operation after the spinoff, sales were less than 20 million yuan. Growth came quickly amid China’s insatiable hunger for coal. By 2011, revenue approached 2 billion yuan ($500 million).
On June 8, 2012, two days after the acquisition was completed, Caterpillar executives addressed Siwei’s first post-merger board meeting in Zhengzhou. They pledged to preserve Siwei’s culture and way of doing business.
Wang says he was inspired. Siwei would retain independence, but be able to draw upon the experience and expertise of its new Fortune 500 parent.
The excitement faded quickly. Accounts of what went wrong, why and how, now diverge completely in Peoria and Zhengzhou.
In the interview, Wang said he knew Siwei’s accounting methodology was bad, and its finance team too inexperienced to make improvements. He said as CEO, his primary concern had been chasing market share. “Better to have market share than to solve every single problem and lose the market.” But his finance team, he said, couldn’t keep up as the firm grew and orders poured in.
Wang said he was proactive about the accounting problems. He raised it two or three times at Siwei board meetings, he said, hoping Caterpillar’s more experienced finance team could help. He said the board gave him half a year to resolve the issue.
Caterpillar denies that. Spokesman Dugan said Wang never brought the issue up and said Siwei’s accounting problems – including the existence of a second set of books – were only discovered in November 2012, after Caterpillar found inventory discrepancies.
Wang says there was no second set of accounting books.
THE GAME IS UP
Wang said he mobilized employees in finance, sales, manufacturing and technology to dig into the accounting issues following the acquisition. At the time, Wang said, nobody knew exactly how bad things were.
By October 2012, Wang found that costs were sometimes allocated to incorrect projects. Other times, the company had simply not capitalised costs, or had accounted for them improperly on Siwei’s balance sheet. Siwei had also double-booked some sales, which led to inventory discrepancies.
At the same time, however, by Wang’s estimates, the company’s income had been underreported by about 170 million yuan because it had under-valued equipment made in-house.
Caterpillar spokesman Dugan said this account was not accurate, but did not respond to specific questions about whether Caterpillar had written off too much. Requests to interview Caterpillar Chairman and CEO Oberhelman were declined.
In the months to follow, Wang’s relationship with Caterpillar soured. Every decision, it seemed to Wang, had to go through Caterpillar’s lawyers, and Wang said he rarely interacted with senior Caterpillar executives.
At the end of Wang’s marathon grilling by Caterpillar attorneys on November 16, the day of the awards ceremony in Hong Kong, the attorneys concluded there had been mismanagement but no fraud, Wang said.
Two months later, Wang says he was told to drop by Caterpillar’s China headquarters in Beijing at the tail end of a business trip. Company lawyers fired him, he says, and refused to answer his questions.
The written notice said: “Your misconduct and serious dereliction of duty have caused severe damage to the company. You have also seriously violated company rules.”
Since Caterpillar bought Siwei, it has had no new orders for hydraulic roof supports, two former employees with knowledge of customer accounts said.
The number of working employees fell to about 1,900 in September from about 4,300 at the start of the year, one former office employee said. Four other former employees corroborated the scope of the cuts.
Wang feels Caterpillar never had a “comprehensive understanding” of Siwei’s financial situation and believes he was the scapegoat.
“It looks like it is precisely to justify and cover up a dereliction of duty by their so-called elite teams that an easily discovered management issue is labelled as deliberate, intentional fraud,” he said.
Caterpillar stands by its allegation of fraud. And it is trying to open a new era at the company it acquired.
On November 8 it announced the company name had been changed to Caterpillar (Zhengzhou) Ltd. The Siwei brand, it said, would be phased out.

New Frugality Puts Strain on Chinese Firms; Anticorruption Campaign Dashes Peak Holiday Sales

New Frugality Puts Strain on Chinese Firms
Anticorruption Campaign Dashes Peak Holiday Sales
JAMES T. AREDDY
Updated Jan. 22, 2014 7:59 p.m. ET

In a campaign to stem wasteful spending and corruption by officials, China has banned government-run companies from spending public money to get calendars printed. The WSJ’s James Areddy reports.
SHANGHAI—As China prepares for the Year of the Horse, a crackdown on wasteful spending and corruption is weighing on calendar maker Li Zhen.
A growing list of new rules requires government officials to downshift their lifestyles by reducing public money spent on cigarettes, banquets, cars and travel, and fully eliminating perks like fireworks and private-jet travel. Tallying up edicts from the Communist Party’s internal corruption watchdog, more than a dozen broad categories of behavior, from entertainment to funerals, are being monitored for profligate spending.
The policy shift, announced in November, throttled the printing agency Mr. Li and his wife own, Shanghai Magnificent Star Calendar and Gift Ltd., by summarily forbidding thousands of government-owned banks and other companies from sending customers free calendars.
Mr. Li’s longtime business customers abruptly canceled orders. His warehouse now bulges with hundreds of thousands of increasingly unmarketable 2014 calendars worth over $170,000, including many embossed with corporate logos for companies that won’t pay.
“The impact is really huge,” says 42-year-old Mr. Li.
An unexpected peak-season rut for China’s calendar business illustrates how broadly a corruption crackdown has challenged business as usual. Private clubs are shutting down following official criticism they are extravagant; officials attend meetings without watches and belts to avoid suspicion they have ill-gotten wealth; military officers, once able to ride high in imported SUVs, were recently told to drive only domestically made vehicles.
The campaign may be beginning to drag on China’s economy by reducing demand, economists said after a report this week showed last year’s gross domestic product growth held steady at 7.7%.
President Xi Jinping sharpened anticorruption rhetoric that had become obligatory in speeches by Chinese leaders when he vowed a year ago to pursue “tigers” and “flies”—high-ranking officials and lowly bureaucrats—to restore trust in the Communist Party.

