Highlights from the EO print edition, No. 605, Jan 28, 2013

An Old Cat Gets Burnt - Inside the Caterpillar Affair
News, page 1
~ About 6 months after Caterpillar Inc. (CAT), the world's largest manufacturer of construction and mining equipment, purchased Hong Kong-listed ERA Mining Machinery Ltd last June for $653 million, it's been forced to write down the value of the company by $580 million after uncovering accounting fraud at one of ERA's subsidiaries, a Chinese company called Zhengzhou Siwei Mechanical and Electrical Manufacturing Co., (鄭州四維機電設備制造有限公司).
~ Days before the company announced the write down on Jan 19, a large investigation team from the company went to Zhengzhou to prepare a report on what had gone wrong.
~ One of the members of this investigation team, who spoke to our journalist on the condition of anonymity, told the EO that the company had already determined that the accounting misconduct constituted individual actions (個人行為) and that it had already fired 7 high-level executives involved in the affair.
~ The research team maintained close contact with the Henan Provincial government and the Zhengzhou City government during their investigations.
~ The EO learned that the team assigned to oversee the takeover was well aware of the financial problems that existed at Siwei, but they still recommended going ahead with the deal. Those connected to the affair say that John Lee (李汝波) and Emory Williams Jr. (衛(wèi)興華), two former large shareholders in Siwei, bought the company cheap and then sold it on to Caterpillar at a high price in a case of "Americans cheating Americans" (一場美國人騙美國人的局). Caterpillar refused to comment on this, saying "we don't comment on any rumors or conjecture".
~ The 55-year-old Emory Williams Jr. is a U.S. businessman and a former chairman of the American Chamber of Commerce in China. John Lee is a graduate of the South Dakota School of Mines and a former Chinese government official.
~ After the story broke, companies that had done business with Siwei were told not to accept media interviews.
~ One person who took part in the initial negotiations to acquire Siwei told the EO that he believed that someone working for Caterpillar's acquisition team accepted bribes from Siwei, noting that "it happend inside a high-end entertainment center in Zhengzhou".
~ High-level executives at Caterpillar only found out about the fraud after Ernst & Young was asked to re-examine Siwei's books after the original deal had been completed.
~ A member of Caterpillar's investigation team told the EO that the Luis de Leon, vice president with responsibility for the Mining Products Division, was the employee responsible for overseeing the acquisition. Caterpillar has since announced that Luis de Leon is leaving the company to pursue other opportunities.
~ A former classmate of Emory Williams Jr. told the EO "during these international acquisitions, those cheating the foreigners often appear to be other foreigners, but behind the scenes it's always a Chinese person, these are the unwritten rules of the game."
Original Article: [Chinese]

Local Governments Push Ahead With Mergers of Cultural and Media Departments
News, page 1
~ As of Jan 1, 2013, 210 cities across China had already merged their cultural departments with the local radio, film and television administrations and the press and publishing offices to form new "Culture, Broadcasting, News and Publications Bureaus" (文化廣電新聞出版局).
~ A recent report into how the merging of the local offices of various administrative bodies is progressing, noted that in addition to 210 local-level cities, Shanghai, Tianjin and Chongqing have also restructured the government agencies in charge of various cultural affairs. Hainan province has also completed a similar restructuring at the provincial level.
~ In addition to the government agency that handle TV, film and radio at the local level, those that handle press and publishing, heritage, sport, copyright and even the anti-pornography office have all been merged into a broader cultural bureau in these locations.
~ The reforms at the local level could be a precursor to the expansion of the central Ministry of Culture, which some say will swallow up the State Administration of Radio, Film and Television (SARFT) and the General Administration of Press and Publishing (GAPP) in a ministry reshuffle in March.
Original Article: [Chinese]

