THE

THE February
2009

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

China and the financial crisis: 10-page special focus

Features
Financial Crisis: China Impact 6
Financial Crisis: China’s Response 9
Financial Crisis: Beginning of the BRIC Era 12

Regulars
Macroeconomic Monitor 16
China Sourcing Strategy 24
China Inc. Goes Global: OFDI/M&A 32
 Retail Sales Growth, % y-o-y
China US
40
30
20
10
0
- 10
Nov '05 Nov '06 Nov '07 Nov '08

“This is the worst financial crisis since the Great Depression….”

IMF, World Bank, OECD, etc

Export Growth, % y-o-y

30 China US

20

10

0
N ov ' 05 N ov ' 06 N ov ' 07 N ov ' 08
- 10
Main Photo: Sonyasonya / flickr. Data: US Bureau of the Census; Nat. Bureau of Statistics
4
At the Highest Level
China’s sharp slowdown will catch many by surprise and wrong-footed. Indeed, over the next 2-3 quar-
ters a painful adjustment will continue to unfold, requiring good information, solid planning skills and a
strong ability to implement. Anticipating and managing risk must be the focus. But do not lose sight of
China’s long-term trajectory – it will remain a prominent market and opportunity, outperforming develop-
ing and developed countries over the medium and long term. Do not get caught out twice!
As we enter the Year of the Ox we
look back on a year in which the global
economy underwent profound
changes. These changes include ad-
justments in the global banking and
financial system; new trajectories in
real economic growth; extreme volatil-
ity in energy, commodity, property and
financial asset prices; dramatically
reduced trade; layoffs on an unprece-
dented scale; corporate and country
bankruptcies; and a scramble interna-
tionally to launch appropriate rescue
packages. In delivering these rescues
many nations broke some of their own
sacred rules, even rules that were pre-
viously universally accepted as un-
breakable. But worsening conditions
progressively became more systemic
and by the fourth quarter of 2008 im-
pacted negatively on global sentiment
and confidence – with most busi-
nesses now, in 2009, unsure about
their prospects for the future.
These unfolding global circumstances
are not encouraging. Towards the end
of 2008, as China celebrated 30 suc-
cessful years of market-oriented re-
forms, it became clear that China’s
economy had been fully pulled into the
global financial and real economic cri-
sis and Q4 growth of 6.8% confirmed
the severity of the adjustments that are
in train in China. Indeed, looking
ahead there is significant concern over
China’s short-term prospects. We con-
cur that over the next 2-3 quarters
China will be growing at rates that are
well below those that the world has
grown used to. In line with Q4’s head-
line GDP growth, we anticipate Q1 and
Q2 2009 to see growth of well below
the 7-8% range, widely viewed as the
‘minimum’ that can ensure stability in
the country. Important though, is that
we do see a rebound late in the year.
Still, it is clear that the ensuing period
will be a very challenging phase. Dur-
ing this time we identify a number of
managerial imperatives for those that
manage businesses in China or that
have China exposures to watch. The
overarching objective is to anticipate
and manage risk in a few key areas:
• The landscape is changing – re-
gions, sectors, policies and industry
linkages and value chains are ad-
justing and reacting in different
ways. Stay on top of these changes
and manage information well.
• Strategic review is needed – the
severity of the economic impact
may render existing strategies ei-
ther completely irrelevant or may at
least make them somewhat out of
date. A comprehensive strategic
review is necessary with some ele-
ments of the strategy likely to
change much.
• Re-discover partners – many Chi-
nese firms and players have been
affected already, some detrimentally
so. Know how their strategic focus
and ability to perform have changed
and mitigate the associated risks.
• Supplier audits and health-checks –
many firms that source from China
are really ‘outsiders’ to China. Now
is the time to pay close attention to
the health of suppliers and their
ability to deliver on previously (or
newly) agreed contracts and to do a
rolling due diligence.
So, we acknowledge the seriousness
of the current and unfolding environ-
ment. We face testing times. But we
must add that now, more than ever, it
is necessary to maintain a balanced
perspective on China’s future. We
must guard against a view that is too
heavily influenced by adverse short-
term trends or prevailing sentiment
that is so deeply negative (and deterio-
rating). A balanced view would also
enable planners to differentiate be-
tween short, medium and long term
trends, issues and prospects. Over the
medium and long-term China’s pros-
pects remain solid. We must also con-
sider that it is natural for developing
countries to face periods of turmoil. In
this respect China is really now just
behaving ‘normally’ and there is no
merit in becoming utterly disillusioned
with China. Rather, see China for what
it is: a key developing market, with the
associated dynamism (good and bad)
that is endemic in developing coun-
tries, but that will remain prominent
and even become more important over
the long haul.
Also, as China adjusts we can expect
policies and changes that would likely
bring structural changes that would in
themselves represent opportunity, for
example, in casting the Chinese con-
sumer as a key pillar of future growth.
We can also expect more moderate
and therefore sustainable growth. Fi-
nally, we need to remind ourselves
that populous China, with its roughly
USD 3.5 trillion GDP, is now the
world’s third-largest economy, growing
– still – at a pace faster than the aver-
age for all developing nations, all de-
veloped nations and indeed the world.
Even in dynamic Asia it still leads the
field. Moreover, we do not see this
changing. As such, over the long-term
it will remain a focal point in board-
rooms around the world.
Ultimately, as we set out on the year of
the ox, to navigate urgent short-term
risks, we must not lose sight of, or be
deflected from, the complex long-term
maze that must simultaneously be
‘solved’ in order to capture full long-
term advantage in the world’s leading
developing market.
I trust that our readers will enjoy this
edition of The China Analyst – and as
always we welcome all feedback.
We wish all our readers a prosperous
Year of the Ox!
Kobus van der Wath
Founder & Group Managing Director
THE BEIJING AXIS
China Business Solutions
Strategy I Sourcing I Investment
kobus@thebeijingaxis.com
 5

Table of Contents February 2009

Financial Crisis: China Impact
6 China’s banking system has sustained limited direct losses from the financial crisis, yet the global slowdown has seriously
impacted China’s exports, and GDP growth may slip below the crucial ‘minimum range’ of 7-8% in 2009.
Financial Crisis: China’s Response
9 With the Chinese government finding itself among the best positioned in the world to inject and control the spending of a
massive stimulus package without major debt, inflationary or exchange rate consequences, there is much room for hope.
Financial Crisis: Beginning of the BRIC Era
12 The BRIC economies have been severely affected by the crisis. Yet they are now ready not only to deal with the current
predicament, but also to rise above it by emerging from the crisis with an enhanced role in the global economy.

16 Macroeconomic Monitor: China’s Slowdown

China’s economy has been slowing down dramatically since the middle of 2008, and while the adjustment will be significant
over the next several quarters, over the longer term we expect China to become more prominent, not less. We examine.
China Facts, Figures & Forecasts
22 China Facts, Figures & Forecasts provides a cross-section of data illustrating growth, transformations and trends in com-
merce and industry.
China Sourcing Strategy
24 This section provides information and analyses to help formulate successful China Sourcing Strategies for the year ahead
as international procurement managers assess the risk to China’s status as a top-tier global supplier.

29 China Sourcing Blog Highlights

Highlights from The China Sourcing Blog, THE BEIJING AXIS online information portal and discussion forum on all issues
relevant to sourcing from China.

30 China Trade Roundup

This section illustrates the main trends in the growth and transformation of China’s trade profile, and summarises a selection
of the latest available trade statistics for China.
China Inc. Goes Global: OFDI and M&A
32 With Chinese firms increasingly ‘Going Global’, this section analyses Chinese Outbound Foreign Direct Investments and
cross-border M&A by Chinese companies.

36 BRICS Breakdown
Incorporating recent economic statistics from Brazil, Russia, India, China and South Africa, BRICS Breakdown is a compara-
tive segment that evaluates and contrasts China with the other leading developing economies.
Financial Markets
37 Tracking the dynamics of China’s Shanghai and Shenzhen Composite Index indicators and benchmark interest rates, Finan-
cial Markets also illustrates recent trends and transformations in China’s exchange rate regime.
China Business News Highlights
38 A roundup of the main business headlines from China during the fourth quarter of 2008, including the latest indications of the
impact of the global slowdown on China, notably in the airline and shipping industries.

40 Regional Focus: China-Africa

While China-Africa trade is still relatively small, the region has strategic importance for China as trade focuses on resource-
rich countries like Angola, DRC and South Africa. Since 2006 China has also vastly increased its FDI to Africa.

42 Regional Focus: China-Australia

China-Australia relations have become more strategic. This has allowed boom-times down-under on the back of significant
growth for Australian exporters, but lower commodity prices and China’s current slowdown also show the risks.

44 Regional Focus: China-Russia

Russia and China are actively developing their trade relationship, although bilateral FDI flows are not yet very significant.
This section provides an overview of the status of trade and bilateral investments between China and Russia.
Upcoming Events
46 A schedule of all the major upcoming fairs, exhibitions and conferences in China, with a focus on events pertaining to re-
sources and industrial sourcing.
Careers at THE BEIJING AXIS
48 THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present and
future business challenges. Positions are available in multiple international offices.

49 THE BEIJING AXIS News

Company news for the fourth quarter, including attendance of China Mining 2008 in Beijing and the Global China Business
Meeting in Barcelona, as well as exciting new team developments.

THE CHINA ANALYST is published & distributed quarterly by THE BEIJING AXIS. For more on our services see p. 50.
6
Financial Crisis: China Impact
China’s banking system has sustained limited direct losses from the financial crisis, and is in much
better shape now than it was after the Asian financial crisis a decade ago. The global slowdown in
demand is set to seriously undermine China’s export growth for 2009, yet the overall impact of the
crisis is expected to be manageable, even though GDP growth may slip below 7-8% in 2009. By
Barry van Wyk.
Origins
When restrictions on the mixing of
commercial and investment banking
were eliminated in the United States
in the 1990s because they were
seen to be restricting competition,
more opportunities were created for
commercial banks. Yet partly as a
consequence of this, investment
banks evolved complex and risky
derivative securities to sustain their
profitability.
As part of these financial derivatives,
banks in the US began packaging
mortgages together and reselling
them, creating more profits and al-
lowing more households to receive
loans. Yet lax oversight allowed
banks to grant loans to some buyers
who were not able to pay them back,
and when US house prices began to
fall in 2006, the value of the financial
derivatives exponentially decreased
in value. What made this so damag-
ing, however, was that many banks
and hedge funds had included sub-
prime mortgage-backed securities in
their portfolios. This is now history.
The bursting of the US housing bub-
ble revealed the extent of leverage
used in the housing market and as-
sociated mortgage-backed securities
(to be running into many trillions of
dollars), and hence the devaluation
of mortgage-related assets caused
substantial write-downs on the bal-
ance sheets of financial institutions.
Yet in September 2008, when within
a few days investment bank Lehman
Brothers collapsed and American
International Group (AIG) was res-
cued by the US Federal Reserve, a
crisis of confidence in the financial
system itself seemed inevitable. By
December, banking systems world-
wide had written down sub-prime-
related losses of USD 965 billion.
Amid heightened alarm about asset
Where is the money going? China is implementing a USD 586 billion stimulus
package in an attempt to re-engineer growth, yet is the private sector being
starved of funding?
values backed by sub-prime mort-
gages and their derivatives, credit
markets stagnated and liquidity de-
creased substantially. Risk-aversion
pervaded financial markets, and fear
and uncertainty dominated investor
sentiment. This remains the case.
Central banks responded to the cri-
sis with various emergency meas-
ures, attempting to inject liquidity
into financial markets, while govern-
ments implemented broader rescue
packages. Due to global financial
and commercial interdependence,
however, adjustments in the US fi-
nancial system have severely im-
pacted US and world demand, caus-
ing commodity prices and exports
from developing countries in Asia to
slow amid the generalized weaken-
ing of economic growth. As an indi-
cation of the extent of the slowdown,
output in advanced economies is
forecast to contract on a full-year
basis in 2009 - the first such fall in
the post-war period. According to
World Bank estimates, world trade is
expected to contract by 2.5% in
2009, after an estimated expansion
of 5.8% in 2008.
China and the financial crisis
Contagion
Asian financial institutions have sus-
tained only 3% (or USD 30 billion) of
the USD 965 billion sub-prime-
related losses, and the bulk of this in
Japan. Improved liquidity manage-
ment since the 1997/1998 Asian fi-
nancial crisis, along with low levels
of lending to the corporate sector in
recent years, meant that capital
losses have not seriously impaired
the profitability of the region’s bank-
ing systems. China’s banking sys-
tem, moreover, has also profited
greatly from reforms in the last few
years that contributed to reducing
the level of non-performing loans
extended by major Chinese com-
mercial banks from 18% in 2003 to
9% by 2005.
While by no means incapacitating
China’s banking system, uncertainty
about the economic outlook and risk-
aversion have nonetheless served to
put pressure on domestic liquidity.
Credit tightening and rising raw ma-
terial and labour costs in H1-2008
were an ordeal for small enterprises
in China, compounded by large de-
 7
China and the financial crisis
creases in overseas orders in H2- WB/IMF Outlook Comparing Earlier Downturns (Avg. Annual Change)
2008. By Q4-2008, 80% of small 1997 1998 2000 2001 2007 2008(f) 2009(f)
enterprises in China were estimated
to be under cash flow pressure. The World GDP (market exch. rates)
advent of the financial crisis has also World Bank Nov 08 3.8 2.5 4.2 1.7 3.7 2.6 1.0
ignited debate about whether
China’s entrepreneurial dynamism is IMF WEO Nov 08 3.8 2.5 4.2 1.7 3.7 2.6 1.1

being inhibited by remaining govern- China weighted world GDP

ment controls in the financial sector,
which could be hampering the flow World Bank Nov 08 3.7 1.7 4.3 1.4 4.1 3.0 1.2

of funding to smaller firms. A lot of IMF WEO Nov 08 3.7 1.7 4.3 1.4 4.1 2.9 1.4
the impetus for the slower growth
outlook for China in 2009, however, World imports
predates the real impact of the finan- World Bank Nov 08 9.7 4.8 12.2 0.3 7.4 5.8 -2.5
cial crisis. Tightened monetary poli-
cies since 2007 have likely been the IMF WEO Nov 08 9.7 4.8 12.2 0.3 7.2 4.8 2.1
main driver for dampened demand in China
China’s real estate sector, and hous-
ing sales growth and housing prices Exports 22.6 7.1 30.6 9.6 15.3 11.0 3.5
have decreased throughout 2008. GDP 9.3 7.8 8.4 8.3 11.9 9.4 7.5
As a result, new real estate con-
Note: In constant prices. Data weighted using China’s export weights, corrected for re-export via Hong Kong
struction and investment have weak-
Source: World Bank
ened accordingly.