To reinforce new regulations reflecting his call for “honor to frugality and shame to extravagance,” government authorities stepped up enforcement, firing and detentions of bureaucrats. The party last year punished a record 182,000 officials nationwide, more than 13% above the rate a year earlier, according to its internal investigation agency, the Central Commission for Discipline Inspection.
Chilling officialdom and winning cheers from the public, the party punished cadres at various levels: public shaming for a county health official in Zhejiang province who allegedly accepted donations to cover his son’s wedding, and incarceration for Jiang Jiemin, the former head of oil giant China National Petroleum Corp., on unspecified corruption allegations.
President Xi earlier this month said the campaign has just begun.
“Every official should keep in mind that all dirty hands will be caught,” Mr. Xi said. Speaking with his back to a Communist hammer-and-sickle emblem as state television panned toward top cadres and uniformed military officials, Mr. Xi said: “Senior officials should hold party disciplines in awe and stop taking chances.”
Even critics of the campaign’s sometimes heavy-handed tactics credit Mr. Xi’s administration for effectively targeting ostentation and eliminating spending on dispensable items like calendars. Yet, there is less to suggest Mr. Xi is upending patronage structures that have repeatedly given rise to spectacular corruption cases, including in the railway, food and charity businesses.
“You need transparency. You need division of power,” said Thorsten Pattberg, a former researcher specializing in ethics at Peking University. “It looks they are punishing the black sheep. It’s not like they are reforming the system,” he said.
The man criticized about the wedding had to return the money but kept his job. He couldn’t be reached to comment.
Analysts say the former oil chief, who also couldn’t be reached, owes his fall mostly to his political links.
Bureaucrats are competing to dial back spending. Seven provinces targeted for extra scrutiny reduced 3.373 billion yuan, about $560 million, in spending for receptions, travel and vehicles during the latter half of 2013 compared with the year-earlier period, according to the official Xinhua news agency. Of the 30,000 caught violating regulations, Xinhua said, about a quarter got punished. “The regulations, publicity and all the punishment for all the officials who violated the rules” suggest the policy adjustment is permanent, said an official in the eastern city Wuxi.
Highlighting how compliance is fast replacing gross domestic product growth as a measure of success, the official said his government managed to cut the number of officials traveling overseas by 44% in 2013—twice the cut announced by his province, Jiangsu. The official, who traveled on city business three times in 2013, added that stipends were far lower than previous years, and “the hotels were not so flashy as before.”
New frugality extends beyond government budgets. China’s rich, according to Shanghai wealth-tracking service Hurun Report, cut gift-giving 25% last year, a rough indication they felt less pressure to funnel benefits toward officials responsible for granting contracts, business licenses and tax breaks.
Some unapproved activity is simply moving underground. While Hurun research found flashy watches are out, it said China’s wealthy are increasingly gifting discreet items like travel vouchers and health-care products. The kind of parties officials once hosted in gilded restaurants are sometimes now being catered clandestinely in suburban villas and behind simple doorways, according to people who have attended such events.
When a group of foreign bankers visited western China late last year, one of them said they inadvertently put local country officials in a bind: How to make the out-of-town guests feel welcome without appearing profligate? The officials decided on karaoke, according to the banker, though instead of partying in a club, the group retired to a government office where a disco ball was strung from the ceiling and hostesses served beer. “It was fairly awkward,” said the banker. “But they were just trying to be nice. You’d be surprised how sensitive they have become about perceptions.”
In announcing the free-calendar ban, Chinese authorities acknowledged that giving holiday greeting cards and calendars is a long-established and often innocent practice. Yet, explained Xinhua, “The printing is more and more luxurious and the waste is more and more severe.”
Calendar seller Mr. Li pointed to his stock and expressed frustration that he might only be able to salvage cardboard for recycling. But, he said he can’t completely disagree with the new policy: “In the long run, this is good because it’s a waste of money.”

SEC judge bars global auditors’ Chinese JVs

SEC judge bars global auditors’ Chinese JVs

January 23, 2014 4:14 am
By Josh Noble and Paul J Davies in Hong Kong
The Big Four global auditing firms have vowed to appeal a decision by a US Securities and Exchange Commission judge to ban their Chinese joint ventures from working for any US-listed Chinese companies.
SEC administrative trial judge Cameron Eliot ruled late on Wednesday that all four joint ventures – Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian – had violated the Sarbanes-Oxley Act, and said they should be barred from practising in the US for six months.
The SEC ruling is the latest twist in a long-running battle between US and Chinese regulators over access to company documents of Chinese companies listed in New York.
The four accountancy firms released a joint statement announcing their intention to appeal the judgment.
Accounting expert Professor Paul Gillis noted that parts of the judgment were redacted because they reported interactions between the SEC and China Securities Regulatory Commission “more candidly than is customary in diplomatic circles”.
The Big Four – EY, PwC, KPMG and Deloitte – have refused to turn over audit working papers requested by the SEC in several fraud investigations, as they say such a move would violate Chinese law.
The SEC has already banned some smaller US accounting firms for performing audit work for “botched” audits on a number of US-listed Chinese companies.
The ban for the Big Four does not come into effect immediately, but if finalised by the SEC all four joint ventures would be unable to audit the accounts of the Chinese companies listed in the US, of which there are more than 100.
These companies will be forced to hire new accounting firms in China, of which there are about 50 registered with US authorities.
Many Chinese companies that listed in the US did so through reverse mergers, buying a listed shell company. This method was seen as a short-cut to American stock markets and became notorious after several companies were targeted by short-sellers and a number proved to be frauds.
In their joint statement, the Big Four said: “It is regrettable that the SEC’s administrative law judge has recommended sanctions against the big four firms in China for failing to produce work papers to the SEC in circumstances where such production would have violated Chinese law and regulations. However, the firms note that the decision is neither final nor legally effective unless and until reviewed and approved by the full US SEC Commission. The firms intend to appeal and thereby initiate that review without delay.”
“This has significantly upped the ante in the regulatory battle between the US and China”, Professor Gillis wrote on his China accounting blog. “The SEC appears to be signalling to Chinese regulators that it is willing to deploy the ‘nuclear option’, for six months anyway.”
Observers had thought the spat between the US and China over accounting had been settled after the US Public Company Accounting Oversight Board PCAOB, China’s finance ministry, and the CSRC signed a memorandum of understanding last year.