The Drive to Make China Urban
News, page 4
~ The Economic Observer learned that currently a number of cities such as Shiyan (十堰) in Hubei province, Lanzhou (蘭州) in Gansu province and Yan'an (延安) in Shaanxi province are actively "removing mountains to build cities" (削山造城). Lanzhou has set aside 75 billion yuan, while both Shiyan and Yan'an plan to invest up to 100 billion yuan on such projects.
~ Other places are "establishing cities by rescinding townships" (撤鎮(zhèn)設市). Zhejiang province has already announced that 27 small towns will be upgraded to cities; Shandong, Hubei, and Anhui also said that they will develop a batch of "township-level cities" (鎮(zhèn)級市).
~ The numbers for planned investment in major urbanization projects in 2013 are astounding - Anhui will invest 640 billion yuan, Hainan 138 billion yuan, Jiangxi 430 billion yuan, Jilin 900 billion yuan, Guizhou 417 billion yuan, Shaanxi 310 billion yuan and Xinjiang 300 billion yuan.
~ This year, the total volume of investment in Zhejiang province will break the 2 trillion yuan mark, an increase of 20 percent year on year. Heilongjiang and Henan, China's two largest grain-producing areas will also lift investment substantially. The total investment in urban and rural construction in Heilongjiang over the past five years was 754 billion yuan, while this year it will reach 221 billion yuan. Henan's investment in urban expansion and new rural community construction will be 1.3 trillion yuan, an increase of 41 percent year on year.
~ Regarding this new wave of urbanization, a number of experts told the EO that the fact that some regions are engaging in "removing mountains to build cities", "filling the sea to build cities," forcing farmers off their land and removing tombs indicates that many local governments still put too much emphasis on the pace of urbanization and are still reliant on land sales as a source of revenue. Experts also said that officials need to be careful about this latest jump in investment in urbanization, as the investment drive is being driven by government, this latest round of urbanization could easily turn into a bonanza for the real estate industry in some cities.
~ Li Tie (李鐵), the Director General of China Center for Urban Development of the National Development and Reform Commission, said that the central government doesn't want to see urbanization pushed through large-scale investment. As urbanization will stimulate domestic demand, the appeal of this consumption should be driving investment, it's not just some investment policy.
~ Mr. Li thinks that to solve the difficult issue of urbanization in China we must carry out a deep reform of the existing land management system, household registration system and city administration system.
~ Li also supports the practice of "establishing cities by rescinding townships," and recommends that the government lower the standard for qualifying as a city, so that towns with a population of at least 50,000 are eligible. In this way, we can more than double the numbers of cities and let more rural residents become city dwellers.
Original article: [Chinese]

When Beijing Hits 30 Million
Nation, page 10
~ As the annual meetings of Beijing's People's Congress and Political Consultative Conference began on Jan 21, the topic of population controls was on everyones lips, especially as the latest official figures showed that by then end of 2012, that there were almost 21 million people living in the city, an increase of 507,000 over last year.
~ The pollution outside the meeting hall also impacted on proceedings, with one of the city's deputy mayors Hong Feng (洪峰) noting "if the population is not properly controlled, and we don't pay enough attention to the environment, although the GDP may have increased in 5 years, no one will be willing to live here."
~ Some predict that if population control measures aren't implemented, the city's population could climb to 30 million over the next 5 years.
Original Article: [Chinese]

CIC Seeks Funds and Qualified Staff
Market, page 17
~ China Investment Corporation (CIC), China's $4 trillion dollar sovereign wealth fund, is facing two challenges: setting up a fixed mechanism for injecting funds and hiring skilled staff.
~ Recently, Lou Jiwei (樓繼偉), Chairman of CIC, revealed that the company had made profits on its overseas investments in 2012.
~ On Jan 23, a source close to CIC told the EO that CIC's returns had exceeded 10 percent in 2012 and that the annualized rate of return over the past five years was more than 5 percent.
~ The source also revealed that up until now CIC had still not established had a fixed long-term funds injection mechanism.
~ In addition, CIC also faces problems in attracting and retaining skilled staff. With a few high-level departures over the past two years.
~ The problem is that there is a scarcity of people with the skills that CIC requires.
~ CIC is not able to compete with investment bankss when it comes to salary packages.
Original article: [Chinese]

Sinopec Cutting Back on Graduate Intake
Corporation, page 26
~ The Economic Observer has learned that a number of secondary-level subsidiaries of Sinopec are rescinding on contracts that had already been signed with thousands of recent university graduates after the parent group stepped in and announced new controls on the number of new hires to be made this year.
~ In the past, Sinopec subsidiaries usually held campus recruitment drives and had a large degree of autonomy over the whole recruitment process.
~ However, in January this year, the group's headquarters vetoed many of the recruitment plans for this year.
~ A source close to Sinopec said that the company had changed recruitment policy. The group has shifted from independent recruitment by subsidiaries to a system where graduates first apply online and then sit the same exam company-wide.
~ The source also said that the aim of the new policy is to control staff numbers at the petrochemical giant.
~ This year subsidiaries of Sinopec will recruit a total of 2,011 students, a sharp reduction from the approximately 9,000 graduates hired in previous years.
~ Currently, Sinopec has more than 1.06 million employees, making it the biggest employer among the hundred or so centrally-administered stated owned enterprises.
~ In 2011, Sinopec spent almost 36.3 billion yuan on wages and other staff expenses, an increase of 26 percent over 2010.
~ An executive involved in the rescinding of the contracts told the EO that as Sinopec is a COE, it cannot layoff workers directly, and thus it has chosen to reduce recruiting new staff.
Original article: [Chinese]