The financial crisis has impaired the
flow of foreign direct investment to
China, with new FDI contracts de-
clining by 26% y-o-y in the first ten
months of 2008 and actual flows
dropping in Q4-2008. The rapid de-
cline of China’s stock market, more-
over, which has fallen by as much as
two-thirds since October 2007 (and
losing RMB21 trillion since late
2007), has been aggravated by the
weakened outlook for corporate
earnings and general risk-aversion
associated with the crisis, yet much
of the fall in China’s stocks have
also been ascribed to their inflated
value after 2-3 years of super-gains.
Exports only?
Much of the focus of the impact of
the crisis on China has been di-
rected at the export sector. As gross
exports account for about 40% of
China’s nominal GDP, the chain of
events triggered by the financial cri-
sis has ominous implications for sus-
taining high economic growth. Yet
exports of higher value-added ma-
chinery, equipment and electronics
continued to grow at a high pace for
the duration of 2008. The bulk of the
retraction in exports has fallen on
light manufacturing such as toys and
textiles. Hence the global slowdown
has served to exacerbate the dete-
riorating outlook for China’s light
manufacturing heartland in Guang- Of China’s four export powerhouses,
dong, where thousands of factory Guangdong, Shanghai, Zhejiang and
closures and possibly as many as Jiangsu, only Jiangsu has main-
five million job losses have led to tained double digit output growth into
protests by laid-off workers. Yet not- Q4-2008.
withstanding the unrest engendered
by factory closures and job losses, While much of the media coverage
the plight of Guangdong also reflects of the crisis has focused on factory
China’s loss of a competitive edge in closures and job losses in export-
some low value-added products, oriented sectors, the dramatic slow-
notably toys, shoes and textiles. down in heavy industrial sectors re-
lated to construction, automotive,
Export growth to the EU started to steel, power and metallurgy has con-
weaken in August, although exports stituted a stronger warning of deeper
to emerging markets - the destina- systemic exposure in the Chinese
tion of over half of China’s exports - economy. Considering that total in-
still grew 32% y-o-y in US dollar dustrial value-added growth for Jan-
terms in Q3-2008. Prospects are for Oct 2008 amounted to 14.4%, and
a sharp reduction in export growth in that industrial producer prices in-
2009, however, as the crisis deep- creased by 8.2% in this period,
ens in the US and Europe. The Pur- many of China’s large firms could
chasing Managers’ Index (PMI), face negative real growth in 2009.
based on monthly questionnaires
sent to 400 manufacturers, suggests Nevertheless, the crisis in China is
that Chinese exports may contract expected to be largely manageable
further in the months ahead. Drop- in 2009, although much of the re-
ping to a record low of 38.8 in No- sponsibility for sustaining growth
vember before improving to 41.2 in now falls on the government. As
December, the PMI registered below growth falls below 7-8% we can ex-
50 (with 50 and above indicating pect more bold stimulus. Still, China
expansion) for three consecutive will face its share of old and new
months at the end of 2008. challenges in the year ahead.
China’s industrial production growth
in November declined to 5.4%, from
8.2% in October, and there are indi-
cations that the industrial slowdown Barry van Wyk, Consultant
in China may be more broad-based. barryvanwyk@thebeijingaxis.com
8
China and the financial crisis
Financial Crisis Timeline, 2007-2008
22 June 07 Bear Sterns halts redemptions for investors in High-Grade Structured Credit Strategies Enhanced Lev-
erage Fund and High-Grade Structured Credit Fund
August 07 Discovery of sub-prime mortgage-backed securities in portfolios of banks and hedge funds around
the globe sparks worldwide credit crunch
August 07 US Federal Reserve injects USD 100 billion into money supply for banks to borrow at low rates
10 Aug 07 For the first time since 11 September 2001, banks coordinate efforts to increase liquidity
18 Feb 08 Shares in Northern Rock are suspended and the UK bank is nationalised
17 March 08 JPMorgan Chase buys investment bank Bear Stearns for USD 2 per share
April - May 08 UBS, Deutsche Bank, Merrill Lynch, Citigroup, RBS, MBIA, Blackstone, HSBC and Barclays all re-
port more sub-prime-related losses and write-downs
07 Sept 08 US government seizes mortgage lenders Fannie Mae and Freddie Mac, which account for half of all
outstanding mortgages
15 Sept 08 Investment bank Lehman Brothers declares bankruptcy
15 Sept 08 Bank of America takes over Merrill Lynch for USD 50 billion
17 Sept 08 US government bails out AIG for USD 85 billion
26 Sept 08 In the largest bank failure yet in the US, Washington Mutual, the giant mortgage lender with assets
valued at USD 307 billion, is closed down by regulators and sold to JPMorgan Chase
01 Oct 08 US Senate and House of Representatives approve revised bailout bill, the USD 700 billion Troubled
Asset Relief Programme (TARP)
Oct 08 Britain agrees a GDP400 billion three-pronged plan to bail out British banks; Russia approves meas-
ures worth USD 86 billion to assist its banks
09 Oct 08 The US stock market suffers its largest loss since the crash of 1987 amid panic over General Motors,
Morgan Stanley and several big insurance companies
13 Oct 08 EU economies unveil bailout packages totaling over USD 2 trillion
26 Oct 08 IMF offers lines of credit, including USD 16.5 billion to the Ukraine and USD 25 billion to Hungary,
which had earlier also received a EUR5 billion credit line from the European Central Bank
Oct - Nov 08 The French government injects EUR10.5 billion into six of the country’s largest banks; Japan unveils
fiscal stimulus of USD 51 billion, South Korea of USD 11 billion
31 Oct 08 The Bank of England says that the world’s financial firms had by now lost USD 2.8 trillion as a result
of the ongoing crisis
09 Nov 08 China announces stimulus package of USD 586 billion to rebuild market confidence and spur do-
mestic demand
15 Nov 08 G20 developed and emerging nations agree in Washington to enhance cooperation to revive eco-
nomic growth and to implement financial reforms
Nov 08 IMF approves USD 7.6 billion bailout for Pakistan; IMF approves a USD 2.1 billion loan for Iceland
after its banking system collapsed, the first IMF loan for a Western nation since 1976
25 Nov 08 US Fed commits another USD 800 billion to revive lending
26 Nov 08 People’s Bank of China cuts lending and deposit rates by 108 basis points
26 Nov 08 The European Commission unveils an economic recovery plan worth EUR200 billion, aiming to
stimulate spending and boost consumer confidence
23 Dec 08 China cuts interest rates for the fifth time in three months as the government tries to inject money
into the economy
Dec 08 Data provider Dealogic reports that companies abandoned 1,309 transactions valued at USD 911
billion in 2008, with total M&A volume reaching a total of USD 3.28 trillion for the whole year, down
29% from 2007
Sources: ADB Asia Economic Monitor Dec. 2008; Gtnews.com; Various

Financial Crisis: China’s Response
China has not escaped the consequences of the global financial crisis, and its economy has already
taken a hit. But with the Chinese government among the best positioned in the world to inject and
control the spending of a massive stimulus package into an ailing economy without major inflation-
ary or exchange rate consequences, there is much room for hope. By Lilian Luca.
It is no longer a matter of debate
whether or not China has been af-
fected by the global financial crisis.
Only two to three months ago, one
could still hear opinions from econo-
mists and other observers that the
Chinese economy has ‘decoupled’,
and that the crisis will therefore not
affect China’s real sector. Moreover,
some optimistic analysts saw China
as the economic saviour of the rest
of the world, at least in terms of sus-
tained imports of raw materials and
manufactured goods, giving other
countries some room to manoeuvre.
We have by now seen, however,
that China’s economy is affected by
the crisis, and the more pressing
issues are: How badly? What will the
government do? and Will that be
adequate?
China starts to become affected
The financial crisis has hit the world
in two waves: the first one, affecting
mainly financial institutions, has had
very little effect on China. Long criti-
cised for tight control over its finan-
cial markets and on the flow of capi-
tal, China has gained in this situation
by being relatively isolated from the
liquidity crisis and losses in the de-
rivatives markets that have impacted
many other countries. The second
wave, with the real economy being
affected by the crisis, has only now
started to hit China, with a delay of
3-4 months compared to other parts
of the world.
The latest economic statistics from
China leave no room for doubt about
the effects of the crisis. Imports are
down, export growth has halted, and
GDP growth for next year is con-
stantly being revised downwards by
analysts. The magic figure of 8%
growth that is the Chinese govern-
ment’s minimum target for the econ-
omy is not very likely to be achieved
as things stand at the moment – that
is, unless the government imple-
ments some more radical policies
and stimulus spending packages. In
the latest World Bank forecast (Dec
2008), 7.5% GDP growth is pre-
dicted for 2009, yet the Goldman
Sachs forecast is 6% and that of
Asianomics, 0-4%. (Ours is 5.6%.)
November has delivered a series of
grave economic news flashes from
around the world, including China.
Chinese y-o-y imports have dropped
for the first time in two decades by
17.9% (versus +25.3% last year),
reflecting not only the worldwide
drop in commodity prices, but also a
significant decrease in the volume of
Chinese imports. And China’s ex-
ports contracted in November by
2.2% (versus +22.8% last Nov) and
by 2.8% in December, reflecting the
slowdown of the major world econo-
mies. The growth of exports to de-
veloping countries is still strong at
+32% year-on-year, accounting for
about half of total Chinese exports,
but that will also probably decline in
the coming months. It also means
that China’s exports to developed
countries are shrinking fast.
In terms of job losses, so far it is
China’s Foreign Trade
Trade Balance
Exports, % change y-o-y
Im ports, % change y-o-y
60
50
40
30
20
10
0
Jan-05 Jul-05 Jan-06 Jul-06
-10
-20
Source: China Customs
9
China and the financial crisis
only the heavily export-oriented light
industries that have been signifi-
cantly affected. But news abound
about construction sites and proc-
essing plants being closed down,
and it is only a matter of time before
large layoffs in China’s industrial
sector hit the headlines.
Decoupled or not?
Researchers (Anderson, He, Zhang)
have argued that the dependence of
China’s GDP on exports – often
quoted at around 40% – has been
overstated. They have suggested a
smaller figure of about 8-10% as the
contribution of net exports to China’s
GDP, meaning that even if net ex-
ports will stall, GDP growth in China
could still be a healthy 8-9% - if, and
only if, the other components of
GDP (private consumption, govern-
ment spending, and investments)
keep on growing. At this moment in
time, it is not even a question of
whether consumption and invest-
ment will slow down in China – but
rather by how much, and what the
government needs to do in order to
positively influence consumption (via
Jan-07 Jul-07 Jan-08 Jul-08
10
income tax cuts, one-time transfer
payments, pension increases or
property transfers), encourage in-
vestments (via ensuring easier ac-
cess to cheap loans for enterprises,
larger tax deductions for invest-
ments, faster depreciation or govern-
ment-guaranteed long-term purchas-
ing contracts) and directly affect
GDP via increased government
spending.
Crisis containment responses
around the world
The current financial crisis appears
too serious to hope or wait for it to
correct itself. We are already seeing
some of its negative effects, and
these are bound to intensify further
during at least the first half of 2009,
and perhaps even longer. A major
deflationary recession is already un-
derway around the world, with the
associated loss of jobs, decreases in
household income (due mainly to
budget freezes and reduction of pay-
ments), and a decrease in corporate
profits. With the financial markets
remaining depressed, credit is and
will remain tight for quite some time
still, leading to a significant drop in
the amount of new investments and
also to capital depletion in firms
around the globe.
The slowdown of the world economy
is already putting social and political
pressure on governments worldwide,
including China. Will the Chinese
government resort to more ‘positive’
stimulus packages or will it enter (or
be drawn into) a downward spiral of
protectionism and currency devalua-
tion? Will the government’s initia-
tives have a positive effect long-
term, or will they haunt the country in
10-15 years if they are short-
sighted?
Governments around the world have
announced and implemented some
initial measures to combat the ef-
fects of the crisis. Some, such as
Russia, Korea and Japan, have tried
to inject liquidity in capital markets,
and have failed to achieve any sig-
nificant results after spending enor-
mous amounts. Another approach to
‘solve’ the financial crisis, attempted
by a few governments around the
world, has been to buy out the ‘toxic
assets’ that partially caused the col-
lapse in the first place. Countries
such as South Korea have tried to
devalue their currency in an attempt
to stop the progressive decline of
exports, only to waste all their efforts
– when exports are slowing down
due to a sharp decline in demand,
there is little if anything one can
achieve from enforcing a cheaper
currency.
Of course there is also still the im-
mensely important ‘project’ of setting
up a new world financial system, but
this process will be excruciatingly
slow and will not have much of a
short and medium term effect, there-
fore we will not focus on it in this
article.
Partial consensus around the world’s
governments now seems to indicate
that the real economy needs a sub-
stantial jolt of support in the form of
a large Keynesian-styled stimulus
package, and countries should avoid
descending into a negative trend of
beggar-thy-neighbour policies of pro-
tectionism and currency devalua-
tions.
Questions still linger about the types
of projects that need to be targeted
for the best overall long-term effect
and the best way to finance these
stimulus packages. Will they be
spent on ‘bridges to nowhere’ or will
they help build the new Silicon Val-
leys and ‘tiger economies’ of the
world? How does a government
make sure that the financing of a
stimulus package does not break the
back of future generations? No-one
has the answers yet, and we can be
certain to see a number of different
approaches around the world, and
only time can tell which ones will
succeed.
Chinese government measures
thus far
Up to this juncture, the Chinese gov-
ernment seems to be taking a
Keynesian stimulus package ap-
proach, and we have reason to be-
lieve that it will continue in the same
direction, with even bigger an-
nouncements in the pipeline of
measures to support the ailing econ-
omy in Q1-2009. Let’s look at a few
of Beijing’s announced measures, to
understand the general trend.
China and the financial crisis
A major stimulus package worth
RMB4 trillion (almost USD 600 bil-
lion) was announced near the end of
October, in an attempt by the Chi-
nese government to prop up the
confidence of consumers, firms and
government agencies.
Infrastructure build-up package. The
plan so far includes major transpor-
tation system upgrades (railroads,
tunnels, highways) and build-up in
disaster-affected areas (earthquake-
hit Sichuan, areas affected by
floods, etc.) Utilities and rural infra-
structure projects are also part of the
plan, as well as projects aimed at
environmental protection and tech-
nological innovation.
Large provincial-level infrastructure
upgrade projects – such as the
bridges that will connect Hong Kong,
Macao and Zhuhai, and the Hebei
“Three Year Big Changes” pro-
gramme – are all part of additional
provincial packages worth around
RMB10 trillion. Some of these pro-
jects have been rescheduled to com-
mence earlier than was originally
planned.
Consumer spending support has not
directly been part of the stimulus
plan so far, but economists point out
that spending in social and educa-
tional areas will go a long way to
increase the average Chinese citi-
zen’s safety net and quality of life,
and reduce the need to continually
save for a rainy day, thus indirectly
increasing consumer spending. Also
indirectly affected will be consumer
spending on tourism and leisure,
resulting from investments in new
railroads and high-speed trains, for
example.
Social and educational measures
will take the form of projects for low-
cost housing, new health care facili-
ties, spending on new schools and
educational projects - all necessary
measures for the country’s long-term
success. In addition, the new Labour
Law in effect since January 2008 will
further serve to improve the well-
being and protection of China’s
workers, indirectly affecting an in-
crease in their consumption rate.
Support to corporations to encour-
age investments are a small compo-

Engine of growth: The countryside has been the impetus behind China’s eco-
nomic miracle for 30 years. With the government pushing land reforms and social
and educational projects, the countryside is well positioned to provide a much-
needed consumer spending boost. (Photo: BriceFR / flickr)
nent of the measures announced
thus far, containing a few minor tax
cuts.
Ongoing financial market reforms
will also indirectly help alleviate the
economic distress: the Chinese
stock market will allow short selling
and margin trading soon, which may
encourage more trading activity. In
an attempt to increase their financ-
ing ability, provinces will in the near
future also be allowed to issue
bonds.
Land reform has been speeded up in
the past few months, and the latest
measures intended to legalise the
transfer of rural land rights can pos-
sibility have the largest long-term
positive impact on the Chinese
economy. In effect, the government
is creating additional assets out of
‘thin air’ – as land becomes property
it will at some point in the future be-
come tradable in one way or an-
other, it will have a value attached to
it, and will allow the peasants who
own it to borrow against it, rent it out
or sell it. The multiplier effect, across
750 million people, will be significant
– increased rural incomes, a nar-
rower income gap, and expansion of
the financial system via the entrance
of a whole new segment of clients
into the market. This would also
have positive social consequences.
Export-boosting measures, in the
form of reinstated export rebates for
more than 2,000 products and the
return of the policy of allowing toll
trade of non-ferrous commodities,
have recently been announced. The
renminbi also seems to have largely
stabilised against the US dollar over
the past two months, putting an end
to a three-year trend of sustained
strengthening, and this should go
some way to helping the chances of
Chinese exporters. We are still wait-
ing to see the effects of all these
measures, but with the worldwide
demand for imported consumer and
investment goods very much on
hold, it is quite likely that their effect
will be minimal, or at least smaller
than Beijing might be hoping for.
The likely overall effects of these
and other possible forthcoming
measures by the Chinese govern-
ment will be to keep China on the
path of becoming the largest world
economy – and not by 2040, as fore-
casted only a few years ago, but
much earlier, perhaps as soon as
2030. The trade imbalances that
have plagued China’s relationships
with the EU and the US will naturally
adjust themselves, and China will
become a stronger, more diversified
economy, and will find its own place
in the field of global specialization –
perhaps, as the Chinese govern-
11
China and the financial crisis
ment would have it, more in the
value-added industries of the future,
more sustainable and environmen-
tally-friendly.
With regard to financing its stimulus
packages, China is probably best
positioned of all the large economies
to do so on a large scale, without a
debilitating effect on future genera-
tions. The Chinese budget deficit
has been minimal in the past, and
the almost two trillion-plus USD in
foreign reserves mean that the
stimulus plan will not negatively af-
fect the RMB exchange rate in any
significant way. Moreover, for the
first time ever, the central govern-
ment will allow local and provincial
governments to run deficits, in effect
creating even more financing re-
sources for future additional stimulus
packages on a local level.
Peeking into the future
Will China during this crisis engage
in a worldwide shopping spree for
technology, talent and markets? Will
it pursue a powerful push into devel-
oping and utilising less resource-
intensive green technologies? Will it
invest massively in the education
and healthcare of its people? Will it
reduce its economy’s dependence
on cheap labour and migrate it on to
the next level?
Or will it pursue a strategy of unnec-
essary and wasteful infrastructure
build-up that will lead only to overca-
pacity and a negative environmental
impact, while creating jobs only in
the short-term?
It will probably be a combination of
these strategies that the government
will pursue, some more, and some
less successful. But we do not for
one moment doubt the resolve of the
government to steer the economy in
a direction that benefits the people,
and the ability of the Chinese people
to work hard and look towards the
future with optimism.
Lilian Luca, Director: Russia/CIS
& Group Corporate Office
luca@thebeijingaxis.com
12
Financial Crisis: Beginning of the BRIC Era
The BRIC economies have been severely affected by the global financial crisis. Yet in contrast to
the vulnerabilities they have displayed in the past, the largest developing economies in the world
are now ready not only to deal with the current predicament, but also to rise above it by emerging
from the crisis with an enhanced role in the global economy. By Javier Cuñat.
In 2001, Jim O’Neill, head of global
economic research at Goldman
Sachs, predicted in his article
‘Dreaming with BRIC’ that the com-
bined GDP of Brazil, Russia, India
and China will surpass the GDP of
the G7 economies by 2050. Accord-
ing to O’Neill’s hypothesis, the inte-
gration of BRIC countries with the
world economy will intensify in rela-
tion to the comparative advantages
and endowment factors of their re-
spective economies. China and India
will become world-leading econo-
mies for the supply of goods and
services, while Brazil and Russia will
excel in providing raw materials.
Irrespective of the occasional criti-
cism directed at O’Neill’s hypothesis,
the fact is that BRIC countries have
experienced impressive economic
growth in recent years. Between
2000 and 2007, China grew at an
average rate of over 10%, India and
Russia at 7%, and Brazil at 3.4% -
all exceeding the world average of
3.26% and accounting for close to
30% of global economic growth for
the same period of time. Today,
BRIC countries account for 14% of
world GDP, increasing from the 9%
of ten years ago.
Yet in spite of optimistic trends in
recent years, the current global eco-
nomic turbulence is threatening the
long-term prospects of the four
emerging giants. While it is still un-
certain what the full impact will be
and what the end result of the imple-
mented responses will look like, it is
clear that virtually nothing will remain
the same in the wake of the financial
crisis. What are the implications for
the BRIC nations?
Impact
The extent of the impact on the
BRIC economies will be partially de-
termined by the intensity and dura-
tion of the economic recession in the
US and the EU. In the last quarter of
2008, the four countries have al-
ready experienced a notable eco-
nomic slowdown which is expected
to persist for the duration of 2009,
impacting several parts of their
economies to varying degrees:
• As the liquidity crisis and risk
adversity persists, enterprises will
shift capital to their home econo-
mies and hold back on invest-
ment plans. This will naturally
result in a decrease of Foreign
Direct Investment (FDI) in 2009.
This is pertinent to the BRIC
economies, especially China and
India, since the major part of in-
coming FDI in the past has origi-
nated from Western companies
seeking lower production costs
and access to local markets. FDI
has also played a significant role
as an engine of growth for the
BRIC countries, in 2007 constitut-
ing 4.4% of GDP in China, 2.6%
in Brazil, 2.5% in Russia, and 2%
in India.
• Economic recession in the US
and EU will be accompanied by
an increase of unemployment
and saving rates and therefore a
decrease in consumer spending.
This is already resulting in de-
creased internal demand as well
as reduced external demand for
imports from BRIC countries.
BRIC Exports by Destination 2007, USD bn
Others
China
India
Russia
Brazil
0 200 400
Sources: UN Comtrade; Euromonitor International
China and the financial crisis
Again, this is especially relevant
to export-based economies like
that of China, where exports ac-
counted for around 40% of GDP
in 2007, with most of these ex-
ports going to the US and EU.
Similarly, India, heavily reliant on
its software and back-office ser-
vices (export) sector, will suffer
from the decrease of outsourcing
activities from Western compa-
nies. In 2007, Indian exports con-
stituted 52.8% of its GDP.
• The decrease in demand is also
having a serious effect on com-
modity prices, especially im-
pacting Russia and Brazil as ma-
jor commodity exporters. Be-
tween June and November 2008,
the price of coffee and soybeans,
two of the main commodities ex-
ported by Brazil, decreased by
16% and 40%, respectively. As
for Russia, the least diversified
economy of the BRIC nations, the
falling price of brent crude oil—
decreasing from USD 147 in July
to USD 39.8 in December 2008,
has also had severe implications
of reduced revenue for compa-
nies like Rostneft and Lukoil. As
producers and exporters suffer
from the adjustment of commod-
ity prices and cessation of loans,
this will contribute to lower output
and economic growth in 2009.
BRIC Developed Econom ies
39% of Chinese exports and more
than 40% of Indian exports have the
US and EU as destinations
600 800 1000 1200