President Xi’s son hides riches offshore: ICIJ probe

President Xi’s son hides riches offshore: ICIJ probe
Thursday, January 23, 2014 – 09:30
The China Post/Asia News Network
HONG KONG- Relatives of top Chinese leaders including President Xi Jinping and former Premier Wen Jiabao have used offshore tax havens to hide their wealth, according to a mammoth investigation released Wednesday.
The International Consortium of Investigative Journalists (ICIJ), citing information culled from 2.5 million leaked documents, said that Xi’s brother-in-law and Wen’s son and son-in-law were among those with offshore holdings.
It is the latest revelation to shine a light on the hidden wealth of family members of China’s top officials, a topic considered off-limits by Communist Party leaders.
Offshore entities can be legal and there was no evidence that the politicians were aware of their relatives’ actions.
The release came on the same day that China put leading activist Xu Zhiyong on trial for his part in protests calling for officials to disclose their assets.
It also came days after Wen reportedly penned a letter to a Hong Kong columnist proclaiming his “innocence” over previous claims that his family amassed huge wealth during his decade in power.
The ICIJ report cited nearly 22,000 offshore clients from mainland China and Hong Kong, including relatives of former president Hu Jintao, former premier Li Peng and late leader Deng Xiaoping, the man credited with opening up China’s economy in the 1980s.
Also included were members of China’s National People’s Congress, heads of state-owned enterprises and some of the country’s wealthiest men and women, including real estate mogul Zhang Xin; Pony Ma and Zhang Zhidong, co-founders of Chinese Internet giant Tencent; and Yang Huiyan, China’s richest woman.
ICIJ said it sent letters to the government officials, wealthy individuals and others named in its report.
“Their response in most cases was to not respond, a standard practice in China,” it said.
ICIJ said it collaborated with more than 50 partner organisations across the globe in sifting through the data, including The Guardian, Le Monde in France, El Pais in Spain and Hong Kong’s Ming Pao newspaper.
The websites of all four were not accessible within China on Wednesday, and nor was ICIJ’s.
Chinese foreign ministry spokesman Qin Gang told reporters at a regular briefing that “the logic of the article is unconvincing, which cannot but raise questions of ulterior motives.”
Asked if the government planned to follow up on the report, Qin responded: “What I want to point out is, the clean will be proved clean and the dirty will be proved dirty.”
The confidential files leaked to ICIJ also include the names of 16,000 clients from Taiwan.
Conflict of Interest
Ninety per cent of the mainland Chinese clients set up offshore entities in the British Virgin Islands, often with the help of Western firms such as UBS and PricewaterhouseCoopers, the investigation said. Seven per cent were established in Samoa and three per cent in other areas.
The British Virgin Islands was the destination of choice for Xi’s brother-in-law Deng Jiagui, a wealthy real estate developer and investor who married Xi’s older sister in 1996.
According to the report, Deng owns a 50-per cent stake in BVI-based company Excellence Effort Property Development.
While such offshore trusts and companies “may not be strictly illegal,” they are often linked to “conflict of interest and covert use of government power,” Minxin Pei, a political science professor at Claremont McKenna College in California, told the ICIJ.
In 2012 the New York Times and Bloomberg news agency published investigations into the vast wealth said to have been amassed by family members of Wen and Xi.
Both news organisations have since had their websites blocked in China, and authorities have denounced the reports as an effort to “smear” China’s leadership.
Last November the New York Times found that US bank JPMorgan hired Wen’s daughter as a consultant, part of a broader strategy that the newspaper said was aimed at accumulating influence in China by employing relatives of leaders.
According to the Times report, JPMorgan paid a total of US$1.8 million to Fullmark Consultants, a firm set up by Wen’s daughter Wen Ruchun, who also goes by the alias “Lily Chang.”
The files leaked to ICIJ purported to show Fullmark Consultants was set up in the British Virgin Islands in 2004 by her husband, who was its sole director and shareholder until 2006.
Hong Kong’s Ming Pao paper on Saturday quoted Wen as writing in a letter to a columnist: “I have never been involved and would not get involved in one single deal of abusing my power for personal gain.
“I want to walk the last journey in this world well. I came to this world with bare hands and I want to leave this world clean.”
It headlined its story on the ICIJ revelations about Wen but omitted any reference to Xi.

New rules have gone into place in China to prevent cinemas from manipulating viewing figures and other cinematic frauds

China’s new rules stop box office cheats
Liu Lu, Tao Yiping
BEIJING, Jan. 22 (Xinhua) — New rules have gone into place in China to prevent cinemas from manipulating viewing figures and other cinematic frauds.
The State General Administration of Press, Publication, Radio, Film and Television, China’s movie watchdog, confirmed on Wednesday that it has issued a circular with new rules to prevent box office fraud.
Earlier this month, the administrators defined a standard on the technicalities of managing cinema ticket sales to prevent tax avoidance through falsification of numbers of movie-goers and reporting of artificially reduced ticket sales.
According to the circular, film distributors should conduct routine inspections of cinemas and report those which break the rules whenever and wherever they are discovered. Persistent or severe offenders may have their licenses revoked.
These frauds are often facilitated through the use of illegal ticketing software offering double systems to cheat on box office sales. The circular said that all ticketing software must be upgraded before May 1 and disqualified software will not be allowed. An upgrade to the national digital ticketing platform will be completed by that date and all commercial cinemas must upgrade or face being banned from operations.
China has made rapid progress in the film industry in recent years.
In 2013, box office sales neared 21.8 billion yuan (3.6 billion U.S dollars), and domestic films raked in about 12.8 billion yuan, a year-on-year increase of 54.3 percent.
However, industry experts believe that real box office sales are at least 10 percent more and cheating by some cinemas has gravely affected tax revenue, as well as hitting the enthusiasm — and bottom line — of film makers.
Yin Hong, professor of Tsinghua University, said it is now common for cinemas in smaller cities to report fewer box office receipts to avoid paying taxes.
“Box office fraud will lead to disorder in the film market and to vicious competition which will ultimately affect Chinese people’s viewing pleasure,” said Yin.
Wang Changtian, president of film company Enlight Pictures, said that if film releasers did not make a profit, they would have no funds to make more movies; a vicious circle of film development.
Yin suggested harsher punishments for cheating cinemas and incentives for local departments to supervise cinema operations.
“The standard of ticket management can be further improved this year,” said Zhang Hongsen, head of the administration.
Departments at all levels should be positive in solving emerging film ticketing problems to keep the film industry on an even keel, Zhang added.

