Highlights from the EO print edition, Issue Wrap No. 497, Dec 6

CBRC Warns Against Companies Controlled by Zhou Tianbao
Cover
~ The China Banking Regulatory Commission (CBRC) has warned banks across the country  to be alert to the risks of the 50 affiliated companies controlled by Zhou Tianbao who is rumored to have fled China and gone abroad.
~ These 50 companies have racked up a total of 16.06 billion yuan in loans, among which, 3.28 billion yuan are bad or overdue.
~ One of the 50 companies, Pacific Century Automobile System Co. Ltd, just spent 420 million US dollars purchasing Nexteer Automotive from General Motors.
~ Affiliated companies refer to companies related to the shareholders and legal representatives of a company. As the CBRC's list of 50 affiliated companies is based on information reported by individual financial players, there might be affiliated companies not included in the list.
Original article: [Chinese]

Same Growth Target, Tighter Monetary Policy for 2011
News, page 3
~ The Central Economic Work Conference is likely to begin this week. The conference will evaluate the current economic climate and work to develop macroeconomic policies for the coming year.
~ Monetary policies for 2011 will be difficult. Some believe China's growth rate will decrease. Many in the National People's Congress Finance Committee believe that the economy will face problems due to overheating in the coming years.
~ Much will also depend on economic growth in the US and how the European sovereign debt crisis unfolds.
~ Next year, the target growth rate will remain at 8 percent, but future targets during the "Twelfth Five Year Plan" are likely be set at a lower level of around 7 to 7.5 percent.
~ Next year, target inflation will be set at 4 percent, although the actual rate of inflation is likely to be higher.
~ Wang Tao from UBS predicts tighter monetary policy and is expecting the central bank to set a credit growth target of 14-15 percent and a lower new lending target of 6 trillion yuan in order to control burgeoning inflation.
~ Fiscal policies will likely remain the same, but the goals and message of the policies will change.
~ It is reported that government spending will shift focus to institutional reforms in education, hospitals etc.
Original article: [Chinese]

Another Attempt at Income Reform at Public Institutions
News, page 4
~ The Ministry of Human Resources and Social Security and related departments are drafting the "System for Determining Income and Performance of Public Institution Posts" (事業(yè)單位崗位績(jī)效工資制度) and the "Suggestions for Promoting the Reform of Public Institutions," (分類推進(jìn)事業(yè)單位改革的意見) the two documents will be issued in the near future, signaling that income reform will coincide with general reforms of the public sector.
~ As part of the more general reforms to these public institutions, those that are able to operate without public assistance in the public sector will ultimately be pushed towards entering the market; while smaller institutions will undergo restructuring.
~ One focus of the reforms will be standardizing employee subsidies.
~ The diversity of public institutions has made large scale reform difficult. Institutions under certain ministries, such as the Ministry of Science and Technology, have also grown exponentially.
~ A source from the Chinese Academy of Social Sciences says reforms have generally focused on hiring requirements and salary. There is still no standard by which to judge the performance of employees working in the public sector and related public institutions like schools, hospitals and others.
~ Most ministries and affected institutions are pessimistic about what can be achieved by this round of reforms.
Original article: [Chinese]

Control of the Fiscal Purse Strings
News, page 4
~ China's central bank is facing a challenge to the role it plays in the management of China's treasury funds, with a bitter controversy erupting between the institution and the Ministry of Finance.
~ The Ministry of Finance argues that the central bank's managment of the national treasury is simply a relic of the planned economy era and that it should be reformed.
~ For the past two decades, the People's Bank of China has helped to manage the national treasury, but as the Ministry of Finance has now gained more experience, they argue that they need more management and decision-making power.
~ Control over important decisions has already shifted away from the central bank and to the Ministry of Finance in practice, but not in law.
~ Will the central bank be able to retain its administrative rights or will it be demoted to the role of an agent in relation to fiscal issues? The answer to this question will be revealed in the nature of the amendments to the budget law that are expected after discussions between representatives at a meeting of the NPC's Standing Committee at the end of the month.
Original article: [Chinese]

EO Interview with Artur Runge-Metzger - Head of Unit Climate Strategy for the European Commission at the Cancun Climate Conference
News, page 8
~ Economic Observer: Why haven't we seen improvements over the many meetings this year?
Runge-Metzger: I think there was an improvement this year, improvement in terms of debate and the style of the debate. You need to look at the texts and at where they were before the leaders arrived. There has been quite an improvement. Just over the last two weeks even, since we had the Pre-Cop ministerial meeting in Mexico City, there is a new text on the table that may have compromises for the Convention Track.
~ EO: What about the participation of US and China?
Runge-Metzger: I think both US and China have shown a great interest in the international negotiations. They have been active participants in all the meetings, making constructive proposals toward moving forward. Both countries are serious and they want to see a result coming from Cancun
~ EO: What other events will influence the talks?
Runge-Metzger: What is making the climate change negotiations difficult is the international economic and financial crisis. There is no doubt that many countries have had difficulties without public finances. Financing for the battle against climate change has become more difficult. In Europe we have not gone back on the promises we made last year in Copenhagen. We have lived up to them despite the fact that some of our governments are running really big deficits.
~ EO: Why have we seen less conflict between the US and China?
Runge-Metzger: There is a very simple explanation for this. Last year we did not have the Copenhagen Accord. In the agreement, a lot of the issues between the China and US were resolved. I think as long as both sides stick to it, you will not see a major standoff between the two countries. From there, there is a very good starting point from which work can be done on the monitoring reporting verification systems.
Original Article: [English] [Chinese]