• Falling commodity prices and fear
of larger losses have driven in-
vestors to pull their investments
out of stock markets in BRIC
economies. The MSCI Emerging
Markets Index, (benchmark for
equities in 24 developing nations)
fell 53% for the whole year 2008,
with Russia’s and India’s stocks,
two of the worst performing, div-
ing 72% and 65%, respectively.
Brazil went down 56% and China
52% for the same period of time.
While the impact of the crisis on the
BRIC economies is clearly substan-
tial, it is also of a more indirect na-
ture due to knock-on effects of de-
creased demand and the credit
crunch in the US and EU. Yet the
duration and intensity of the impact
will depend not only on the current
outlook for these economies, but
also on the BRIC’s own response
capacity, the structural dimensions
of their economies, and the imple-
mentation of adequate fiscal and
monetary policies.
Ready to respond
At the current juncture, the invest-
ment and external sectors have be-
come less prominent as engines of
growth. But if consumption and gov-
ernment investment will become
more significant in the years ahead,
the longer term outlook for BRIC
countries is still more optimistic than
that of developed nations:
• Collectively, the BRIC countries
make up a potential consumer
market of 2.8 billion people, con-
stituting more than 40% of the
world’s population. In addition,
Companies from Emerging Countries in the Fortune 500, 2000–2007
70
Non BRIC BRIC
60
50
40
30
20
10
0 financial crisis. This is due not
2000 2001 2002
Sources: Fortune 500; The Economist
Forex Reserves, % Annual Growth, end–2008, USD bn
2000 +32.9
BRIC countries collectively hold 39% of
the world’s foreign exchange reserves
1500
1000 +8.7
+16.6
500
0
China Japan Eurozone
Source: CIA, World Factbook
Source: CIA, The World Factbook
sustained high GDP growth in
recent years has facilitated a no-
table increase in the purchasing
power and disposable income of
BRIC consumers. According to
Euromonitor International, from
2002 to 2007, the number of
households in BRIC countries
with an annual disposable in-
come of USD 10,000 or more
increased more than four-fold
from 20.6 million to 90.1 million.
This illustrates the fast-paced
growth of the middle class and its
emerging importance in BRIC
nations. In 2007, moreover, the
proportion of consumer spending
in GDP in China was only 35%,
48% in Russia, 54% in India, and
61% in Brazil. This is still very low
compared to developed nations.
• Sustained trade surpluses and
FDI inflows in recent years have
enabled BRIC countries to garner
39% of the world’s foreign cur-
In 2007, 35 Chinese Companies
were in the Fortune 500
2003 2004 2005 2006 2007
13
China and the financial crisis
+56.8
+2.7 +64.4
+105.9
Russia Taiw an India Brazil
rency reserves. China, which
held almost USD 2 trillion of for-
eign reserves at the end of 2008,
accounted for a full 27% of this
total. BRIC nations are currently
able to implement sizeable fiscal
stimulus packages in order to
spur internal consumption and
foster stability of their national
currencies during the financial
crisis. China is at present consid-
ering the possibility of increasing
its current package of RMB 4 tril-
lion (USD 586 billion) to RMB 14
trillion (USD 2047 billion), while
Russia has injected USD 20 bil-
lion into its economy and cut the
tax on profits last November. The
Brazilian government has called
for USD 3.6 billion in tax cuts and
India announced last December
that USD 4 billion will be added to
its current fiscal package to ease
credit access to the most affected
sectors of the economy. In addi-
tion, low public debt in BRIC
countries will provide more room
for fiscal stimulus than in other
emerging and developed nations.
• From 2000 to 2007, the amount
of multinational companies
from emerging economies in the
Fortune 500 has increased enor-
mously from 25 to 62. Although
the bulk of these have suffered
from the effects of currency de-
preciation and the fall of stock
markets, many large BRIC firms
are currently better equipped to
overcome the challenges of the
only to sustained growth in recent
years, but also because state-
14
South-South Foreign Direct Investment 1985–2007, USD bn
350
300
South South FDI
250
200
150
100
50
0
85 86 87 88 89
Sources: World Investment Report; UNCTAD
owned companies are direct
beneficiaries of government fiscal
assistance. For example, with
their balance sheets brimming
with cash, and with lower interest
rates and an appetite for re-
sources, we may see a new wave
of Chinese companies looking
for bargains abroad in the second
half of 2009 and beyond.
• Due to the limited operational
capacity of foreign banks in BRIC
countries, the larger market share
of a few state-owned banks,
lower levels of external debt, and
the lesser degree of integration in
the global financial system, BRIC
banking systems have been
shielded from the worst effects of
the financial crisis. Furthermore,
BRIC banks are able to learn
from the mistakes of their West-
ern counterparts and are already
implementing better risk manage-
ment strategies.
These are reason enough to believe
that BRIC economies will gradually
recover from the current challenges
that they face. In some respects they
may even pull up before the US and
Europe are able to rebound on a
cyclical basis. But more pertinent,
adequate structural reforms and
macroeconomic policies in the past
decade have enabled the BRIC
economies to (still) enjoy sounder
medium to long term economic pros-
pects than the developed world. The
steps to be taken now, however, will
determine that future.
Stronger together
While the Goldman Sachs prediction
did not include an indication of the
FDI from Em erging Econom ies
East Asian
Financial Crisis
90 91 92 93 94 95 96 97 98 99
potential scope of economic and
political cooperation among the four
BRIC countries, the circumstances
of the current environment are im-
pelling these nations to plan and
implement common actions.
The G20 Summit that took place in
Washington on 15 November illus-
trated the enhanced role that the
BRIC countries will play in the deci-
sion-making processes that will
shape the post-crisis environment.
The four countries assumed a com-
mon position at the Summit, propos-
ing reform of the Bretton Woods sys-
tem, including the restructuring of
the WTO and IMF, considered inca-
pable of preventing and resolving
the current financial crisis, as well as
the enlargement of the G7 to incor-
porate the world’s leading emerging
economies in a format more closely
resembling the G20. In addition, re-
form of the regulatory framework of
global financial supervision was also
proposed, including the admission of
the BRIC countries to the Financial
Stability Forum (FSF). Developing
nations were able to point to the in-
herent contradiction of continuing to
utilise the traditional leadership
structures of the G7 while the crisis
emanated from the developed world
itself.
The G20 meeting of November 2008
also witnessed the first announce-
ment that the BRIC leaders would
convene the first official BRIC meet-
ing in Russia in 2009 to further take
common actions in terms of coop-
eration in trade and investment.
Russia, China and India are already
experimenting with rouble settle-
China and the financial crisis
Chinese Companies
‘Going Global’
Global Economic
Slowdown
00 01 02 03 04 05E 06E 07E
ments in bilateral trade, especially in
the energy sector. Considering the
high fluctuation of the dollar and
euro exchange rates, the switch to
national currencies is especially im-
portant and will enhance BRIC coun-
tries’ cooperation in the face of the
global financial crisis.
The current period also forms a criti-
cal juncture with the highest ever
level of FDI between emerging coun-
tries. The last five years have wit-
nessed a dramatic increase in the
flow of FDI both from and to emerg-
ing nations, increasing from USD 36
billion in 2002 to close to USD 300
billion in 2007. Chinese companies
have been especially prominent in
this process, which has changed
from an intra-regional (China in Asia,
Brazil in LatAm etc.) to a global phe-
nomenon, characterised by Chinese
investments in East Asia, Africa and
Latin America, for instance.
The IMF has actively sought the as-
sistance of the BRIC countries to
find a workable solution out of the
current predicament. It is apparent
that due to the current economic
recession in the developed world,
emerging economies will be the only
viable engines of growth for the
global economy in 2009. Longer
term tectonic plates are shifting: the
structure of the world economy is
changing and the global financial
crisis is enhancing this shift. This
new world will see the BRIC nations
claiming a prime position.
Javier Cuñat, Manager: China
Strategy Group & LatAm Desk
javiercunat@thebeijingxis.com
16

Macroeconomic Monitor: China’s Slowdown

China’s economy has been slowing down dramatically since the middle of 2008. This slowdown is
currently intensifying and economic statistics for late 2008 and the first half of 2009 will disappoint
those who have become used to GDP growth rates of over 7-8%. Expect growth of below that magi-
cal range in the next few quarters. However, do not be caught out twice. While China’s slowdown
and adjustment will be significant over the next several quarters, we still expect China to outperform
other Asian economies, developing economies (from other regions), and developed economies. In
short, do not expect a V-shaped correction over the short-term, but count on China to remain a sig-
nificant growth driver in the global sphere over the medium-term. Long-term we see China becom-
ing more prominent, not less. By Kobus van der Wath.
Over the coming six months we ex-
pect a dramatic economic slowdown China Annualised Quarterly GDP Growth, % y-o-y, 2007–2010F
in China after the already slower y-o- 14 Q3 and Q4 2008 GDP Q1 and Q2 of Q3 and Q4
growth of 9.0% and 6.8% 2009 will see a of 2009 will
y GDP growth of 9.0% in Q3 and 12 showed the initial slowdown continuation of the show a mild
6.8% in Q4 of 2008. (We expected slowdown but at a rebound that
6.5% for Q4.) Indeed, full year 2008 10 sharper rate will extend
into 2010
GDP growth of 9.0% is in sharp con- 8
trast with 13% in 2007 (revised up
from 11.9%) and well below the av- 6
erage annual rate of over 11% sus- 4
tained for the past 4 years. But the
2
point here is that next several quar-
ters will test Beijing’s resolve even 0
more as it tries to buoy the economy Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1F Q2F Q3F Q4F
in order to maintain at least 7-8%. 2007 2008 2009
Sources: China Monthly Economic Indicators; TBA Analysis
The deeper slowdown that we ex-
pect in the first and second quarter Q4-2008 - while for 2009 we are ex- ures are all in ranges that have not
of 2009 is a continuation of a trend pecting growth rates of below or been seen recently (or even at all,
that emerged in the first half of 2008 around 5% for both of the first two over the past 30 years). As this new
and that became more pronounced quarters, before a mild rebound later reality materialises - and settles in
in Q3-2008 as the global picture in the year. Much of that rebound will with the media, analysts and other
changed, but that trend especially be a statistical phenomenon but it commentators - many businesses
intensified in Q4-2008. Exports, in- will nevertheless buoy sentiment. will question what this means over
dustrial production and many other Our full year 2009 forecast is 5.6%. the long-term. China just celebrated
indicators in October, November and 30 years of pro-market reforms, but
December already showed this in- But whether our forecast is 100% will the current set of economic chal-
tensification clearly. (See charts on accurate is not the issue. What is lenges invite an appropriate re-
next 2 pages.) To illustrate, y-o-y certain is that China’s slowdown is sponse and what will it mean for the
GDP growth for the four quarters of serious and analysts around the next decade of policy-making and
2008 slowed from 10.6% in Q1 to world are revising their global and reform? Our view is that China’s re-
10.1% in Q2, 9% in Q3, and 6.8% in China forecasts down and these fig- form process is irreversible, and pol-

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

Temporary slowdown
16 Overheating below 7-8% ’minimum
concerns range’ in 2009
Past periods
14 7-10% GDP of overheating 7-8% GDP
growth ‘band’ growth ‘band’
12
10
8
6
4
2
0
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0 8 0 9 F 10 F