Remy Martin in low spirits as China’s crackdown drains brandy sales

Remy Martin in low spirits as China’s crackdown drains brandy sales
Wednesday, January 22, 2014 – 14:13
Lyu Chang
China Daily/Asia News Network
CHINA – France’s second-biggest distiller Remy Martin can no longer count on the Chinese New Year, usually the best time of the year for a sales boost, for a bonanza this Spring Festival because of the government’s crackdown on extravagant spending.
Sales of the Paris-based company were down in the first three quarters by more than 12 per cent to 845.7 million euros (S$1.47 billion) from 964.5 million euros over the same period in the previous year because of the “unfavorable situation” for spirits in China, the company said on Tuesday in a statement.
“The campaign to promote morality in China is expected to continue to adversely affect the consumption of ultra-premium products. No significant recovery can be expected because of the Chinese New Year,” the statement said. The Chinese New Year, known as the Spring Festival, is a key point for giving expensive gifts and high-end liquor. It begins on Jan 31 this year.
A further significant slowdown in sales over the previous two quarters was recorded in the third quarter, primarily in the Chinese market, while the brand continued to deliver good results in the United States, Russia, Japan and Africa.
From January to September, the company’s most profitable brand, Remy Martin brandy, declined 21 per cent at 465.9 million euros. But its liquors and spirits improved sales by 3.2 per cent to 188.5 million euros, a reflection of the healthy performance of the division’s brands.
Chief Executive Officer Frederic Pflanz said in November that annual earnings could fall 20 per cent or possibly more.
The liquor is not only the target of the government’s mounting campaign against corruption and extravagance: High-end wines and Chinese white liquor are also on the list.

China’s Interbank Squeeze: Understanding the 2013 Drama and Anticipating 2014

China’s Interbank Squeeze: Understanding the 2013 Drama and Anticipating 2014
Daniel H. Rosen and Beibei Bao | January 22, 2014
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In mid-December 2013, as in June, China’s benchmark money market rates shot up as the People’s Bank of China (PBOC, or “the Bank”) declined to inject liquidity to satisfy business as usual growth in credit among banks. These two end-of-quarter incidents were dubbed “cash crunches” by most observers, but to us that term mischaracterizes what’s going on and glosses over the important differences between these two episodes.
The year 2014 has started off with additional drama over credit markets in China, and concerns that rising costs could lead to defaults for some risky financial products and end up spilling over to a broader financial crisis in China.  In this note we explore the current situation and the recent changes in money market structure. We also consider the common view that the central bank is not in control, and whether its intervention can steer reform for the coming year. As we held throughout 2013, we believe the Bank knows what it’s doing, is being as rational as it can be in the context of China’s unique political crosswinds, and will play a decisive role in shaping 2014 outcomes.
PBOC’s death is wholly exaggerated: Many pundits have been writing that the Bank has lost control of monetary conditions in China and is flailing about making policy mistakes. The opposite is true: in 2013, the Bank demonstrated that it is precipitating corrections, not reacting to them, and can apply differentiated tools in the face of different pressures.
Higher rates boost foreign opportunities:  Since the Bank is acting decisively, and not reacting to something it can’t manage, the higher borrowing costs it has engineered are likely to stick through 2014. At this elevated level, they will start to change business patterns in the real economy. Resulting stress for both Chinese financials and real economy firms will, in our view, widen opportunities for their foreign cousins.
High stakes, but no meltdown: Continued business-as-usual debt creation would lead to national insolvency in a few years at the current rate of growth, but the aggressive measures being taken to avoid that won’t seize-up the system in China, since government controls both sides of the ledger. In fact China has had far fewer defaults – which are a normal reality in a market economy where investors must take responsibility for their risk/return choices – than it should for its size, and this is part of growing up and getting stronger.
BREAKING DOWN THE MONETARY BASE
Ask any trader in China what the most critical dates in 2013 were and chances are they will say June 20 and December 23. On those two days interbank borrowing costs spiked severely, sending traders and banks scrambling for money to cover their positions until the last minute of market closing. Rumors of bank and wealth management product defaults cascaded, and the PBOC seemed to fuel panic by remaining on the sidelines and declining to supplement liquidity as was normally expected [Figure 1].
In late June 2013, as major media were flashing “cash crunch” headlines and seven-day interbank repo rates soared to 11.62% (almost triple current rates as of this writing), the PBOC issued a notice observing that “total liquidity isn’t in shortage”. Indeed, on June 21 financial institutions’ total excess reserves at the central bank were about 1.5 trillion RMB, more than twice necessary levels (according to the PBOC), in addition to about 18 trillion RMB of required reserves. During the December cash crunch, the PBOC used an unusual platform – the Twitter-like Weibo – to note that excess reserves remained around 1.5 trillion RMB, at a “relatively high historical level”. With so much excess reserves in central bank vaults, why were the banks still short of cash?

The problem isn’t aggregate funds and obligations, but the structure of specific indebtedness and also the PBOC’s capacity to manage market expectations. Let’s first take a look at the three major sources of state influence over China’s monetary base: fiscal deposit injections, forex purchases, and PBOC open market operations (OMOs). These are the regular channels through which the Bank provides liquidity to the market, and then banks leverage this high-powered money up through various lending activities. To make sense of the battle being fought in Beijing, it’s necessary to look more closely at these three channels [Figure 2].

Fiscal deposit flows: Fiscal deposits are money placed with the PBOC by various levels of government through banks. Placement of fiscal deposits at the PBOC by government offices withdraws liquidity from the market, and injection of fiscal deposits means government expenditures occur, drawing money from PBOC accounts back to the banking system, increasing liquidity. Fiscal deposit flows are highly seasonal, often increasing liquidity at the end of the quarter as government spends money to meet budgetary objectives, and withdrawing liquidity over the rest of the quarter. For the last two months of the year traders can generally estimate the volume of fiscal deposit injections based on flows over the first ten months and the central government budget published at the beginning of the year, and execute trades accordingly. Fiscal deposit data is released monthly by the PBOC in its “Summary of Sources and Uses of Credit Funds of Financial Institutions (RMB)” (“Summary”) – financial institutions in the table include the PBOC, other banks, trust companies, financial lease companies and auto financing companies. A decrease in “fiscal deposits” means increased liquidity in the economy. In November 2013, the latest month data available, the injection of fiscal deposits was 43.5 billion RMB, and in June, it was 122 billion RMB.