Central Government Conducts an Investigation into Chengdu's Hukou Reforms
Nation, page 12
~ Some ministerial agencies are conducting an investigation into Chengdu, the capital of Sichuan Province. They intend to find out whether the reform of the city's household registration system, (戶口 Hukou), might be copied by other Chinese cities, and possibly spread across the country.
~ The highlight of the Chegdu reforms are, in contrast with the policy of other cities which only allow rural residents to become urban residents at the price of giving up their land, the Chengdu government allows those with a rural registration to be registered as urban residents while maintaining their property in rural areas. While this has raised farmers' desire to become urban residents, the government tries to curb their enthusiam by providing acess for rural residents to enjoy the same social security benefits as their urban counterparts do.
Original article: [Chinese]

Cinda Securities Has Lost its Way
Market, page 21
~ In 2007 Cinda Securities acquired Hantang Securities, however, as the two companies are so incompatible, the merger has run into difficulties. Cinda Securities was set up by administrative fiat as an assett managment company focused on dealing with the bad debts of Chinese banks whereas Hantang Securites was a commercial firm.
~ The managers at Cinda Securities are from an asset management background and were not familiar with how to manage a brokerage service, a fact that became clear after the merger.
~ Since the personel managment system of Cinda Securities was incompatible with more market-focused methods, the company hemorrhaged talented personel.
~ Cinda Securities is not unique, and almost all asset management securities traders are facing the same problem. Private equity fund manager Wang Liang said, "Cinda Securities Brokerage Services has gotten into an awkward position between policy and market, and its only way out is to seek talented people who understand market conditions."
Original article: [Chinese]

Morgan Stanley to Sell its Stake in China International Capital Corporation
Market, page 22
~ Morgan Stanley will sell its 34.3 percent stake in China International Capital Corporation (CICC) to Texas Pacific Group (TPG), Kohiberg Kraivis Roberts & Co (KKR) and the Government of Singapore Investment Cororation (GIC), among whom, the GIC will become the second largest shareholder after Central Huijin Investment Ltd., the domestic arm of China's sovereign wealth fund, China Investment Corporation (CIC).
~ Morgan Stanley has been cooperating with CICC for 15 years. Though it has sent many high executives to CICC over the past decade, it has obtained neither a controlling share of the company nor management rights.
~ After divesting their stake in CICC, Morgan Stanley will establish a securities company with Huaxin Securities. Meanwhile, by recruiting personnel who have experience working at international financial institutions, the CICC has accelerated its steps to go global.
Original article: [Chinese]

Cotton Speculation Ebbs
Corporation, page 28
~ Though the price of cotton yarn futures has fallen from 33,000 yuan per ton to the current price of 25,000 yuan per ton, the market is still gloomy. Additionally, with the government taking a tough position on tackling speculation, cotton prices have dropped by 23.6 percent compared with their December peak.
~ The fall in price is likely to land a heavy blow to speculators and cotton processing companies that were late getting into the game and hoarded large amounts of cotton bought at peak prices.
~ However, things might be changed in the near future. As the government determines to protect interests of cotton farmers, cotton prices are likely to stabilize, though it will take some time.
Original article: [Chinese]

2010 Energy Industry Review
Corporation , page 31
~ In 2011, the energy industry will face rising prices and the strenthening of industry monopolies; this situation is an irreversable trend already being pushed forward by powerful interest groups, deepening reform, and industry regulations.
~ The price of natural gas and petroleum will increase, however the price of coal and electricity are controlled by administrative intervention, and their growth rate will be relatively mild.
~The three state-owned oil giants will be the biggest beneficiaries from the price reform of resource products in 2011.
~Monopoly strengthening will push private gas stations and private coal mines out of the industry; they will face their largest challenge since the 2008 financial crisis.
~  Buying shares in new energy enterprises is a realistic choice, but do not pin your hopes on gaining high profits overnight .
Original article: [Chinese]

EO Interview with Dirk Moens, Secretary General of the European Union Chamber of Commerce in China
Corporation, page 31
~ We talked to the Secretary General of the European Union Chamber of Commerce in China about the effects of a change in taxation policy in relation to foreign firms operating in China.
~ EO: As you know China will levy two additional taxes on foreign capital. There has been a saying that it is the end for foreign capital in China enjoying supranational treatment. Do you agree with this?
Dirk Moens: First let me say that I do not like the term "supranational treatment." I don't like it because I think it gives an image as if foreign investment companies received all kinds of gifts and favors from the government. I think that's the wrong image. I think we need to make a distinction between incentives to attract FDI and tax incentives when a company is already in a steady state of operation. They are two different things.
~ EO: Do you think that the new tax policies are bad news for foreign companies' competitiveness?
Dirk Moens: I think here we need to make a distinction between foreign companies that operate for the Chinese market and foreign companies that operate to export. And in the Chinese market, again, if this tax is applied to all players in the industry it does not affect competitiveness. I think on the other hand, European companies are used to increasing productivity, to increasing efficiency, to improve energy consumption and so on. If anything, it should give them an advantage because they have the technology and they are used to compete very fiercely. So I don’t think it's a big deal in the competitiveness for those companies that are active on the Chinese market. Obviously anything that affects the cost structure of a company that exports might potentially affect the competitiveness of a company. So that might have a potential influence.
Original article: [Chinese]