Sources: World Bank; China Statistical Abstract 2006; OECD Report; TBA Analysis

Monthly Imports, % y-o-y, USD bn
140 Im ports (lhs)
120
100
80
60
40
20
0 -40%
06-Jan 06-Jun 06-Nov 07-Apr
Source: China Monthly Economic Indicators
icy-making and implementation are
core competencies of the CCP. Our
view is also that China is on a much
better footing now than say in 1997
during the Asian crisis, and although
a deep, painful adjustment is occur-
ring in some sectors and regions,
the medium to longer term prospects
for China remain sound. In short,
over the next few quarters, but also
over say a five year horizon, China
is still likely to outperform Asian,
developing country, developed coun-
try and world average rates of
growth as it has done before. But
over the short-term China’s slow-
down will be severe and for many
businesses and strategies the fallout
will be serious. Below we elaborate
key trends that are underway.
Losing an engine in mid-flight:
Export growth disappears, stellar
growth ends?
During the past few months, China’s
export growth has been on a down-
ward trend and in November and
December exports actually recorded
year-on-year declines of 2.2% and
2.8%. This poor performance will be
repeated for several months and we
do not expect to see a revival in the
near term; in fact, we do not see
much of a rebound before the latter
part of 2009 and then only a mild
one. This view is shared widely and
Beijing also realises that recent ex-
port trends have not been a tempo-
rary blip. For the full year 2009 we
actually see exports contracting.
This presents a problem for several
reasons. Firstly, China has become
more reliant on exports over the past
5-10 years. In 2001 China’s exports
amounted to around 23% of GDP,
Grow th Rate (rhs)
07-Sep 08-Feb 08-Jul 08-Dec
while in 2007 the ratio came to about
40%. In fact, in 1997 - at the time of
the Asian crisis - this ratio was below
19%. Secondly, and importantly,
many other drivers of growth also
depend on the export performance,
for example employment, household
income, manufacturing output, in-
vestment demand and so forth. The
fact that imports are also slowing
down means that net exports as a
direct contributor to GDP remains
roughly intact (China is actually still
enlarging its trade surplus), but the
indirect effect of lower industrial pro-
duction (see chart on the next page),
capacity utilisation, layoffs and re-
duced taxes all contribute to an un-
comfortable ripple-effect.
Industrial production, for instance,
grew 5.4% year-on-year in Novem-
ber after an already slow 8.2% in
October, and December (despite a
marginal increase 5.7%) was also
weak. (Industrial production related
to exports meanwhile grew by only
5.2% and 6.8% in October 2008 and
November 2008, respectively.) Other
examples of weaker activity over the
Monthly Exports, % y-o-y, USD bn
Exports (lhs)
140
120
100
80
60
40
20
0 -10%
06-Jan 06-Jun 06-Nov
Source: China Monthly Economic Indicators
17
last few months are: coal production
grew 5.2% in November against
40% 9.2% in October; electricity produc-
tion declined 9% in November ver-
30%
sus a decline of 4% in October; and
20% the Purchasing Managers Index
10% reached its lowest level in November
2008 since its introduction in 2005.
0%
(See China Sourcing Strategy for
-10% more on PMI, p. 25.) Overall, indus-
trial output in 2008 was up by 12.9%
-20%
-30%
in 2008, much below the 17.9% in-
crease in 2007. For 2009, we are
looking for industrial output growth of
below 10% at around 8-9%.
Thirdly, the world regions that China
export to (70% of China’s exports go
to the US, Western Europe and
Asia) are all likely to be affected for
a considerable period. Some coun-
tries’ economies and imports will
likely not recover for 2-3 years or
more. This is a stark reminder that
ideas about decoupling, expounded
by many during the previous fat
years, was mostly unrealistic.
Fourthly, many small and medium-
sized (and some large) exporters
have suffered a slow deterioration in
viability and financial health (due to
rising costs, a firmer RMB, etc) for
quite a while. For many, notably in
the Pearl River Delta (PRD), 2007
and 2008 were already tough and
the latest fall-off in exports was (or
will be) the end of the game. Many
have shut down and the resultant job
losses and/or layoffs present a huge
challenge for Beijing.
Social stability remains paramount,
and there is an urgent need to cre-
ate jobs and revive ailing sectors
and regions. Here it is notable that
concerns over inflationary pressures,
Grow th Rate (rhs)
60%
50%
40%
30%
20%
10%
0%
07-Apr 07-Sep 08-Feb 08-Jul 08-Dec
18
Growth Rate of Industrial Added Value, % y-o-y
30
Grow th Rate of Industrial Added Value
25
20
15
10
5
0 2003
2001 2002
Source: National Statistics Database
that were rife from the middle of
2007 to the middle of 2008, have
now made room for concern over an
extended deflationary cycle. CPI
peaked early in 2008, while PPI also
peaked around mid-year. Lower en-
ergy, commodity and import prices
along with reduced food prices in-
creasingly synchronises with much
weaker demand growth for a low
inflation environment, creating clear
risks of deflation into 2009.
The upshot is that China must
quickly create new drivers of growth.
At the very least it must find ways to
avoid a hard landing. But it is not
easy to quickly stimulate domestic
demand in order to serve as a re-
placement for external demand.
However, at least in China there is a
long history of pump-priming, infra-
structure projects and other demand
stimulus experience to draw on.
Many other economies will move too
slowly either in planning a stimulus
response, or in implementing the
plan. The US and Western Europe
are examples of long decision cycle
systems where political deadlock is
Monthly Retail Sales, % y-o-y, USD bn
160
140
120
100
80
60
40
20
0 10%
07-Jan 07-Jun
Source: National Statistics Database
2004 2005 2006 2007 2008
common. China, we expect, will not
make either of these two mistakes.
(Re)starting the backup engine:
Government stimulus to avoid a
hard landing?
As the global financial crisis un-
folded in H2-2008, and as the real
economic reality became evident
around the world (and in China),
China’s policy makers and planners
became convinced that the impact
on the local economy would likely be
severe. Moving seamlessly from a
five-year phase of trying to slow eco-
nomic activity, there was a swift
change to an expansionary policy
stance. Monetary measures were
taken (reserve requirements were
cut, interest rates were cut and
money supply growth targets were
loosened while banks were encour-
aged to keep lending growth up);
and fiscal policy was quickly identi-
fied for significant stimulus.
The four trillion yuan stimulus pack-
age announced by Beijing in late
October formed part of this policy
Retail Sales Grow th Rate
07-Nov 08-Apr
about-turn (from restraining the
economy to providing strong impetus
for faster growth). We cover China’s
response elsewhere in this publica-
tion (see China Response, p9), but
suffice to say that so far there has
already been a strong response that
is likely to be augmented by addi-
tional measures in the period after
Chinese New Year and over the
course of 2009. So far other meas-
ures have included: lower property
sector transaction taxes, subsidies
to low income earners and the agri-
cultural sector and reduced export
taxes for many industries. There has
also been a slowdown (or even a
reversal) in the reduction of export
subsidies. Expect more.
As mentioned above, our 2009 GDP
forecast projects a very weak H1-
2009, a consolidation in Q3-2009
and a mild recovery in Q4-2009.
This recovery can be ascribed to a
somewhat less vulnerable global
picture at that time, a statistical
windfall in terms of measuring year-
on-year growth against a weak Q4-
2008, and (our anticipation of) Bei-
jing’s success in delivering a stimu-
lus package. Our Q4-2009 forecast
is 7.5%, which would again bring
growth back into the usual
‘expected’ range. Moving forward
into 2010 we expect a continuation
of that momentum until statistics
again work against us in H2-2010,
but we nevertheless look for a full
year GDP growth rate of 7.5% in
2010.
Flying again: Unlocking China’s
domestic consumer potential?
Exports have contracted for the past
several months, yet to write off
26%
22%
18%
14%
08-Sep

Annual per Capita Rural and Urban Disposable Incomes, % y-o-y, USD
2,000 Per Capita Annual Disposable Incom e of Urban Households
1,800 Per Capita Annual Net Incom e of Rural Households
Grow th Rate(Urban)
1,600 Grow th Rate(Rural)
1,400
1,200
1,000
800
600
400
200
0 0%
1997 1998 1999
Source: National Statistics Database
China’s ability to compete in export
markets over the longer term would
be a mistake. But it is also true that
easy export gains, on the back of
low labour costs, are no longer pos-
sible or viewed as the model for pull-
ing China ahead over the next 30
years. That, for example, is why the
export-intensive PRD is now rein-
venting itself to move to higher
value-added industries, higher tech-
nology sectors and a services-based
segment. This is also why there is so
much debate about how China could
unlock the potential of its vast popu-
lation as a credible and sustainable
consumer market. After all, private
consumption in China constitutes
only 30% of GDP as opposed to
70% in the US (and over 50-60% in
the UK, Germany and Japan), so
there is scope to expand that share.
Recent events and reduced external
demand have now forced Beijing to
stimulate household consumption.
Exports may remain important but it
can no longer be perceived as the
reliable engine of growth that it used
to be. At the very least we can ex-
pect China’s planners to think more
about their export composition, ex-
posure and policies.
The long-term future will no doubt
see much more emphasis on do-
mestic demand, specifically on the
private consumer. There is already a
huge market of new rich and an up-
and-coming middle class to tap into
and grow. But it probably also suits
Beijing to put more emphasis on the
grassroots and in particular secure
the incomes and prospects of the
rural poor (especially in central,
western and north-eastern China).
Pulling these households into the
Eastern China success story has
2000 2001 2002 2003 2004
always been a key element of CCP
planning.
The problem of course is that this
was supposed to be something that
would be addressed over multiple 5-
year plans. Suddenly, the need for
accelerated rural development, job
creation and social security is far
more urgent. While exports have
practically fallen off a cliff over a
matter of 3-4 months, it will take
many quarters to kick-start the
stimulus programme, spend the
money, implement projects and see
results at the grass-roots level (let
alone in quarterly GDP growth statis-
tics). This is a key challenge for Bei-
jing and commentators are sure to
highlight the risks to social stability.
But Beijing is aware of the risks too,
and will do everything possible to
expedite implementation of its meas-
ures over the course of the next few
quarters.
In effect, as the global economic
situation deteriorates further and as
the impact on China becomes
worse, the Chinese government will
select a number of longer term capi-
tal projects that were previously de-
layed or cancelled due to overheat-
ing concerns over the past few
years, and re-launch them in a su-
per-package over the coming two to
three years. Future 5-year plans will
likely also be reviewed in line with
the notion of making the Chinese
consumer a top priority.
The fundamental fact remains that
China has an underdeveloped con-
sumer base that can be developed,
a national spending capability
(higher savings and lower indebted-
ness compared to most other coun-
19
25%
20%
15%
10%
5%
2005 2006 2007
tries affected by the crisis) and an
implementation apparatus that could
see the Chinese consumer reshaped
as a key pillar of the Chinese econ-
omy. These factors are central to our
continued optimism over China’s
medium to long term prospects.
Exchange rate outlook: No longer
a one-way bet
The gradual appreciation of the RMB
over the past three years, both
against a basket of currencies and
against the USD, may be on hold.
(Since the de-pegging in 2005 the
RMB has appreciated by 20%
against the USD.)
It will be difficult for Beijing to engi-
neer a sudden return to a weaker
bias for the RMB, and a significantly
weaker RMB would be politically
unacceptable. However, a simple
continuation of the appreciation
trend of the past three years is
unlikely too. At the very least the
current circumstances will inject a
good degree of two-way risk into the
business of forecasting the USD/
RMB. (Forward rates in the NDF
market has already illustrated this
clearly.) It will also fuel friction be-
tween Beijing and the new admini-
stration in Washington.
Our view is that the RMB will be
range-bound over the next six
months. The extent of the slowdown
globally, and in China, will then de-
termine what we can expect for the
next stage of RMB adjustment. For
the time being our forecast antici-
pates a further but slight apprecia-
tion in the RMB during the second
half of 2009.
20
CHINA MACRO STRATEGY:
Risk & Reward Coexist, Business
Planning is Crucial
Key elements of our global out-
look for 2009, 2010 and beyond
By 30 June 2009 we would have
seen the low for most financial asset
and commodity prices globally.
After 30 June 2009 the chances of
good news increase in probability,
i.e. expect an end to a period of
‘one-way-bias’ in news.
After 30 June psychology in global
markets will turn steadily from
‘gloom’ to ‘cautiously optimistic’ as
intermittent signs of recovery be-
come discernible over the medium-
term.
In the second half of 2009, in Q3
and especially Q4, a statistical and
activity rebound will occur. This will
buoy the prevailing mood and cause
a consolidation phase for 2010 to
potentially look much different.
The first half of 2010 will be meas-
ured against very poor numbers in
the first half of 2009. This will help
anchor confidence and turn the page
on 2008/9 in a positive fashion. This
will hold true for the world but also
for China.
There is scope for supply bottle-
necks and capacity shortages
across products as we enter deeper
into 2010. This will lay the founda-
tion for price escalation, fixed asset
investment and a welcome sea-
change in investor sentiment.
Key elements of our China out-
look
China’s first half of 2009 will be
weak, but the second half will be
better, followed by a stronger first
half of 2010 as the stimulus starts to
kick in. Confidence, prices and ex-
pectations will all ‘track’ this macro
cycle for direction.
A V-shaped correction looks very
unlikely but we do not see a perma-
nent reduction of China’s growth
beneath the 7% level (that is so cru-
cial for social stability in China).
Rather we expect a new average
range over the medium and longer
term of very close to but hopefully
above the 7% level. This will be a
departure from previous years when
high (above 9%) but unsustainable
growth became the norm.
We view the upper end of a 6-8%
GDP growth range as acceptable (in
order to meet Beijing’s social chal-
lenges, avoid structural distortion
and/or overheating), and it will also
be a more sustainable growth rate
over the long-term.
We expect changes in the long-term
composition of GDP: regional, sec-
toral and internal/external demand.
Reasons for optimism
Policy makers—Beijing’s resolve
and the realisation that in the short
to medium term domestic demand
needs to cushion the blow from re-
duced exports. The stimulus meas-
ures announced so far are likely only
the beginning of an ongoing effort
that will unfold in coming months.
Implementation—A key strength of
the Chinese system is the ability to
deliver on plans and there are many
shovel-ready projects.
Structural issues—China’s economy
is structurally different from say the
US or Asian countries in 1997 with
lower indebtedness, higher savings
and stronger bank balance sheets.
Causes for concern
Duration—Exports are unlikely to
come back anytime soon but just
how long before this happens?
Marginal projects—There is a risk
that marginal projects are taken on
in the stimulus programme that may
not ripple through far/wide enough.
Consumer and general sentiment—
Property and stock markets have
seen significant value-erosion. This
is sure to weigh on consumer de-
mand just as we need more reliance
on domestic demand. (From late
2007 to the end of 2008 the stock
market lost 21 trillion yuan, or
roughly 100% of GDP in value.)
Unemployment—Just how many job
losses have been sustained in 2008
and how many are likely to occur in
2009? This is an obvious area of
concern but very little information is
available on the exact scale.
Strategic opportunities
Despite a short-term disappointment
in growth we believe that the world
will maintain the view that China is a
significant developing country that
will continue to industrialise, urban-
ise and modernise. As this history
unfolds we expect to see opportuni-
ties over the short, medium and long
term. A few preliminary ideas:
• As Beijing continues to support
domestic demand (in particular the
‘grass-roots’) we can expect more
centers of growth and market op-
portunities in third-tier, fourth-tier
and fifth-tier cities and regions. It is
time for go-to-market strategies in
rural and Western China
• A shift away from ‘more-is-better’,
to quality and sustainability will
make global suppliers of key tech-
nologies and solutions attractive.
Efficiency and safety now become
priorities and foreign firms will
benefit if they develop the right
channels-to-market in this phase
• The next stage of growth will coin-
cide with a renewed environmental
consciousness which will make
foreign technologies, services and
solutions in this sector more attrac-
tive. This is a long-term trend that
must be captured
• The Chinese consumer is about to
become far more powerful and
renowned. Firms that have well
developed Chinese consumer
knowledge and plans will excel
• Players in infrastructure must sell
know-how and technology into
large-scale projects during the
stimulus period
• China Procurement will remain a
big opportunity for firms that can
manage international projects and
risk. The end of a runaway world
economy provides an environment
where long-term supply relation-
ships can be forged and developed
in a sober and rational manner
Kobus van der Wath
Founder/Group Managing Director
kobus@thebeijingaxis.com
 21

Selected Quarterly TBA Forecasts for China

(% y-o-y)
2007 2008 2009F
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Real GDP 11.7 12.2 12.2 11.9 10.6 10.1 9.0 6.8 4.3 4.5 5.8 7.5
Retail Sales 19.2 20.9 23.1 26.0 n/a 24.0 22.2 19.8 17.0 16.0 15.5 18.0
Capital For-
- - - 24.8 - - - 25.5 - - - 29.0
mation
Industrial
15.1 18.3 18.7 17.5 16.6 15.9 13.0 6.8 6.0 8.2 9.5 10.5
Output
Exports 27.9 27.4 26.2 22.2 21.3 22.3 23.1 14.6 -3.0 -4.0 1.0 5.0
Imports 18.2 18.2 20.7 25.4 28.7 32.4 25.7 -10.1 -10.0 -8.0 2.0 3
CPI 102.7 103.6 106.1 106.3 108.0 107.8 105.3 103.2 102.0 101.0 100 100
USD/RMB 7.76 7.68 7.56 7.43 7.16 6.96 6.84 6.83 6.8 6.8 6.7 6.65
China Consensus: China GDP Growth Forecasts for 2009 by Selected Analysts
(% y-o-y)
Highest to Lowest Latest forecast for 2009 Previous forecast for 2009
(by December 2008, January 2009) (by beginning of Q4-2008)
CASS 9.3 (started to signal downside risk) 9.7
UOB 8.3 n/a
Asian Development Bank 8.2 9.5
Merrill Lynch 8 8.6
Wing Hang Bank 8 n/a
HSBC 8 n/a
EMIS 21 Source Consensus
7.76 >9
(30 Dec 2008)
World Bank 7.5 (Reference to sub-6% growth) 9.2
UBS 7.5 9.5
Deutsche Bank 7.0 7.6
BMI 6-7 8.8
Global Insight 6.9 n/a
AT Kearney 6.0 n/a
EIU 6.0 7.5

Goldman Sachs 6.0 n/a

THE BEIJING AXIS 5.6 8.5
RBS 5.0 8.0
Asianomics 0-4 (see 30% risk of negative growth) n/a
Sources: Press; Various; TBA

China Chart Pack
China Outlook 2009—Selected
Economic & Other Indicators
THE BEIJING AXIS China Strategy Group has again prepared a start-of-the-year ‘China Out-
look’ chart pack for the Chinese economy in 2009. The chart pack outlines historical and re-
cent trends, along with forecasts for selected economic statistics and other indicators, cover-
ing China’s national accounts, prices, consumption, investment, public finances, external
trade, financial indicators, demographics and comparative international statistics. The chart
pack can be downloaded from the ‘Knowledge’ section on our website at:
www.thebeijingaxis.com
22

China Facts, Figures & Forecasts

The following is a brief selection of data and forecasts that illustrate the main trends in the growth
and transformation of China’s commerce and industry. We also include a forecast of developing and
developed country growth, along with world average growth.