Forex purchases: Foreign exchange (forex) purchases involve local currency (renminbi) injected into the economy in exchange for foreign currency-denominated assets bought by the banking system. The PBOC can only impact forex inflows partially because forex transactions are hard to track and voluminous nowadays, and include both legal trades and hot money inflows. When Beijing launched a crackdown on export over-invoicing and hot money inflows in the spring of 2013, forex purchases fell sharply from 294 billion RMB in April to 67 billion RMB in May, before turning negative in June. To smooth the volatility caused by forex inflows, the PBOC conducts offsetting operations; when it fails to do so the mismatch of market expectations creates problems. In the Summary, increasing forex purchases mean more liquidity in the market (which can be countered by sterilization operations). In November 2013, total purchases of forex added 398 billion RMB to liquidity, while in June they withdrew 41 billion RMB. PBOC sterilization operations were conducted with reserve requirements, OMOS (see below) such as bill issuance (which are transparent but haven’t been employed lately) and other liquidity tools which are non-transparent (see below), leaving the net effect on liquidity somewhat unclear. Some analysts use the monthly increase of excess reserves at the central bank and other public data such as fiscal deposits and currency in circulation to estimate the net sterilization effect, but PBOC doesn’t provide an exact number.

Open market operations: OMOs are another monetary policy option the Bank can deploy to influence market liquidity. Regular OMOs include central bank bill issuance, repurchase agreements, and reverse repurchase agreements. These instruments carry a maturity period ranging from a few days to three years, and when they mature they impact market liquidity in the opposite way to their initial effect. Data on OMOs is released by the PBOC as they are carried out, with publication on the Bank’s website, and at the CEIC, Bloomberg and Wind databases.

In January 2013 the PBOC introduced two new tools to adjust liquidity more swiftly and accurately. One is Short-term Liquidity Operations (SLO), in which the PBOC provides credit to designated large banks for no more than seven days, with details not published until one month later. The other is a Standing Lending Facility (SLF). Compared to SLO, SLF has a different maturity period –previously one to three months but in January 2014 for just a few weeks to get past Chinese New Year – and it is also different in that announcements on the PBOC website don’t follow a regular schedule. The next release, of Q4 operations, will probably be in PBOC’s Q42013 monetary policy report in the coming month.
In addition to these interventions, several other factors affect the monetary base from the supply side, including central treasury cash auctions, forex flows not purchased by the banks, changes in the required reserve ratio (RRR), and unpublished and irregular injections and withdrawals of credit by the central bank such as by forcing the big banks’ hands in holding forex privately. However, unlike the three formal channels defined above, these are not considered regular PBOC interventions and data on some of them is lacking.

THE CRUNCHES: MISMATCHED EXPECTATIONS AND PBOC STERILIZATION
Many assumed the November-December 2013 liquidity squeeze was a repeat of June, but details were different in important ways. Starting in May, a Beijing crackdown on hot money inflows – partly out of determination to arrest the shadow banking sector getting out of control – choked down on forex inflows. The central bank not only refused to provide extra liquidity to offset the crunch, it kept conducting repurchases until June 9, thus continuing to withdraw renminbi from the market as well. PBOC also issued 92 billion RMB of central bank bill in May and 22 billion RMB more in June to further tighten credit. The Bank’s stance, and the evident lack of opposition to it from the nation’s paramount leaders Xi Jinping and Premier Li Keqiang, was a stark reversal from 1Q13, when total social financing (TSF, the broadest measure of new credit in China) rose to levels not seen since the financial crisis stimulus program in 2009 [Figure 3].
The Bank’s abrupt switch in stance caught the large state banks off guard. They had (dangerously) refused to believe that the Xi-Li Administration meant to break with business as usual up to this point; nor had they bet on American tapering so early – Bernanke signaled the end of QE on June 19 – given their poor read on US fundamentals (they had little presence in the US and senior leaders were preoccupied with Chinese conditions). The market began speculating that an unusual meeting of the Politburo Standing Committee at the end of April 2013 might have made a 180-degree turn in monetary policy.  The large banks flipped to cash hoarding mode in the first weeks of June, and though they had roughly 1.5 trillion RMB of excess reserves with the PBOC they refused to deploy this cash to help midsized counterparts make up for the PBOC’s absence from the interbank market.
With the end of the 2Q13 looming, smaller shareholding banks were at risk of disaster within days. Their predicament dated to the second half of 2010, when Beijing faced up to the need to discipline the liquidity explosion echoing from the 4 trillion RMB 2008-2009 stimulus program. With trillions tied up in long-term infrastructure and property projects years from generating cash flow, but with mismatched short-term debt repayment obligations and reported liquidity growth that had to be staunched, the smaller banks used to finance the local stimulus projects were told to go to these interbank markets (which are generally off balance sheet and not subject to lending/deposit ratio regulations) to stay solvent and avoid disorderly defaults. As a result, by 2013 the scale of the credit created by the interbank market was second only to proper RMB loans, as the PBOC’s 3Q2013 monetary policy report makes clear.
The big question in June was whether the PBOC anticipated these consequences of clamping down on interbank credit creation and higher borrowing costs, and whether they were in control both before and after US Fed tapering signals poured gasoline on the fire. To our minds, the addition of a new, special column introducing the SLO and SLF tools in the Bank’s Q1 monetary policy report published May 9 (just after the April 26 Politburo Standing Committee meeting), to be used “when multiple liquidity determinants reinforce each other or when market expectations change, [and  when we are] likely to see short-term liquidity shortages that cannot be timely eased by money market financing”, makes clear this was an anticipated war of choice.  This short sentence closely described what happened six weeks later.  Why didn’t the Bank advertise its intentions more broadly then?  Our belief is that doing so would have invited a maelstrom of preemptive criticism of the Bank from still powerful vested interests wanting growth at all costs. Remember, the vast majority of elite Chinese and foreign economists and political scientists still believed Xi Jinping would be a compromised, compromising leader at this juncture. The PBOC was doing its best to steer between preventing a systemic collapse and imposing capital discipline to deliver Xi’s reform commitment, and doing a pretty good job of it. And then on June 19 Ben Bernanke signaled (prematurely it turned out) the end of quantitative easing and the beginning of a taper, and that turned a managed squeeze of forex hot money out of Chinese markets into a more alarming rush. These external impacts, combined with murky expectations between regulators and banks, leavened by the end of the Bernanke put (guarantee of copious quantitative easing of liquidity), sent interbank rates to a dizzying June 20 peak.