China Selected Economic Indicators

2003 2004 2005 2006 2007
Nominal GDP ($bn) 1,641 1,932 2,244 2,645 3,242
GDP per capita ($) 1,270 1,486 1,716 2,012 2,454
Real GDP growth (%) 10 10.1 10.4 11.1 13.0
Growth in private consumption (%) 9.2 10.5 12.1 12.7 14.9
Growth in real fixed asset investment (%) 26.7 25.8 25.7 24 24.8
Fixed investment (% of GDP) 39.4 40.7 42 42.8 44.1
CPI inflation (% change in average index for the year) 1.2 3.9 1.8 1.5 4.8
Exchange rate (RMB per USD, end-year) 8.28 8.28 8.07 7.8 7.09
Nominal wage growth (% change year-on-year, average) 13 14.1 14.6 14.4 16.5
3-month inter-bank rate (%, end-year) 3 3.6 3.6 2.8 4.4
Broad money supply (M2,% of GDP) 162.9 158.9 160.7 163.9 163.6
Broad money supply (M2,% change year-on-year) 19.6 14.6 17.6 16.9 16.7
Current account balance ($bn) 45.9 68.7 160.8 249.9 333.7
Net FDI ($bn) 47.2 53.1 67.8 60.3 67.7
Foreign debt ($bn, end-year) 193.6 247.5 281 323 373
Foreign debt (% of GDP, end-year) 11.8 12.8 12.5 12.2 11.5
Central bank gross FX reserves ($bn) 403 610 819 1,066 1,500
Source: Credit Suisse Capital Markets Report

World GDP growth, % y-o-y, 1990–2010F

14 China
13 Emerging and Developing Economies
12 World
11 Advanced Economies
10
9
8
7
6
5
4
3
2
1
0
97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
-1
-2

Sources: IMF; TBA Analysis

 23

FDI Statistics by Province

China’s Utilized Foreign Direct Investment

Heilongjiang

Jilin
Xinjiang Beijing

Gansu Inner Mongolia Liaoning

Ningxia
Hebei Tianjin
Qinghai
Shanxi Shandong

Tibet Shaanxi Henan Jiangsu

Sichuan

Hubei Anhui Shanghai

Chongqing
Zhejiang
Flow Stock Jiangxi
China’s FDI Hunan
(USD bn) (USD bn) Guizhou
Fujian
2003 53.50 228.37
Yunnan
2004 60.63 245.47 Taiwan
Guangxi Guangdong
2005 72.41 272.09
2006 72.72 292.56
2007 83.52 327.09 Provinces in red made up 75% of
Hainan China’s Actual Utilized FDI in 2007
2008F 92.40 419.49

FDI Actual OFDI From FDI Actual OFDI From

% of % of Comparable % of % of Comparable
Utilized Chinese Side Utilized Chinese Side
Total Total FDI inflow Total Total FDI inflow
(USD bn) (USD bn) (USD bn) (USD bn)

Anhui 3.0 2.5 0.02 0.2 Latvia Jiangsu 21.6 17.8 0.47 6.5 Chile

Beijing 5.1 4.2 0.37 5.1 Slovakia Jiangxi 3.1 2.5 0.02 0.2 Latvia

Chongqing 1.0 0.8 0.44 6.1 Iran Jilin 0.9 0.7 0.24 3.3 Venezuela
Liaoning 9.1 7.5 0.22 3.1 Vietnam
Fujian 4.1 3.3 0.31 4.3 Philippines
Ningxia 0.1 0.1 0 0 Haiti
Gansu 0.1 0.1 0 0 Sierra Leone
Guangdong 17.1 14.0 1.47 20.5 Nigeria Qinghai 0.3 0.3 0 0 Netherlands

Guangxi 0.7 0.6 0.07 0.9 Botswana Shaanxi 1.2 1.0 0.04 0.5 Uruguay

Guizhou 0.1 0.1 0.00 0.0 PNG Shandong 11.0 9.0 0.40 5.6 Malaysia

Hainan 1.1 0.9 0.03 0.5 Honduras Shanghai 7.9 6.5 0.63 8.7 Argentina

Hebei 2.4 2.0 0.06 0.8 Bahrain Shanxi 2.5 2.0 0.12 1.7 Panama

Heilongjiang 0.5 0.4 0.03 0.4 Antigua Sichuan 1.5 1.2 0.79 11.0 Bahamas

Tianjin 5.3 4.3 0.10 1.4 Serbia

Henan 3.1 2.5 0.14 2.0 Latvia
Tibet 0 0 0 0 Vanuatu
Hubei 2.8 2.3 0.01 0.2 Bosnia
Xinjiang 0.1 0.1 0.25 3.5 PNG
Hunan 3.3 2.7 0.29 4.1 Oman
Yunnan 0.4 0.3 0 0 Afghanistan
In. Mongolia 2.1 1.8 0.07 1.0 El Salvador
Zhejiang 10.4 8.5 0.61 8.4 Indonesia
Sources: UNCTAD Database; China Commercial Yearbook 2008
24

China Sourcing Strategy

Affected by the financial crisis, China’s foreign trade slumped in Q4-2008, and the Chinese govern-
ment has taken a series of measures to stimulate exports and domestic consumption. This section
provides information and analysis to help formulate China Sourcing Strategies in 2009. By the CSU
team.

Highlights China Exports as Share of GDP, % 1978–2007

• In November 2008 China’s exports suffered the first 45
monthly y-o-y decline in seven years
• China’s manufacturing Purchasing Manager Index 30
(PMI) in November fell to 38.8%, the lowest point
since the PMI survey was initiated in China in 2005
• The Chinese government adjusted export tax re- 15
bates four times in H2-2008
• China’s Customs estimated the y-o-y growth rate of 0
the total value of imports and exports in 2008 to be 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
18%, and this will fall to below 5% in 2009 Source: World Bank
• The RMB posted a record one-day decline against
the US dollar on 1 December 2008, falling from
6.8349 to 6.8505 China Exports by Category, USD bn
Others
• China removed 1,757 items from its lists of product 1,400
Sundry
categories that had been either restricted or banned 1,200 M achinery Equipment
from foreign investment in processing trade. These 1,000 Products Classif ied by mat erial

products, ranging from textiles to plastic goods, ac- 800 Chemicals and Relat ed Products
600 M ineral Items
count for 77% of the products designated as re- Foodstuff s
400
stricted and may involve USD 30 bn in foreign trade
200
• China adjusted the rate and application scope for 0
some provisional and special taxes from 1 December 2001 2002 2003 2004 2005 2006 2007 Jan -
2008. The export duty was scrapped on 102 items Oct
• Supplier audits have now become even more crucial Source: MOFCOM China 2008

Export Slowdown: Implications for Procurement Managers that Target China

China’s November exports fell by tiles, parts of automatic data proc- ties; the RMB’s appreciation has
2.2%, the first monthly decline in essing machines, televisions/radios, slowed; and China’s energy and raw
seven years. The number for De- garments, footwear and toys. material prices are going down. All of
cember was –2.8%. these are drivers for better pricing.
The main reason for the severity of Buyers in emerging markets and
There were early signs of decreasing export declines is shrinking overseas developing countries, such as south
exports, such as at the Canton Fair demand, as a result of the crisis. Asia, the Middle East, Latin America,
where orders decreased by 17%. Africa and Eastern Europe, could
Also, the PMI fell to its lowest point China’s government is seeking new benefit from the Chinese govern-
since China introduced the survey economic growth angles, while some ment’s policy of encouraging export-
system, and exports of some main measures have been taken to buoy ers to actively develop these mar-
export commodities declined in Q1, struggling exporters, i.e.: kets in 2009 as developed country
Q2 and Q3 of 2008, including tex- • assisting exporters to transform by imports weaken.
stimulating domestic demand
Monthly Export Growth, % y-o-y • encouraging M&A and to help with Annual Export Growth, % y-o-y
35 2 0 0 8 mo nt hly g r o w t h ( y - o - y ) industry consolidation, and 50
30 • guiding exporters to better antici- 40
25
pate RMB volatility by 1) better 30
20
15
managing FX risk, 2) improving
20
10
resilience despite a stronger RMB
10
5
0 Procurement managers that target 0
-5 China may notice a series of favour-
- 10
Jan M ar M ay J ul Sep Nov able trends: more export rebates are 19 78 19 8 8 19 9 8 2008

Source: China Customs (again) provided; fewer export du- Source: China Customs

Regulatory Watch
China raised export tax rebates four times in the sec-
ond half of 2008
1st time (effective 1 August 2008):
China lifted export tax rebates on a range of textiles and
garments to 13%, some bamboo products to 11%.
2nd time (effective 1 November 2008):
This adjustment involved 3,486 items of products, which
is about 25.8% of total products. Rebates were increased
on textiles, garments and toys to 14%, and furniture from
11% to 13%. In addition, rebates on exports of selected
ceramic, plastics, mechanical, electrical and medicinal
products were lifted by 1% to 2%.
3rd time (effective 1 December 2008):
This adjustment raised rebates on 3,770 items of export
goods, about 27.9% of the total products, including labor-
intensive, mechanical and electrical products. The adjust-
ment reduced or eliminated export duties on certain types
of steel, chemical and some fertilizer products.
4th time (effective 1 January 2009):
The last adjustment in 2008 increased rebates on 533
items of high-tech and machinery products. It raised re-
bates on industrial robots and airplane navigation sys-
tems to 17%, motorcycles and sewing machines to 14%.
The RMB posted a record one-day fall to the USD
On July 21 2005, after more than a decade of strictly peg-
ging the RMB to the USD at an exchange rate of 8.28,
the People's Bank of China announced a revaluation of
the currency and reform of the exchange rate regime
(pegged against a basket of currencies). Since then the
RMB started to appreciate.
By the end of July 2008, the RMB had appreciated by
about 18%, but then experienced a 20-day range-trade.
Although it subsequently resumed its appreciation once
more, the speed of appreciation was much slower and
characterised by short reversals.
On 1 December, when the RMB median rate to the US
dollar dropped 156 basis points from 6.8349 to 6.8505, it
started off another round of depreciation and range-
trading. This was considered a signal that China will re-
sist further RMB strength (and international pressure) to
assist domestic manufacturers and maintain the current
account surplus, which came to over 7% of GDP in 2007.
China’s Long-term Exchange Rate Trend
2 Average USD/RMB exchange rate
4 justment, control and forecasting, and in the planning of
6
8 The National Bureau of Statistics of China (NBS) and
10
1988 1994 2005 2008
Source: MOFCOM China
25
Purchasing Managers Index, Jan 2007–Dec 2008
PMI in Manufacturing Industry
60
50
The index has been
lower than 50% for three
40 consecutive months
30
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08
Source: China Federation of Logistics & Purchasing (CFLP)
• The FLP manufacturing PMI in November 2008 fell
to 38.8%, which was the index's lowest point since
the PMI survey was initiated in China in 2005
• It climbed again to 41.2% in December. The new
order index rose by 5.0% and the purchasing price
index rose by 6.1%, while the new export order index
was 30.7%, the lowest among all the composite ele-
ments of the manufacturing PMI
• Among the 20 industries surveyed, the PMI of manu-
facturing of beverages and manufacturing of medi-
cines was over 50%; while the PMI of 10 industries
of a total of 20 was lower than 40%
About the PMI
The Purchasing Managers Index (PMI) is a commonly
used international macro-economic monitoring indicator,
but it is relatively new to China. It focuses on the areas of
production and distribution, manufacturing and non-
manufacturing.
The PMI is a composite index of five sub-indicators which
are allocated the following weights:
Production level (25%)
New orders (30%)
Supplier deliveries (15%)
Inventories (10%)
Employment level (20%)
The magic number for the PMI is 50. A reading of 50 or
higher generally indicates that the industry is expanding.
There are over 20 countries and regions, such as the US,
UK, Japan and Singapore that have established a PMI
survey. The PMI system and its methodology is unified,
and therefore are comparable internationally. The estab-
lishment of the PMI survey in China has significance in
the areas of macroeconomic and industrial economic ad-
enterprises’ operations.
China Federation of Logistics & Purchasing (CFLP) re-
leased the first Purchasing Managers Index on Manufac-
turing (PMI) on July 6 2005 in Beijing.
26

WHY Source in China: Logistics is Relatively Mature compared with other Middle Income Countries/LCCs
On the Ground Situation
• Delivery times depend on many factors – a quoted lead time is only an estimate
• In China, speed is not always dependent on the factors that you are used to
• Regard speed within the context of the time it takes to get one order delivered in perfect order, not the time it
takes to deliver the first order
• China has an overburdened rail system
• Port capacity is large, expanding, but still at times inadequate for existing needs
• Container space from China is very limited; this creates the potential, though not the certainty, of transportation
delays. The current slowdown alleviates this but do not get caught out as exports revive
• Factories may oversell their capacity in order to later cherry pick the ‘right’ client-portfolio
• Input materials are not supplied with the same certainty as in Western economies; this is typically not a high
priority for Chinese manufacturers, but domestic firm SCM is improving
• In many cases after sales service consists of sending free parts with the next shipment, for the party on the other
side to fix the machinery; a comprehensive maintenance and service mindset is still developing
• Uncertainty about the supply of input materials may not always prevent suppliers from making a deal anyway
• Delays are often caused by different interpretations of the responsibilities in terms of documentation
China’s Relative Logistics Performance
Country LPI Customs Infrastructure International Logistics compe- Tracking & tracing Domestic logistics Timeline
shipments tence costs
Singapore 4.19 3.90 4.27 4.04 4.21 4.25 2.70 4.53
Japan 4.02 3.79 4.11 3.77 4.12 4.08 2.02 4.34
China 3.32 2.99 3.20 3.31 3.40 3.37 2.97 3.68
Thailand 3.31 3.03 3.16 3.24 3.31 3.25 3.21 3.91
India 3.07 2.69 2.90 3.08 3.27 3.03 3.08 3.47
Vietnam 2.89 2.89 2.50 3.00 2.80 2.90 3.30 3.22
Brazil 2.75 2.39 2.75 2.61 2.94 2.77 2.58 3.10
Russia Federation 2.37 1.94 2.23 2.48 2.46 2.17 2.40 2.94

Source: World Bank LPI 2007

WHAT to Source in China: China’s Exports are led by Machinery and Mechanical Appliances
China’s Export Mix, % 2007
10.24% Machinery and mechanical appliances; electrical equipment and parts
2.51% thereof; sound recorders and reproducers, television image and
Machinery and sound recorders and reproducers, and parts and accessories of such
3.00% mechanical articles
appliances: Textiles and textile articles
3.34% 43.42% Base metals and articles of base metal
Miscellaneous manufactured articles
4.19% Vehicles, aircraft, vessels and associated transport equipment
4.51% Products of the chemical or allied industries
Optical, photographic, cinematographic, measuring, checking, preci-
5.67% sion, medical or surgical instruments and apparatus; clocks and
watches; musical instruments or parts and accessories thereof
Plastics and articles thereof; rubber and articles thereof
Base metals: Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seat-
9.49% sticks, whips, riding-crops and parts thereof; prepared feathers and
articles made therewith; artificial flowers; articles of human hair
Textiles and textile articles: 13.62% Others
Source: China Customs
Composition of China’s Exports of Machinery and Mechanical Appliances 2007, USD bn
528.82 112.24

46.79
42.66
32.74 24.68 18.73 17.88 14.22 10.80 207.80

Machinery Automatic Radio and TV Electric Parts, acces- Electronic Printing Television Electric Parts for Others
data proc- transmitters, apparatus sories, ex- integrated and ancil- receivers, transform- radio, TV
essing ma- television for line cept covers, circuits lary ma- video moni- ers, static transmis-
chines cameras telephony, for office and micro chinery tors and pro- converters sion, receive
(computers) telegraphy machines assem- jectors and rectifi- equipment
blies ers
Source: China Customs
 27

HOW to Source in China

China Sourcing in 2009: Procurement Risk Management Imperatives in Turbulent Times
As the global financial and real economic crisis deepens and China becomes more affected, firms are engaging in sup-
plier audits. Some firms are scaling back on China sourcing plans in the wake of the crisis but firms that are taking a
long-term view remain active and are still viewing China as having an important share of supply. Looking at the general
picture of sourcing in China in 2009, risk management is more critical than ever. Here we abstract 5 imperatives, all ba-
sic and practical measures, that procurement managers must adopt in turbulent times:
1 Strategic review & sup- Measure exact China exposure (review current and planned future contribution of
plier health check (audits your China procurement) in overall supply chain; and do a rigorous once-off sup-
and due diligence) plier health check and audit to gauge fallout of the financial crisis in your supply
base. Constantly review suppliers contract execution and focus on risk.
2 Review clauses in exist- Review and confirm if existing contracts are subject to premises in terms of RMB
ing supply contracts exchange rates, export duty policy, energy and raw material prices, etc.

3 Renew supplier evalua- Renew evaluation process for new suppliers by integrating current reality market
tion process research (are there better choices emerging?) given changed conditions.

4 Reassess 3rd party ser-
vice providers
5 Strengthen business rela-
tionships with suppliers
Reassess all service providers, including logistics companies, law firms and con-
sulting companies. Many are being squeezed by the current market presenting
risk as they shed teams, close offices, cut costs, cut corners, etc.
Get closer to suppliers than ever and develop strategic relationships, such as
becoming an exclusive agency, signing long-term cooperation contracts, etc.

Process Flow of THE BEIJING AXIS China Sourcing Unit (CSU) - Needs Analysis
This section introduces the process flow of THE BEIJING
AXIS China Sourcing Unit, i.e. how we operate from the
point of receiving enquiries from clients, the services in-
cluded in this solution-process and the benefits provided
to our clients, and lessons learnt. In this edition we touch
on the initial stage of strategic sourcing: Needs Analysis.
A thorough needs analysis will focus China efforts and
increase effectiveness/efficiency. It will also help intro-
duce a risk management orientation form the outset. CSU
collaborates with clients in conducting the needs analysis
by employing TBA’s research capacity, knowledge man-
agement system, on-the-ground reach & by utilising es-
tablished networks. We are especially active in the testing
stage as outlined below.

2
Preliminary Test for Final Systematic
Categories China Categories Industry
1 Needs and ‘Wish- Relevance and ‘Target Search &
Analysis List’ for and Lists’ for Supplier
China Feasibility China Identifica-
tion

Issues to consider:
• Develop initial categories list; test for China relevance
and feasibility; then formulate final ‘China target lists’
• Formulate high-level strategic objectives and business
priorities for sourcing from China, then focus on detail
• Start with categories/commodities that are: low risk; easy
to keep stock in; are known to see large exports from
China; specs and standards have been internationalised;
for which current suppliers don’t have many competitors
• Select products with low/stable trade barriers (duties)
• Develop high-level SC cost model early and deter-
mine if China’s delivery cycle can match SC limits
• Determine own resources and capacity, i.e.: language,
travel, risk management capability - and scale China
ambitions to these constraints (do not be unrealistic)
• Determine costs to mitigate risks’, i.e.: travel, consult-
ants, 3rd party inspectors

China Sourcing Blog Highlights
The global financial crisis has overshadowed the economic landscape in 2008, and CSB has
gauged the China impact and considered the economic landscape that could follow the crisis. Yet
we have also continued our China sourcing analysis with an in-depth guide on how to make good
enquiries, some tips on successful e-commerce, and a few reflections on the Canton Fair.
The China Sourcing Blog (CSB) is
THE BEIJING AXIS online media
platform to keep track of all the latest
trends on sourcing and the Chinese
economy. Taking on a multi-faceted,
dynamic subject and carefully scan-
ning everything from the mainstream
media to the distant corners of the
Internet, CSB strives to get to the
bottom of all the best bits and pieces
on China sourcing. The following are
a selection of CSB postings that ap-
peared over the last three months:
Posted: 30 November and 5, 16
and 19 December 2008
In a series of four postings providing
practical insights on the sourcing
process, CSB illustrated the ins and
outs of How to Make a Good En-
quiry. Based on the experience
gained from years of conducting
successful China sourcing opera-
tions, CSB was able to provide a
concise assessment of not only what
exactly a good enquiry should con-
sist of and how it should be put to-
gether, but also of the soft skills re-
quired to make an enquiry suitable
and comprehensible for Chinese
suppliers, enabling buyers to obtain
the quotation they are looking for.
Posted: 12 December
As the financial crisis continues un-
abated, Brazil, Russia, India and
China (the so-called BRIC nations)
are poised not merely to weather the
current crisis but to go from strength
to strength as a sense of normalcy
gradually returns in the year ahead.
CSB analysed the current outlook for
the BRIC nations and the measures
adopted in these countries to deal
with the crisis, and by all indications
it appears that the aftermath of the
financial crisis will see the BRICs in
better shape than ever.
Posted: 28 November
China’s steel industry has felt the
Gloomy in Dongguan: The financial crisis and the resultant drop in foreign export
orders has severely impacted the Pearl River Delta, causing factory closures and
job losses (Photo: Mariehavens / flickr).
brunt of the financial crisis as the
global slowdown in the demand for
commodities has caused prices to
plummet. With first-hand knowledge
of the consequences being experi-
enced in the industry, CSB analysed
the current state and future pros-
pects for China’s steel suppliers.
Posted: 20 November and 31 Oc-
tober 2008
The crisis that emanated with such
force from the US financial centers
in 2008 inevitably impacted China’s
economy, and in an extensive two-
part series, CSB assessed both the
systemic impact of the crisis on
China as well as the new opportu-
nities presented by the situation.
With the decline in foreign export
orders, the impact on China’s real
economy has been reflected most
prominently in the spate of factory
closures in China’s Pearl River Delta
export manufacturing base. Yet the
crisis has also presented China with
a novel opportunity to promote mod-
ernisation in its export sector and to
shift the balance of its economy from
FDI and exports to domestic con-
sumption, services and innovation.
29
Posted: 7 November
In a posting entitled What can you
get from Alibaba?, CSB offered
some tips for users of the online Chi-
nese trading platform Alibaba. While
it has become an indispensable tool
for innumerable buyers and sellers
of Chinese products, Alibaba does
not necessarily by itself guarantee a
successful China sourcing operation,
and the experiences of buyers using
the platform can often vary from find-
ing many good suppliers to not find-
ing any quality suppliers at all. We
provide some hints on what to look
out for when going online.
Posted: 3 November
And finally, as the most prestigious
event in the China trading calendar,
the Canton Fair is integral to many
foreign buyers’ China sourcing
plans. After attending the 2008
Spring session of the Canton Fair,
CSB reported back with some reflec-
tions on the event and found that the
best booths do not always equate to
the best quality products...
CSB@chinasourcingblog.org
www.chinasourcingblog.org
30

China Trade Roundup

To illustrate the main trends in the growth and transformation of Chinese commerce and industry
with an emphasis on trade and foreign investment, the China Trade Roundup summarizes the lat-
est available China trade statistics.

China Total Imports & Exports 2000–2008, USD bn China Total Trade Dec 07–Dec 08, USD bn

1,500 Exports Im ports

Im ports (CIF)
120
1,250 Exports (FOB)
100
1,000
80
750 60
500 40

250 20

0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 D J F M A M J J A S O N D

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

Total Imports by Main Commodities, % Jan–Nov 2008 Total Exports by Main Commodities, % Jan–Nov 08
1- Electronic Appliances 1% 1- Toys 1%
2- Motor Vehicles 1% 4- Plastic Articles 1%
3- Copper Products 2% 2- Electronic Appliances 1%
5- Furniture 2%
5- Steel Products 2% 4- Soya Beans 2% 6- Footwear 2% 3- Travel Goods and Handbags 1%
6- Data Processing 4% 7- Mobile Phones Articles 3%
7- Refined Petroleum Products 3% 2008.11 2007.11 % 8- Textiles and Makeup Articles 5% 2008.11 2007.11 %
8- Plastic in Primary Form 3%
(USD bn) (USD bn) Change (USD bn) (USD bn) Change
1 8 7 8.8 9- Garments and Clothing Articles 8% 1 8 8 3
9- Electronic Components 10%
2 14 10 45.2 2 12 9 24
10- Crude Oil 12% 3 18 18 -0.3 10- Data Processing 11% 3 12 10 27
4 20 10 103.9 4 14 13 6
5 22 19 16.0 5 24 20 22
11- Others 60% 6 37 35 5.3 11- Others 65%
6 27 23 16
7 29 14 98.3 7 36 32 12
8 32 30 8.3 China Total Exports 8 60 51 18
China Total Imports
9 121 117 3.8 2008.10 2007.10 9 109 105 3
2008.10 2007.10
(USD bn) (USD bn)
(USD bn) (USD bn) 10 123 71 73.6 10 155 141 10
11 635 533 19.1 1317 1103
1060 865 11 861 691 25
2000 2008.11 2008.11 2008.11
Source: National Bureau of Statistics Source: National Bureau of Statistics

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

50
Exports Im ports

40

30

20

10

Nov Dec
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
-10

-20
Source: National Bureau of Statistics
 31

Total China Exports by Country/Region 2008, USD bn Total China Imports by Country/Region 2008, USD bn

300 EU 300 Others

US
250 250
Other
200 Hong Kong 200
Japan
150 150 EU ASEAN
Japan ASEAN S.Korea
Taiwan
100 S. Korea 100 US
Germany Germany
Netherlands Australia
50 UK Russia 50 Malaysia Brazil

0 0
Source: National Bureau of Statistics Source: National Bureau of Statistics

Total China Exports and Imports by Country/Region, % Jan–Nov 2008

Exports Imports
UK 3% Malaysia 3%
Netherlands 3%
Russia 2% Australia 3% Brazil 3%
Germany 4% Germany 5%
Korea 5% EU 21%
US 7% Others 25%
ASEAN 8%
Taiwan 9%

Japan 8%
US 18% Korea 10% Japan 13%

Hong Kong 13%

ASEAN 10% EU 12%
Source: National Bureau of Statistics Others 15%

World Trade Map: Imports and Exports of Goods for Selected Countries Jan–Aug 2008
Imports USD trillion
1.5 % of Total % of Total
US Country
World Exports World Imports
1.4
Total World Trade of Goods DEFICIT Germany 9.85% 8.45%
1.3
Jan-Aug 2008 USD trillions China 8.88% 7.87%
1.2 Exports of Goods 10.563 US 8.46% 14.70%
SURPLUS
1.1 Imports of Goods 9.973
Japan 5.14% 5.13%
Netherlands 4.27% 4.07%
1.0
France 4.11% 5.04%
0.9 Germany Italy 3.64% 3.97%
0.8 China Belgium 3.17% 3.37%
Russia 3.14% 2.10%
0.7
United Kingdom 3.05% 4.49%
0.6 Canada 3.00% 2.81%
France Japan
0.5 UK S. Korea 2.84% 3.08%
0.4 S.Korea Italy Netherlands HK 2.26% 2.59%
Spain Belgium Singapore 2.26% 2.24%
0.3 Mexico 1.93% 2.13%
HK Canada
0.2 Turkey Russia Spain 1.85% 3.01%
Mexico Singapore
0.1 Brazil 1.22% 1.20%
Australia
Brazil Australia 1.17% 1.35%
0.0
Turkey 0.91% 1.50%
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5
Exports USD trillion
Source: IMF
32

China Inc. Goes Global: OFDI and M&A

China has attracted attention not only with its GDP growth but also with its increasingly active over-
seas investments. 2008 saw China’s OFDI diversify into more sectors. Although Chinese outbound
investors are currently more cautious, due to the crisis and volatility, from H2-2009 we will see more
deals. Do not expect a wave, expect surgical, focused banner transactions. By Edward Wang.

Highlights: China Outward FDI and M&A in 2008 China Outward FDI Flow 2003-2008, USD bn
• While global Mergers & Acquisitions (M&A) de- Estimate for 2008: Over USD 40 bn
creased by 29% in transaction value in 2008, Asia Latin America
26.51
China’s M&A transaction value grew by 25% as one Africa North America

of only two countries in the world with M&A growth Europe Oceania

in 2008 21.16
• In terms of OFDI, Chinese companies seemed more
active in 2008 than the previous year, with some 12.27
strategically important deals concluded by Chinese
companies. China’s OFDI flow for 2008 is expected
5.5
to be over USD 40 billion
2.85
• After a few years of doing overseas deals, Chinese 2003 2004 2005 2006 2007 2008
companies are now more familiar with cross-border Source: MOFCOM China
M&A standards and processes and more Chinese
companies are currently considering cross-border
expansion. All surveys show the appetite is there Structure of China’s OFDI Flow 2006–2007
• There is at present a popular view that Chinese 2006 Total: USD 21.16 bn 2007 Total: USD 26.51 bn
companies should take advantage of the ongoing
global financial crisis to more actively acquire over-
seas assets, especially such targets as resources
24% 30% 33%
companies which are ‘less complicated’ than banks. 45%
Expecting a wave is, however, unrealistic; expect
31%
focused and surgical transactions by leading firms 37%
• Although Chinese companies are generally not short
of capital, they are now more cautious and conser- Eq uit y invest ment Eq uit y i nvest ment
vative in their approach to cross-border deals Pr o f i t s r einvest ment Pr o f i t s r ei nvest ment

• It is estimated that China’s OFDI activities will start U nclassi f ied invest ment U nclassif i ed invest ment

to recover in the second half of 2009 Source: MOFCOM China

Major Recent Cross-border Deals

1 Wuhan Iron & Steel
2 Shougang
3 Shenzhen Nonfemet
4 Anshan Iron & Steel
5 Sinopec
1 December 2008: Wuhan Iron &
Steel Co (WISCO) is set to pay
up to AUD 180 million (USD 127
million) for a 50% stake in five
iron ore mining projects owned
by Australian miner Centrex Met-
als Ltd. WISCO, one of China's
largest steelmakers, will also pay
an additional AUD 9.7 million
(USD 6.4 million) for a 15%
stake in Centrex itself. The deal
is still subject to Chinese and
Australian government approval.
2 December 2008: Mount Gibson
Iron Ltd shareholders have ap-
proved a AUD 162.5 million
(USD 107.2 million) package that
could see the mine being more
than 40% owned by Shougang
Concord International Enter-
prises and APAC Resources Ltd.
3 December 2008: China’s nonfer-
rous metals producer Shenzhen
Zhongjin Lingnan Nonfemet has
received government approval to
take a 50.1% stake in cash-
strapped Australian lead and
zinc miner Perilya Ltd for AUD
45.5 million (USD 30 million).
The remaining conditions are
approval by Perilya shareholders
and by Australia's Foreign In-
vestment Review Board.
4 November 2008: China state-
owned Anshan Iron & Steel
Group agreed to raise its stake
to 36.28% by acquiring a further
23.68% stake in Gindalbie Met-
als Ltd, an Australian iron ore
and gold mining company, for a
total of AUD 162.06 million (USD
106.91 million) in a privately ne-
gotiated transaction.
5 December 2008: Sinopec has
completed the acquisition of the
Canada-based Tanganyika Oil
Company after receiving ap-
proval from the Chinese govern-
ment. Sinopec offered RMB 13
billion to buy out the Canadian oil
company in October 2008, the
company's largest overseas ac-
quisition in recent years.
 33

China Total Outward FDI Capital Stock by Region 2007: USD 117.9 bn

Europe Asia
USD 4.5 billion USD 79.2 billion
(3.8% of total) (67.2% of total)
North America
USD 3.2 billion
(2.7% of total) China
Africa
USD 4.5 billion
(3.8% of total) Oceania
USD 1.8 billion
(1.6% of total)
Latin America
USD 24.7 billion
(20.9% of total)

Source: MOFCOM China Note: FDI Stock is a cumulative concept (vs. Flow)

China’s Total Outward FDI Stock by Sector 2007 China OFDI Stock in Africa, Top 10 Countries 2007
Leasing & business services 30.5 Algeria Egypt
Wholesale and retailing 20.2 USD 394 mn USD 132 mn
Finance 16.7
Mining 15.0 Niger Sudan
Transport, warehouse & postal services 12.1 USD 135 mn USD 575 mn
Manufacturing 9.5
Real estate 4.5 Nigeria Ethiopia
USD 630 mn USD 109 mn
IT 1.9
Construction 1.6
Science research, service & geo-survey Zambia Tanzania
1.5 USD 429 mn USD 111 mn
Residential & catering trades 1.3
Agriculture, forestry, husbandry, fishery 1.2 South Africa Mauritius
Water, environment & public facility mgmt. 0.9 USD 702 mn USD 116 mn
Power and other utilities 0.6
Other industries 0.2
Source: MOFCOM China Source: MOFCOM China

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

• China’s OFDI grew at a low stable pace before 2004.
Since 2004, however, China’s OFDI has been grow-
ing at a faster pace, with total OFDI flow increasing
from USD 5.5 billion in 2004 to an estimated USD 40
billion-plus in 2008. It is widely believed that with
China’s increasing integration into the global econ-
omy, this trend will continue in the near future
• The sectors into which more of China’s OFDI has
been invested in the last several years are business
services, wholesale and retail, finance, mining, trans-
port, warehousing and postal services and manufac-
turing. By the end of 2007, more than 88% of China’s
OFDI has been invested in these sectors across the
world
• In terms of investment destinations, 67% of China’s
OFDI has been invested in Asia by 2007. (Bear in
mind HK effect!) However, in recent years, because
of China’s growing thirst for natural resources, a
greater share of China’s OFDI has been invested in
resource-rich areas such as Australia and Africa. In
2007, investment in Oceania, mainly Australia, was
USD 770 million, an increase of 509% on 2006
• Chinese investment in Africa has been growing very
fast in the last few years. OFDI flow into the conti-
nent stood at only USD 74.8 million in 2003, yet this
had increased to USD 1574.3 million by 2007
• By 2007, South Africa had attracted USD 702 million
in capital from China, the most among all African
countries. The major Chinese investors in South Af-
rica are Sinosteel, Zijin Mining (via a London-listed
entity), and Gansu Jiuquan Iron and Steel. Nigeria
and Sudan have also had more investment from
China than most other African countries, with capital
stock from China reaching USD 630 million and USD
575 million by 2007, respectively. China’s invest-
ments in Nigeria and Sudan are heavily slanted to-
wards the oil industry
• Some major investment developments by Chinese
companies in Africa in 2007 and 2008 are ICBC’s
acquisition of a 20% stake in Standard Bank for USD
5.5 billion (2007/10); Sinosteel increasing its invest-
ment in South Africa by USD 440 million (2008/02);
and CREC announcing plans to invest a total of USD
3.1 billion in mining in the DRC (2008/09)
34