To get the saddle back on market expectations the Bank published a special note on June 25 with three messages. First, the PBOC could see 1.5 trillion RMB in excess reserves — more than enough to meet settlement needs – through the crunch, so they knew the liquidity shortage was not aggregate. And they had the ability to compel those in surplus to lend, which they did (picking up the phone and telling them to get to it). Second, to deleverage and reduce off-balance sheet lending risks, the central government would henceforth remain tighter, while actively using shorter-term tools such as re-discounting, SLO and SLF to manage (not eliminate) tensions (eliminating risk for some borrowers was precisely the problem that got China into its current debt mess!). And third, while large banks could ultimately count on the PBOC to provide liquidity, they were expected to be market stabilizers, channeling money to smaller banks when necessary. The implicit message was that these squeezes would happen again, and big banks should prepare, and smaller banks should adjust their balance sheet and asset structures. While Beijing leaned toward more accommodation to offset downside anxieties in a fiscal and liquidity injection from late July 2013, this was tactical, and not an alteration in the overall level of seriousness about draining the shadow banking swamps.
After the June 25 note was released, confusion over the central bank’s stance was largely resolved – or should have been. Anxiety in November and December was therefore not a repeat of June, but rather a different story. As Figure 2 makes clear, the financial system’s forex purchases (injecting RMB into the market) resumed in August and continued through November, and are likely to have continued in end of year data. Probably 75% of this was sterilized.  Washing most of the remaining forex purchase liquidity out was the lack of a year-end ramp up in fiscal deposit injection in November. Compared to an average of 234 billion RMB in government budget funds released to check-writing bureaucracies in the previous three Novembers, the 2013 figure was only 43.5 billion RMB, a reflection of the central anti-corruption campaign and seriousness about ending wasteful infrastructure and overcapacity industry projects. For instance the new 2014 railway fixed investment target was just publicly set to shrink from 2013, a surprise to market expectations. This is the reality: if you are serious about rebalancing and big bang economic reforms, then you have to put your money where your mouth is and reduce investment growth. December is the biggest month for fiscal injections, and it will be much bigger than November, but the trend seems to be much smaller than expected.
So much for fiscal behavior at year-end; on the monetary side the PBOC again took no action to offset the shortfall – instead amplifying them by suspending reverse repos entirely for two weeks, further draining capital. In its 3Q2013 monetary policy report the Bank once more spelled out its intention to address interbank off-balance sheet lending and credit product maturity mismatches. In addition, if leading market traders are to be believed there was additional unannounced capital withdrawal in the first half of November caused by SLF maturity; as noted above, SLF interventions and their reversal are not always reported by the Bank. If this was the case, it may be discernable in the Bank’s 4Q2013 report released in late January or early February (before or after Chinese New Year). Taken together, the evidence is clear that the PBOC worked to drain cash from the banking system over the past three quarters since April 2013, driving up money market rates and reducing the rewards of risky lending and credit product creation. This is not just the flavor of the moment, but serves the Standing Committee’s top level priority of reducing systematic risks and forcing banks to strengthen liquidity controls and reduce funding to overheated sectors through under-regulated channels that circumvent controls.
THE NEW NORMAL?
By our estimate average 2013 money market rates were 150% of the previous ten years’ average. For 2014 the Bank has pledged a prudent monetary policy stance, and in light of interest rate liberalization signals such as the restart of certificate of deposits, markets are expecting interbank rates to float in the current range (currently just over 4% for seven-day repos, down from the December 23 high of 8.94% but still four times January 2009 levels). So what implications does this have for the money market and the real economy in 2014? We have two working conclusions.
First, shareholding banks and other financial institutions that were fed on off-balance sheet lending in the past three years will go through painful restructuring in 2014. They need to adjust their asset structures and bring their gray-area banking activity back to the balance sheet. During this process we believe there will be recurring trust product defaults, though without any real risk of a banking system collapse. The PBOC foresees these problems and has an actively adjusted opinion about the degree of resilience in the system – a much clearer view of that than anyone outside the Bank in fact, by an order of magnitude.  That is not hubris on the Bank’s part.  This is not Soros against the Bank of England; Beijing has sacrificed the benefits of open financial markets prone to speculation in exchange for retaining control over the institutions with access to its credit system: the PBOC is not independent, but it has asymmetric dominance in terms of systemic liquidity information.
When “cash crunches” like last June happen, or when the Bank makes them happen, the Bank has tools with which to manage short-term liquidity without abandoning the goal of long-term deleveraging – the political system of China is finally backing them up and moving institutions, incentives and expectations in the right direction. In January 2014 they demonstrated this again, lest anyone think 2014 would be more placid: the usual pre-Chinese New Year cash demands and the unusual appetite for cash to fund stock buying accounts for newly relaunched IPO markets sent interbank markets right back up for short-term funds.  The Bank let them rise, even while rumors of high-return but risky wealth management product (WMPs) defaults swirled, before injecting the cash the market needed, at high rates, for short durations. The risk is not from the Bank’s gaming the market to impose a new, more conservative set of credit expectations; rather, it is that leverage continues to build up too quickly, and in non-transparent ways, and due to undisciplined political fiat such as ruled the Ministry of Railways in recent years. That is an acute medium-term risk, though for the moment Xi is making progress convincing skeptics that he really is going to shift the patterns of investment.
Second, in 2014 rising borrowing costs will mean repercussions for the real economy: industries that used to rely on cheap capital, especially those in overcapacity, such as steel, cement, glass, and even rail, face strong headwinds in financing. As mentioned above, the just -concluded national railway network conference (a senior-level central affair for this “strategic” sector) announced that the fixed asset investment goal for rail in 2014 was 630 billion RMB, 30 billion RMB less than what was spent last year. Targeting lower growth in 2014 was well beneath market expectations, given how important rail investment was in anchoring Chinese growth targets over the past five years. With falling rail FAI and steel sector consolidation, rising export surpluses thanks to a strong US will not be enough to get China to the rumored 2014 7.5% growth target (we still bet that high a target will not be announced). In response to the financial crisis huge industrial and property investment kept China sailing relatively smoothly, underwritten by largely unregulated shadow bank lending. Off-balance sheet activity and over-investment in China are two sides of the same coin, and if Beijing is determined to tackle either of them then the either side will be affected too. The most productive real economy firms in China – the ones that have to pay the bills and create the sustainable jobs going forward – are completely tangled up in this legacy. Cutting through this in 2014 is going to be messy. Ultimately, this year, we see no alternative for Beijing other than letting capable, productive private businesses off their leash so they can help pull the economy out of the ditch.