China Cross–border Investment Deal-sheet: Major Deals in 2008

Month Acquirer Target Amount Country Stake
USD
Dec Wuhan Iron & Steel (WISCO) Centrex 6.84 mn Australia 15%
Dec Wuhan Iron & Steel (WISCO) Centrex's 5 iron ore projects 127 mn Australia 50%
Dec Shougang Group Mount Gibson Iron Ltd. 110 mn Australia n/a
Dec Shenzhen Nonfemet Perilya Limited 30 mn Australia 50.1%
Nov Anshan Iron & Steel Gindalbie Metals 143 mn Australia 36%
Oct Anshan Iron & Steel VIGANO n/a Italy 60%
Oct China Merchants Bank Wing Lung Bank n/a Hong Kong 97.82%
Sep Sinopec Tanganyika Oil 2 bn Canada 100%
Sep China Oilfield Services Awilco Offshore ASA 2.49 bn Norway 100%
Sep ICBC RosEvroBank 800 mn Russia 100%
Sep People's Bank of China Drax Group 32.2 mn UK <1%
Aug Sinopec & CNPC Petro-Tech Peruana 2 bn USA n/a
Aug Zhuzhou CSR Dynex Power 15.7 mn UK 75%
Aug Hunan Valin Golden West Resources 23.27 mn Australia 11.39%
Aug People's Bank of China Prudential 234.71 mn UK 1%
Aug FUQI International Inc. Temix 19.3 mn Italy 100%
Aug Suntech Power Nitol Solar 100 mn Russia n/a
Jul China Metallurgical Group Corp. Ramu nickel project 1.37 bn PNG n/a
Jul Sinosteel Midwest Corp. 1.32 mn Australia 100%
Jul China Healthcare Acquisition Corp. Europe Asia Huadu 60.375 mn Singapore 100%
Jun Sinopec AED Oil 561 mn Australia n/a
Jun China Metallurgical Group Corp. Cape Lambert‘ iron ore project 367 mn Australia n/a
Jun Changsha Zoomlion CIFA S.p.A. 253.22 mn Italy 60%
Jun Western Mining FerrAus 20 mn Australia 10%
Jun Sinochem International Corporation GMG Global Ltd. 198 mn Singapore 51%
May China Merchants Bank Wing Lung Bank 2.48 bn Hong Kong 53.12%
May China Merchants Bank CIGNA & CMC Life Insurance 20.33 mn USA 50%
Apr China Minmetals Non-ferrous Metals HPTec n/a Germany 100%
Apr China National Gold Jinshan Gold Mines Inc. 218 mn Canada 41.99%
Apr State Administration of FOREX Total 2.9 bn France 2%
Apr China International Marine Containers Goodpack Ltd. 16 mn Singapore 1.5%
Mar China Investment Corp. Visa 100 mn USA <1%
Mar Huaneng Power Tuas Power 3 bn Singapore 100%
Feb Chinalco - Alcoa Rio Tinto 14.1 bn Australia 12%
Feb State Administration of FOREX BP 2 bn USA 1%
Jan State Administration of FOREX ANZ Bank 176 mn Australia <1%
Jan State Administration of FOREX Commonwealth Bank of Australia 176 mn Australia <1%
Jan State Administration of FOREX National Bank of Australia 176 mn Australia <1%
Jan Jinchuan Group Tyler Resources 210 mn Canada 100%
Jan Wuxi Pharma Tech AppTec Lab Services 151 mn USA 100%
Jan Minmetals / Jiangxi Copper North Peru Copper 470 mn Peru 100%
Jan Jinchuan Group Fox Resources 15.7 mn Australia 11%
Sources: Multiple sources; Press; TBA Analysis
 35

China Outward FDI Flow by Sector 2007, USD mn

In August 2007, Chinalco acquired a 91%
26506 4063 4063 860 stake in Peru Copper Inc. for USD 860 million

4065 55 3148
Many Chinese
2127 6604 companies’
expansion
In June 2007, Zijin Mining paid increased their
1668 USD 55 mn to purchase a demand for
7979 subsidiary of Avocet Mining, resources
whose main assets are gold
and exploration rights in Tajiki-
stan

Total Mining Manufacturing TWP WR Finance Others Mining Chinalco Zijin Others

Source: MOFCOM China TWP = Transport, warehousing & postal service; WR = Wholesale & retail

Strategic Rationale: Chinese Outbound Deals by Strategic Rationale 1995–2007 (n=214)

1 2
Primary rationale Number of deals Total deal value, USD mn
Security, access to natural resources 68 27083

Access to new markets 48 15753

Financial investment/diversification 43 15055
Access to capabilities 31 4026
Gaining scale 10 1448
Access to financing 5 184
Government influences 5 448
CEO’s personal ambition 3 577
Export of capabilities 1 14
Sources: Dealogic; McKinsey Analysis. 1) All deals with value > USD 10 million; 2) USD 1 = RMB 7

China FDI Stock: Top 10 Countries/Regions 2007 Top 30 Chinese Companies by OFDI Stock 2007
1 China National Petroleum Corporation
Pakistan 1.07 2 China Petrochemical Corporation
Korea 1.21 3 China National Offshore Oil Corporation
4 China Ocean Shipping (Group) Company
Canada 1.25
5 China Resources (Holdings) Co., Ltd.
Russia 1.42
6 CITIC Group
Singapore 1.44 7 China National Cereals, Oils & Foodstuffs Corp.
Australia 1.44 8 China Mobile Communications Corporation
USA 1.88 9 Sinochem Corporation
10 China Merchants Group
Virgin Island 6.63
11 Shum Yip Holdings Company Limited
Cayman Islands 16.81
12 China Shipping (Group) Company
HK, China 68.78 13 China National Aviation Holding Corporation
14 China National Chemical Corporation
Source: MOFCOM China. In USD bn.
15 China State Construction Engineering Corporation
16 SinoSteel Corporation
Top 10 Provinces/Cities by OFDI Stock 2007, USD bn 17 China Network Communications Group Corporation

7.24 18 Aluminum Corporation of China

GD = Guangdong ZJ = Zhejiang 19 GDH Limited
SH = Shanghai FJ = Fujian
SD = Shandong HLJ = Heilongjiang 20 China Minmetals Corporation
BJ = Beijing LN = Liaoning 21 CITS Group Corporation
JS = Jiangsu SC = Sichuan
22 Shanghai Automotive Industry Corporation
23 Legend Holdings Ltd.
24 China Power Investment Corporation
3.03
25 Haier Group
26 China Metallurgical Group Corp.
1.61 1.59
1.17 1.16 27 Guangzhou Yuexiu Holdings Limited
0.92 0.71
0.44 0.44 28 China National Foreign Trade Transportation (Group) Corp.
29 Shanghai Baosteel Group Corporation
GD SH SD BJ JS ZJ FJ HLJ LN SC 30 ZTE Corporation
Source: MOFCOM China Source: MOFCOM China
36

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

GDP, Current USD bn Inflation, Average Consumer Price Index

Index: 2000 = 100
4,500 300
4,000 275 Russia
3,500 China
250
3,000
225
2,500
200
2,000 Russia
Brazil 175 Brazil
1,500 S. Africa
India 150
1,000 India
500 South 125 China
Africa 100
0
2005 2006 2007 2008E 2005 2006 2007 2008E
Source: IMF Source: IMF

Current Account Balance 2005–2008E, USD bn Current Account Balance, % of GDP, 2005–2008E
450 2005 2006 2007 2008 15% 2005 2006 2007 2008
400
350 10%
300
250 5%
200
150 0%
100
50
-5%
0
-50
China Russia Brazil India South -10% China Russia Brazil India South
Africa Africa
Source: IMF Source: IMF

BRIC World Rankings–Selected Indicators 2007

World Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Total Area
Population
GDP Nominal
Exports
Imports
FDI (received)
Foreign Exch. Res.
Electricity Consumption
Mobile Phones
Internet Users

Source: The Economist

 37

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

Shanghai & Shenzhen Composite Index, Monthly RMB Exchange Rates, 12 Month Trailing, Indexed
Index: December 2002 = 100% Index: November 31 2007 = 100%
500 USD ZAR AUD RUB
Shanghai Shenzhen 110
450
400 100
350
300 90
250 80
200
150 70
100 60
50
0 50
2003 2004 2005 2006 2007 2008 1 December 07 1 December 08

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

Benchmark Interest Rates, as on 2 January 2009 10 Largest Chinese Listed Companies, USD bn
15% 13.8%
Petro China
11.5% I ICBC
CBC

10% Bank of China

Si no p ec
Sinopec
5.6% 5.5% China Life
4.3%
5% Shenhua
ShenhuaCCoal
o al
2.5% 2.0%
China Merchant Bank
0.1% 0.3% Ping An Insurance
Pi ng an
0%
Changjiang Power
EU

UK
US

China

India

Brazil
Japan

South
Africa
Australia

B ank o f
Bank of Comm.
C o mmuni cat io ns

0 50 100 150 200 250

Source: Central banks Source: Shanghai Stock Exchange

Dow Jones Global Titans, YTD % change as on 31 December 2008

- 67 . 2 Russia
- 62 . 4 China 88
- 62 . 1 Turkey
- 58 . 7 Egypt
- 55 . 3 Netherlands
- 53 . 2 Sweden
- 52 . 9 Italy
- 49 . 3 Japan
- 48 . 9 UK
- 47 . 6 Germany
- 47 . 0 France
- 46 . 9 Hong Kong
- 46 . 5 South Africa
- 42 . 8 Spain
The Dow Jones Country Titans
- 4 1. 1 Switzerland
Indexes span major markets from
- 40 . 9 Australia
across the globe
- 1. 7 Cyprus
Sri Lanka 7 .7
Sources: Dow Jones Indexes; WSJ
38

China Business News Highlights

The fourth quarter of 2008 has delivered a series of negative business headlines for China, with
sharp falls in export growth and industrial production illustrating China’s vulnerability to the global
economic slowdown. A drop in inflation, however, has allowed the government a freer hand to at-
tempt to re-ignite economic growth, including significant new investments in infrastructure.

General
China will increase investment in
rail infrastructure to USD 730 bil-
lion by 2020, as an extension of
existing plans to spend USD 102
billion on rail in the next year, which
forms part of the original USD 586
billion stimulus package. As a result
China’s rail network is expected to
increase by as much as 41,000 kilo-
meters by 2020, and construction is
estimated to create 6 million new
jobs.
Inflation in November declined to
the lowest level in two years as food
and energy costs eased. The con-
sumer price index in November in-
creased by 2.4% y-o-y, compared to
a 4% rise in October.
China’s monthly export growth fell
by 2.2% in November from the same
period last year, the first decline in
exports since June 2001. In Novem-
ber, China’s imports also registered
a 22% decrease y-o-y.
Foreign Direct Investment in China
fell by 36.52% in November to USD
5.32 billion, pushing foreign invest-
ment growth down to 26% for the
first 11 months of 2008, down from
35.06% y-o-y growth for the first ten
months of 2008.
trillion, a third of the amount of 2007
and the lowest rate since 2005.
Property prices in 70 major Chi-
nese cities increased by 0.2% y-o-y
in November, the lowest growth rate
since publication of the data began
more than three years ago. Price
growth fell consistently over the
course of the year since reaching
11.3% in January 2008.
Chinese aviation conglomerate HNA
Group, of which US billionaire
George Soros is a shareholder, in
December became the first pri-
vately-owned airline to receive a
government bailout of USD 72.3
million. Earlier in the month, China
Eastern Airlines and China Southern
Airlines each received capital injec-
tions of USD 437 million. In total,
China’s airlines lost USD 1.03 billion
in the first 11 months of 2008, with
Air China reporting a USD 280 mil-
lion loss in the third quarter alone.
About 192 billion people traveled by
air in China during 2008, a 3.3% in-
crease y-o-y, yet the growth rate has
decreased by 13% since 2006.
In December, Premier Wen Jiabao
declared that creating employment
opportunities for university students
would be Beijing’s top priority in
2009. China’s premier expressed
concern about official government
figures indicating that 10 million
migrant workers had lost their
jobs in the first 11 months of 2008,
while 4.85 million had returned to
their homes.
Natural Resources
As of December 19, the price of
gasoline was reduced by 14% to
USD 816 per metric ton, the first
price cut since January 2007. The
price of diesel was reduced by 18%
to USD 727 per metric ton, and that
of jet fuel by 32% to USD 739 per
metric ton.
China’s top fuel refiners in early
December prepared to cut produc-
tion to the lowest level in 20 months
due to excess inventory and weak

Merger and acquisition (M&A) ac-

tivity from July to November 2008
slowed 47% compared to the same
period last year, the South China
Morning Post reported, citing ac-
counting firm PricewaterhouseCoop-
ers. 543 deals were announced in
the five-month period, the lowest
level since 2006, as investors re-
mained cautious during the ongoing
financial crisis. Nevertheless, ac-
cording to a report issued by Thom-
son Reuters, China’s M&A activity
was the best in the region for the
whole year 2008, growing by 44% to
USD 159.6 billion. In contrast, global Catching Up: China’s rail infrastructure is to get a massive boost in the next few
M&A volume dropped to USD 2.89 years as part of the government stimulus package. (Photo: Enzojz / flickr)

demand. Twelve of China’s largest
plants reduced production by 5% in
December, continuing the decline in
production that commenced in No-
vember. Industry sources have also
suggested that refiners are cautious
before the expected implementation
of a fuel tax and other pricing re-
forms in January.
Plans were announced in early De-
cember to stockpile 1 million met-
ric tons of base metals - including
aluminum, tin, copper, lead and zinc
- to support domestic metal produc-
ers. Taking advantage of the low
crude oil prices to increase its re-
serves, China has also been in-
creasing its imports of oil, and some
analysts estimate reserves to have
grown by 25 million barrels since
August. China’s reserve capacity is
currently 102 million barrels of crude
oil, and this is expected to increase
to 170 million with completion of the
current phase of construction on oil
reserve bases.
Industry
Industrial production in China
grew by 5.4% in November, the
slowest growth level for a non-
holiday month since records com-
menced in 1994. The drop in indus-
trial production has hit China’s steel
makers particularly hard, with Chi-
nese crude steel output down 18
percentage points from October’s
figure.
As a clear indication of how China’s
Pearl River Delta has borne the
brunt of the global slowdown brought
on by the financial crisis, provincial
GDP growth for Guangdong -
which produces nearly a third of
China’s exports - slowed to 10.1% in
2008, down from 14.7% a year ear-
lier, while export growth slowed to
5.6% in 2008 from 22.3% in 2007.
China’s shipbuilders have experi-
enced a more rapid decline in new
orders compared to their foreign
competitors. According to a report by
Clarkson Research Studies, Chinese
shipyards have reported a decline of
44% in new orders, compared to the
global average of 37%. The Interna-
tional Monetary Fund has predicted
an ever gloomier outlook for 2009,
forecasting new orders to decrease
Running on empty: China’s airlines lost a total of USD 1.03 billion in the first 11
months of 2008, and the growth rate of people traveling by air has decreased by
13% since 2006. (Photo: mag3737 / flickr)
by 40% from the level of 2008.
Retail
China’s total retail sales for 2008
are expected to reach RMB10.8 tril-
lion, an increase of about 21% y-o-y.
The National Bureau of Statistics
reported that China’s retail sales
rose 21.9% to RMB9.78 trillion in the
first eleven months of 2008.
ICT
In early January China issued third
generation (3G) mobile technol-
ogy licenses to three state-owned
telecom operators. China Mobile
received a license for TD-SCDMA,
the domestically-developed 3G stan-
dard, while China Unicom will use
CDMA2000 from the US and China
Telecom will use the WCDMA stan-
dard developed in Europe. All three
standards will facilitate faster data
downloads, video phone calls and
other advanced features.
Chinese internet and communica-
tions company 263 Network Com-
munications announced in Decem-
ber that it will acquire a 50% stake in
US telecom service provider iTalk
Global Communications. The trans-
action will be the first expansion of
a private Chinese telecom service
provider into a foreign market.
Finance
In November, China’s central bank
39
cut interest rates by 108 basis
points, the largest cut in over 10
years, in a further attempt to bolster
China’s slowing economy.
In a further effort to strengthen
cross-strait financial relations, Indus-
trial and Commercial Bank of China,
Bank of China and China Develop-
ment Bank have offered USD 19
billion in loans to Taiwanese com-
panies operating on the mainland.
In addition, Beijing will also purchase
USD 2 billion worth of flat-panel dis-
plays from Taiwanese manufactur-
ers, and lawyers from Taiwan will
henceforth be allowed to work on the
mainland. Regular scheduled ship-
ping between the mainland and Tai-
wan was also launched earlier in
December.
China’s State Council announced in
December that it will increase the
money supply in China by 17% in
2009 as part of efforts to spur con-
sumer spending and bolster the
economy.
China Construction Bank (CCB) in
December received a USD 10 bil-
lion quota from the State Admini-
stration of Foreign Exchange
(SAFE) to provide financial guaran-
tees to Chinese companies engaged
in cross-border investments. In-
tended to support mainland compa-
nies that trade overseas, the quota
is the largest among China’s banks.
CCB also plans to US72.6 billion
available for loans.
40

Regional Focus
CHINA-AFRICA

While China-Africa trade is still relatively small, the region has strategic importance for China as its
trade with Africa focuses on resource-rich countries like Angola, the DRC and South Africa. Since
2006, China has vastly increased its investment in Africa. This section summarises the current trade
and investment landscape, and analyses China’s current business footprint on the continent.