China: Delta blues; Shoppers will have to pay more as the world’s factory comes under wage and labour strain

China: Delta blues; Shoppers will have to pay more as the world’s factory comes under wage and labour strain

January 22, 2014 7:06 pm
China: Delta blues
By Demetri Sevastopulo
Shoppers will have to pay more as the world’s factory comes under wage and labour strain
Gerhard Flatz, the general manager of an Austrian factory in China that makes high-end skiwear for European brands, has a problem. He cannot find enough skilled seamstresses even though top performers can earn $1,500 a month, about eight times the local minimum wage in Heshan.
“China has a shortage of skilled labour,” says Mr Flatz during a tour of the Heshan factory southwest of Guangzhou.

As he walks past the pattern room where his most talented employees work, the garrulous Austrian explains that he is careful not to reveal their names to prevent poaching.
“This is like the NSA”, he says with a smile, referring to the most secretive branch of the US intelligence services.
Heshan is just one of the many cities in Guangdong that has transformed the province into the factory of the world. Shenzhen, the home to companies such as Huawei and Tencent, is another.
When Christina Zhang moved to Shenzhen in 1983, the rural fishing county was a far cry from the booming city it has become in the three decades since Deng Xiaoping created China’s first special economic zone .
“Most of the area was paddy fields,” says Ms Zhang, who works at PCH International, a logistics company. “I learnt how to ride my bicycle on Shennan Road. There were no cars [but] now it is the main road.”
Since Deng launched his economic reforms in 1979, Shenzhen has changed from a tiny county of 30,000 people across the border from Hong Kong to a metropolis of 10m with one of the highest per-capita incomes in China.
Shenzhen, Guangzhou, Dongguan, Foshan and other regional cities form the heart of the Pearl River Delta, a region of 56m that is vital to the world economy because it produces everything from bicycles to jeans and sex toys to iPads.
Dongguan alone made about 30 per cent of the toys delivered over Christmas around the globe. Yao Kang, deputy Communist party secretary of the city, says it also makes 20 per cent of the sweaters and 10 per cent of the running shoes worn by consumers. As locals say: “When there is a traffic jam in Dongguan, the world runs out of supplies.”
Underscoring its phenomenal growth, Guangdong last week estimated that its economy grew 8.5 per cent to Rmb6.33tn ($1.05tn) in 2013, which would sandwich it between South Korea and Indonesia.
The PRD has managed to produce cheap goods for so long because millions of migrants have been willing to work in factories making products they can rarely afford. In Shenzhen, authorities plan to raise its minimum wage by 13 per cent to Rmb1,808 next month. Although the city has the highest minimum wage in China, it would take a worker two months to earn enough to buy an iPad Air.
But the system is coming under strain in ways that affect everyone from London shoppers to young Chinese in Guangdong: workers are harder to find, wages are rising rapidly, raw material and land prices are going up, the renminbi is getting stronger and other regions are becoming increasingly attractive for manufacturing.
The obvious challenge to the region is labour costs, with wages in Guangdong rising at double-digit rates each year. That is unlikely to change since China is targeting nationwide annual increases of 13 per cent in its 2011-15 five-year plan, as part of a push to spur consumption and reduce the economy’s dependence on investment.
Roger Lee, chief executive of TAL, a Hong Kong company with 11 factories in Asia that produces clothes for dozens of global brands, says wages have doubled over the past five years. In 2008 its Dongguan factories made clothes at half the cost of its facilities in Malaysia and Thailand but that gap has since disappeared.
Crystal Group, one of Asia’s largest apparel companies with 11,000 workers in Dongguan, says organic costs – including wages and the strengthening renminbi – have risen 10-12 per cent over the past five years. As a result, it has been forced to shift production of commodity items such as polo shirts and underwear elsewhere.
“Our strategy is to . . . produce them in cheaper countries like Vietnam or Cambodia,” says Dennis Wong, executive director. “That is why we are still surviving.”
While some companies such as Crystal are shifting production to southeast Asia, others are moving to cheaper parts of China. Samsonite, the luggage maker that outsources about 65 per cent of its production to Chinese companies, has seen many of its vendors move to provinces around Shanghai in the Yangtze River Delta.
“About 80 or 90 per cent of the people we were working with were based in southern China,” says Tim Parker, chief executive of Samsonite. “Now probably the majority . . . we purchase comes from eastern China”.
Despite rising labour costs, any decision to leave the delta is not easy for foreign companies and their local manufacturers. Its ecosystem – everything from clusters of suppliers to road and rail infrastructure to access to ports in Shenzhen and Hong Kong – is hard to match elsewhere without sparking other cost increases.
Nick Debham, Asia head of consumer markets at KMPG, says textile manufacturers, for example, can shift lower-skilled production to countries such as Bangladesh and Cambodia relatively easily, although wages in those countries are also rising. But other industries, such as toy manufacturing, which is concentrated in south China, are less mobile as they rely on concentrated clusters of suppliers.
“There are so many ancillary bits and pieces that need to be in place, it is difficult to move the whole thing lock, stock and barrel out of China,” says Mr Debham.
For companies that are contemplating moving inland in China instead of overseas, the decision is no easier. Mr Lee of TAL says his company conducted a study five years ago that concluded that moving inland would cut labour costs by 15 per cent but that the level of infrastructure would not be as good as in Guangdong.
For manufacturers that cannot easily relocate, one solution is to automate more. Samsonite’s Mr Parker says his Chinese vendors are doing exactly that. He says there is plenty of scope since many Chinese factories use far more basic equipment than, for example, those the suitcase maker employs in its own facility in
Belgium.
“In China . . . you will find a totally different set-up and it is driven . . . by the relatively low cost of labour,” says Mr Parker. “That’s all changing because as the costs of labour increase, so some of our more enterprising suppliers are beginning to invest in more . . . sophisticated sewing equipment in order to reduce the labour content.”
Some local governments, such as Dongguan, are trying to accelerate that process with subsidies. Mr Yao, the deputy party secretary, points to the knitting town of Dalang as a successful example, saying that its factories used the government funds to buy 40,000 computerised knitting machines, reducing the need for 200,000 workers.
While manufacturers juggle solutions to rising labour costs, the trend is expected to get worse for various reasons. Rising wages are partly due to local governments raising the minimum levels. In its 2011-15 economic plan, Guangdong is targeting a 40 per cent rise. But the driving cause is factories being forced to pay more to attract workers amid an increasingly tight labour market.
Several factors explain the scarcity of workers but the main reason is demographics. As a result of its one-child policy, China’s working-age population – people between the ages of 15 and 59 – fell by 3.45m to 937m in 2012, in what was the first decline in many years.
The labour squeeze is exacerbated in the PRD as migrant workers now have greater opportunities in their home provinces. These new opportunities are a result of central government policies aimed at promoting inland development to reduce the income gap with rich coastal regions. The “go-west” strategy is creating jobs in the interior that are particularly attractive to women who in the past left their children and moved to Guangdong for factory jobs.
Another reason manufacturers are having to pay more is that workers are increasingly picky about jobs, since they have more choices as the PRD labour market shifts in their favour. Young workers are also less willing than earlier generations of migrants to toil in factories.
The explosive growth in smartphones and Weibo and Weixin – known as WeChat in English – one of the most popular social media services in China, has further empowered workers by making it easier for them to learn about other factories that may have better conditions.
Factories say finding female workers is increasingly difficult. The one-child policy, coupled with the general preference for male children, has skewed the gender balance, reducing the number of female workers. But young women also increasingly prefer service industry jobs over more arduous production line work.
The demographic and economic trends that are sparking higher wages in the PRD are forcing multinationals to raise prices, put more pressure on their suppliers to cut costs or simply accept lower profits.
But some manufacturers, such as KTC in Heshan, say a more serious issue than rising wages – which can be absorbed at a cost – is the difficulty in finding enough workers with the right skills to allow production to continue.
KTC has opened a factory in Laos but, as in the case of Crystal Group, the workers there make less complicated garments than in Heshan because they do not have the same skills as their Chinese peers.
Top Form, a Hong Kong lingerie maker, faces a similar problem. Kevin Wong, executive director, says it closed a factory in Shenzhen and opened one in Cambodia in 2011.
Mr Wong says that although wages in the southeast Asian nation are
one quarter of the level in Shenzhen, that was not the main reason for the move.
“It was never the labour cost. Once you don’t have the people, the overhead just kills you,” says Mr Wong, explaining that it was becoming impossible to find enough workers in Shenzhen.
Regardless of the industry, the challenges in the PRD are forcing all manufacturers to find cost-cutting solutions, with the most extreme one being relocation from China. But Mr Debham says talk of multinationals abandoning China are overblown, and that many companies do not follow through on their repeated threats to leave China.
“People think that the cost issues in China and the labour issues in China will inevitably force low value-added production out of China, but it is still there,” says Mr Debham.
Given the scale of manufacturing in the PRD, the region is likely to remain the world’s factory for a long time. But manufacturers in the region and consumers buying the products face a pricier future.
William Fung, chairman of Li & Fung, the big global sourcing company that procures products for everyone from Walmart to Target, says rising labour and raw material costs mean the model that served China and the world for 30 years has changed for good.
“The era where China subsidised the world’s standard of living – by giving them really affordable goods from 1979-2009 – is basically over,” says Mr Fung. “People will pay what other people will probably say is a proper price.”
Policy: Keep the cage but change the bird
Manufacturers are not alone in worrying about cost pressures in the Pearl River Delta. Guangdong is also promoting policies that it hopes will prevent it from losing economic competitiveness.
In what Wang Yang, the former Communist party secretary of Guangdong, referred to as “Teng Long Huan Niao” – “Keep the cage, but change the bird” – the province wants to replace inefficient low-cost and labour-intensive manufacturing with more high-tech and service companies and “greener” manufacturing.
As part of that push, it is developing several new economic zones to attract knowledge-based industries. They include Qianhai in Shenzhen, which it hopes to turn into a financial centre, and Nansha port in Guangzhou.
Guangdong is also talking to Hong Kong and Macau about creating a big free-trade zone with the two Chinese special administrative regions. In Guangzhou, Jim Barber, president of UPS International, said the zone would provide an important boost to the region by facilitating cross-border trade and logistics.
The proposal has taken on greater urgency since the central government unveiled a free-trade zone in Shanghai that is expected to provide a boost to the Yangtze River Delta, one of the main competitors to the PRD in China.
Xiao Geng, a PRD expert at the Fung Global Institute in Hong Kong, says the delta needs to push ahead with integration to facilitate knowledge-based industries. But he says it is moving too slowly, mainly because of the fragmented nature of the region, which includes many local governments in addition to Hong Kong and Macau.
Guangdong officials are worried about losing economic ground to Jiangsu – an increasingly prosperous Yangtze River Delta province – particularly since Hu Chunhua, the Guangdong party secretary, is a possible candidate to replace Xi Jinping as president roughly a decade from now.
The PRD received a boost in 2012 when Mr Xi chose to make his first trip as the new Communist party leader to Shenzhen, following in the footsteps of Deng Xiaoping’s southern tour three decades before. “We came here to . . . show that we’ll unswervingly push forward reform and opening up,” Mr Xi said.