China-Africa Highlights
• Beijing sends naval deployment to patrol Somali waters: In China’s first such deployment outside its own waters,
at the end of December three warships were despatched to the Gulf of Aden to patrol for Somali pirates. Earlier in De-
cember, a Chinese merchant ship was rescued by a multinational force from Somali pirates
• Beijing asks for postponement of Bashir indictment: In early January China called for the war crimes indictment
against the Sudanese president Omar al-Bashir to be postponed, stating that such an indictment would have
‘disastrous’ effects
• Angola seeks China’s help: Angolan president Jose Eduardo dos Santos visited China in December, seeking new
loans as tumbling world oil prices started to threaten the country’s plans for big infrastructure spending in 2009
• China offers help to Zimbabwe: In December China offered humanitarian aid to cholera-stricken Zimbabwe, while
urging the formation of a national unity government
• Chinese company to build power plant in Nigeria: Shenzhen Energy Group plans to build a 3,000 megawatts
power plant in a joint venture with Nigeria’s First Bank at an estimated cost of USD 2.4 billion. When finished, the plant
should significantly improve Nigeria’s power generation capacity

China-Africa Trade
China is an increasingly important Africa’s Exports to China, 2007
trade partner for Africa. Exports to
China have great potential for further USD 996 bn USD 36 bn
expansion and is growing at a rapid
pace. Although China only obtains Angola 35.4%
3.8% of its total imports from Africa, Asia 64.9%
its trade with Africa is focused on
resource-rich counties such as An- Others 33.2%
gola, the Democratic Republic of
Congo and South Africa. During the N. America 8.4% DR Congo 7.8%
first half of 2008, exports to China Others 8.3% Eq. Guinea 4.7%
increased substantially (to USD 30 Europe 14.6% South Africa 18.2%
bn), indicating sustained strong Africa 3.8%
growth for full year 2008, but lower World Exports to China Africa Exports to China*
Sources: WTO; China Statistic Bureau; TBA Analysis *Excludes Egypt: 0.7%
commodity prices will now impact
this. (Full year China-Africa total
trade in 2007 came to USD 73 bn Africa Imports and Exports, 2007
and is expected to have exceeded
Agricultural Products Fuels & Mining Products
USD 100 bn in 2008.) Fuels and
Chem icals Clothing
mining products have always been
Iron & Steel Textiles
Africa’s major export products and
fuels and mining products repre- 1% 8%
3%3% 6%
sented up to 82% of the continent’s 3% 8%
overall exports of USD 325 bn in 29%
2007. Imports are more diversified,
but to a great degree focused on
processed products such as chemi-
cals, clothing, textiles, iron & steel. 35%
The differences (surplus) between 82% 20%
2%
import and exports can be ascribed
Africa’s Exports to the World Africa’s Imports from the World
to high energy and commodity prices Total USD 325 bn Total USD 141 bn
in 2007 and the start of 2008. Sources: WTO; TBA Analysis
 41

Regional Focus
CHINA-AFRICA

China-Africa Investment
In 2007, FDI from China accounted China OFDI to Africa, 2003–2007, USD mn
for only 3% of the total FDI inflow to
Africa. Yet China is the biggest in- North Africa
vestor in Africa among the BRIC na- 2007 West Africa
tions of China and Brazil, Russia
and India. In 2006 and 2007, China 2006 Cental Africa
almost tripled its FDI to Africa from
2005 East Africa
USD 518 mn to USD 1,574 bn. At-
tracted to oil in West Africa and raw Southern
2004
materials in Southern Africa, this Africa
trend reflects China’s strategic focus
2003
on Africa. Over the next 5-10 years a
significant further ramp-up in Chi-
0 400 800 1200 1600
nese investment can be expected. Sources: FDI information; TBA Analysis

China’s Business Footprint in Africa

China’s cumulative investments in Major Chinese Investments and Infrastructure Developments in Africa
Africa has grown from USD 49 mil-
lion in 1990 to USD 500 million in China has oil rights China has mineral rights China has both oil and mineral rights
2000, to over USD 13.0 billion in
2007. China’s investment in African Ghana Nigeria Gabon
infrastructure projects rose from less Nearly USD 800 mn in hydro USD 5.4 bn in roads, railways, Deep water harbour, hydro
than USD 1 billion in 2001 to at least and CCGT power plants coal power and hydro power power, railway
USD 7 billion in 2007. While over 30
countries in Africa have benefited Mauritania Sudan
from Chinese finance in some form, 430km railway 4 power plants, 2 hydro pro-
70% of China’s infrastructure fund- project jects, 1,506km oil pipeline, oil
terminals. Total investment in
ing on the continent goes to only Sudan of USD 15 billion
four countries: Nigeria, Angola, Su-
Guinea
dan and Ethiopia. The two largest USD 1 bn Ethiopia
sectors are power (mainly hydro- hydro project USD 500 million
power) and transport (mainly rail- telecom network
roads). DRC
3,500km highway and 3,200km
Chinese contractors in Africa are railway. China Railway Group Angola-Zambia
often served by Chinese service pro- invested USD 2.9 bn in copper USD 500 million in
viders, i.e.: and cobalt mining project. repairs to the
Norinco has cobalt interests 1400km Benguela
• For loans, guarantees and railway
bonds: Bank of China, China Zimbabwe
Exim Bank, China Construction Sinosteel acquired 67% stake in Zambia-Tanzania
the country’s largest ferrochrome Famous 1900km
Bank, and others producer Tanzam railway,
• For miscellaneous credit: China completed in 1975
Angola South Africa
Exim Bank, Bank of China, China Total Chinese infrastructure funding ICBC bought 20% of Standard
Construction Bank, and others of USD 3.2 billion, including roads, Bank for USD 5.6 billion. Sinosteel Zambia
rail, power, water and telecoms. has two chromium mining JVs, CNMC invested
• And for insurance: Sinosure, Sinopec has invested USD 2.4 bn to JISCO has one, and also did USD 150 million in
PICC, PingAn Insurance, and explore 3 offshore oilfields COVEC Vresap water pipeline a copper mine
others Sources: Various; Chinavest; TBA Analysis
42

Regional Focus
CHINA-AUSTRALIA

China-Australia relations have become more strategic, their economies inter-twined. This has al-
lowed boom-times down-under on the back of significant growth for Australian exporters, but lower
commodity prices and China’s current slowdown has shown the risks. But even so, their bilateral
relationship will become only more pivotal to both sides.

China-Australia Highlights
• China remains one of Australia’s Australia-China Trade 1998–2008 (Jan-Sep), USD mn
most important trading partners,
illustrated by the increasing vol- 30,000 Exports to China Im ports from China
ume of both imports from and ex- 25,000
ports to China
• Australia and China are still negoti- 20,000
ating a Free Trade Agreement.
15,000
The 13th round was held in Beijing
in December. The next one is 10,000
planned for Q4-2009
5,000
• Ores, slag and ash remain the top
Australian exports to China 0
• Due to the global financial crisis, 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
China is keen to establish tighter Sources: UN Comtrade; Australian Bureau of Statistics. 2008 figure is based on Jan-September data only.
controls over iron ore imports
(Australia’s second-largest export
Major Australian Imports from and Exports to China 2008, USD mn
commodity to China) to help drive
down prices for steel-making in- Furniture,
Raw hides,
Leather Nickel
puts. Also, China’s first batch of 100% Lighting,
100% 363 493
Articles of
Signs, etc
coking coal imports for 2009 are 1,278
Apparel,
Wool, Yarn,
Accesso-
nearly half the levels they were a 80% ries 80% Fabrics
2,683 1,432
year ago (9.62 mn tonnes) Mineral
fuels, Oils,
• Australian firm RepuTex has re- 60% Nuclear
Electronic 60% etc Others
reactors, 796 7,006
leased its list of the Top 10 most Machinery Equipment
5,111
4,594
sustainable Chinese companies 40% 40%
from the CSI 100 Index. Inner Ores, Slag,
Ash
Mongolia Yili Industrial Group, the 20% 20% 9,456
Others
Shanghai Pudong Development 10,388
Bank and Baoshan Iron & Steel 0%
0%
Company topped the list with an Exported Com m odities
Im ported Com m odities
overall sustainable rating of ‘A’
Sources: Multiple sources; Press; TBA Analysis Source: UN Comtrade

State Trade Watch–How Important is China?

Victoria dise trade in 2007. Exports include centrates, coal and copper ores
China is Victoria’s largest trading part- copper ores, wool and coal
South Australia
ner. Two-way merchandise trade was
Northern Territory • China is South Australia’s second-
worth AUD 11.1 bn in 2007. Exports
China is Northern Territory’s second- largest trading partner with two-way
include wool, raw hides and skins,
largest trading partner with AUD 979 merchandise trade worth AUD 1.7
and internal piston combustion en-
mn two-way merchandise trade in bn in 2007. Exports include iron ore,
gines
2007. Exports include manganese/ copper and wool
Australian Capital Territory zinc ores and concentrates, iron ore Tasmania
China is ACT’s seventh-largest trad- and stone • China is Tasmania’s fourth-largest
ing partner. Two-way merchandise Queensland trading partner and total two-way
trade was worth AUD396,000 in 2007 China is Queensland’s second-largest merchandise trade was worth AUD
New South Wales trading partner with two-way merchan- 387 mn in 2007. Exports include
China is NSW’s largest trading partner dise trade of AUD 5.8 bn in 2007. Ex- lead/zinc ores and concentrates, iron
with AUD 16.4 bn two-way merchan- ports include lead/zinc ores and con- ore and zinc
 43

Regional Focus
CHINA-AUSTRALIA

China-Australia Investment
• Chinese foreign direct investment Australia Export Sector Potential to Attract Investment, USD mn
in Australia have increased rapidly World Export Growth since 2002
35
since 2004, while Australian direct P e t r o l e um,
30 8 ,8 3 3 .2 6 R e f e r e nce M i ni ng a nd
investment in China haven experi- M e t al a nd me t a l
B ub b l e , 7, 0 0 0 . 0 0 q uar r y i ng ,

enced a relative decline in the 25 p r o d uc t s,

2 2 , 5 18 . 5 9
3 6 ,2 6 4 .3 0

same period of time 20 C hemi c a l s &

• Australia’s mining and quarrying c he mi c a l

15
p r o d uc t s , Growth of world trade, all products: 16%
industry is continuing to attract sig- M otor 4 ,8 8 9 .3 2
T r a ns p o r t a t i o n
v e hi cl e s
nificant amounts of FDI while the a nd o t he r 10
se r vi c e s,
6 ,3 2 0 .8 5
t r a ns p o r t
Petroleum and Metal industries are eq ui p ment ,
A g r i cul t ur e a nd
hunt i ng , 7 , 8 5 4 . 4 3
4 , 3 0 7. 2 0 5
playing catch-up
• Australia’s cross-border deals con- 0 World Market Share of Australia (%)
-5 0 5 10 15 20 25
tinue to outweigh China’s relatively World market share, all products: 1.05%
new M&A activities Sources: Investment Map; TBA Analysis

Australia–China Investment Trends, USD Cross–border M&A Deals in Australia & in China
Australia FDI Outflow s Australian Deals (seller)
China FDI Outflow s Australian Deals (purchaser)
Australia Foreign Investm ent to China Chinese Deals (seller)
China Foreign Investm ent to Australia Chinese Deals (purchaser)
30.00 2000 600
20.00 1500 500
10.00 1000 400
Thousands

0.00 500 300

-10.00 0 200
-20.00 -500 100
-30.00 -1000 0
-40.00 -1500 *
98

99

00

01

02

03

04

05

06

07

08
19

19

20

20

20

20

20

20

20

20

2001 2002 2003 2004 2005 2006 2007

20

Sources: UNCTAD; Australian Bureau of Statistics Source: UNCTAD *First half of 2008

Latest Developments in China-Australia Foreign Investment H2–2008

Month Acquirer Target Amount USD Stake Status
Jun Shougang Group Corp Sims Steel n.p. 100% Complete
Jun Sinopec AED Oil– Expl. Permits (3) 555.96 mn 60% Complete
Jul Sinosteel Midwest Corp. 1.32 bn 100% Complete
Aug Chinalco Rio Tinto 14.3 bn 11% Complete
Aug China Metallurgical Construction Cape Lambert Iron Ore– Project 373.44 mn 100% Complete
Sep Sinosteel Murchison Metals 205.672 mn 49.9% Complete
Oct China Stem Cells Holding Ltd. Cordlife 5.735 mn 18.9% (12.65%) Complete
Nov China Shenhua Energy Co. Ltd. New South Wales– Coal Expl. 260.88 mn 100% Complete
Dec Wuhan Iron & Steel Group Centrex Metals Ltd. 6.681 mn 14.9% Ongoing
Dec Shougang Corp. (w/APAC) Mt. Gibson Iron 400 mn 20% Complete
Sources: Multiple sources; Press; TBA Analysis
44

Regional Focus
CHINA-RUSSIA

Russia and China are actively developing their trade relationship, although their bilateral FDI flows
are not yet very significant. This section is an overview of the structure of trade and bilateral invest-
ment between the two countries.

Russia-China Highlights
• RUSAL will continue to invest in
China in spite of the current eco-
nomic crisis. In February 2008, RU-
SAL and China Power Investment
Corporation signed a strategic busi-
ness partner agreement on bauxite
ore, alumina oxide and aluminum
production, including plans to build a
500,000 ton aluminium smelting plant
in China’s Qinghai province
• Evraz Group has entered into a
Share Purchase Agreement with
Best Decade to acquire a 51% stake
of Delong Holdings Ltd. However,
Sources: Multiple sources; Press; TBA Analysis
this deal is taking longer than origi-
nally expected, and Evraz is still
waiting for Beijing’s approval for its
planned USD 1.5 bn takeover of
Delong. Evraz has agreed with Best
Decade to extend the option exercise
period from Aug 18 2008 until Feb
18, 2009
• In July Evraz signed a cooperation
agreement on setting up a JV with
China Metallurgical Group (MCC) to
develop Australia’s Cape Lambert
Iron Ore project. In the new built JV,
Evraz holds 75%, while MCC con-
trols 25%
• China will likely invest USD 6.4 bn in
construction projects in Russia via
ASR (Russian Builders’ Association)
and its Chinese counterpart. The
president of ASR, Nikolai Koshman,
said, “There are 30 selected projects
ready for construction so far, and
related procedures have been com-
pleted”
• Donghua Investment Corporation
(Russia) acquired Mudanjiang Ce-
ment Group Company Ltd. for USD
40 mn

China-Russia Trade
• China is Russia’s fifth-largest trad- Russia-China Trade, 1997–Sep 2008, USD mn
ing partner (and second-largest if
EU countries are regarded as a Exports to China
block) 30,000 Im ports from China
• Light industry products are China’s 25,000
largest export commodities to Rus- 20,000
sia, yet these are increasingly be- 15,000
ing displaced by machinery 10,000
• Russia was China’s seventh-
5,000
largest trading partner in 2007 and 0
ninth-largest in 2008. In 2007,
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 by
Russia became the largest sup- Sep
plier of logs and wood to China. 2008
Russian log exports account for Source: MOFCOM China
68.5% of China’s total log import
volume Russia Imports from and Exports to China, Q1–Q3 2008, USD mn
• Mechanic appliances, footwear,
electrical machinery, vehicles and 100% Vehicles Footwear,
100% Wood and Fertilizers
parts, and textile products are the and parts Textiles articles of 1,002
1,278 1,703 wood,
top Chinese exports to Russia, 80% 80% Pulp,
Wood
while mineral fuels, mineral oils, Electrical charcoal
Others
machinery, 4,300
fertilizers and wood are the top equipment
Machinery 1,928

Russian exports to China 60% and parts

and me- 60%
chanical
5,914
• Around 230 representative offices appliances
Mineral
5,939
fuels,
or firms invested by Russian com- 40% 40% Mineral
panies have been registered in Oils
7,919
China. Many Russian companies 20% Others 20%
10,574
are planning to open sourcing of-
fices in China. Severstal, for exam-
0% 0%
ple, opened a purchasing office in
Im ported Goods Exported Goods
Beijing in November 2008
Sources: Multiple sources; Press; TBA Analysis Source: MOFCOM China
 45

Regional Focus
CHINA-RUSSIA

Russia-China Investment
• Russia’s and China’s FDI to each Russia-China Bilateral FDI, 2004–2007, USD mn
other are 1% or less of their total
respective outward FDI. In 2007, Russia FDI to China China FDI to Russia
China’s total outward FDI was USD 500
22.5 bn, and China’s FDI to Russia
was USD 0.4 bn. Russia’s outward 400
FDI was USD 45.7 bn, and FDI to
China was USD 0.05 bn 300
• Chinese investments in Russia
focus on forestry, mining, construc- 200
tion, textiles and electrical appli-
100
ances. Russian investments in
China concentrate on transporta-
0
tion and construction
2004 2005 2006 2007
Sources: Multiple sources; TBA Analysis Source: UNCTAD

Russia-China Investment
• In 2007, FDI into Russia amounted Russia Industrial Production and Investment, % y-o-y Growth Rate
to USD 52 bn, yet this amount is
expected to increase to USD 55-58 Investm ent Grow th Rate Industrial Production Grow th Rate
bn in 2008 40
• Russian industrial production 20
growth dropped from 16.7% in 0
Nov. 2007 to -56.7% in Nov. 2008.
-20
The investment growth rate de-
clined from 17.1% to -2.1% -40
• The most attractive industry re- -60
Oct-05

Oct-06

Oct-07

Oct-08
Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

mains real estate, followed by

Apr-05

Apr-06

Apr-07

Apr-08

transport, communications, con-

struction & mineral production
Sources: Press; TBA Analysis Sources: Russian Publishing Company ‘Expert Group’; TBA Analysis

Investment into Russia by Sector, USD bn Investment in Russia by Countries, USD bn

140 2005 2006 2007
Real estate operations
To a large extent,
120 Wholesale, retail (transport vehicles excluded) Brit. Virgin lslands returning Russian
Transport facility production USA capital
100
Metallurgical production Germ any
80 37.7% Ireland
Construction
Sw itzerland
Transport and communications 3.7%
60 France
7.0%
Others 21.5%
40 12.3% Luxem burg
36.5%
Netherlands
33.7%
20 Cyprus
34.5% 27.1% 36.3% 30.2% United Kingdom
0
2003 2005 2006 2007 0 10 20 30 40 50
Source: GKS (Federal State Statistics Service of Russia) Source: GKS (Federal State Statistics Service of Russia)
46

Upcoming Events
THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in
China. Services include research, interpretation, negotiation and travel logistics. For more informa-
tion, please send an email to info@thebeijingaxis.com, or for more contact details please see page
50.

Date Event Location

5 - 8 Jan 09 Hong Kong Toys & Games Fair Hong Kong
13 - 16 Jan 09 35th International Fur Fair Beijing
14 - 16 Jan 09 10th China International Trade Show for Exhibition and Conference Industry Beijing
19 - 20 Jan 09 Asian Financial Forum 2009 Hong Kong
16 - 18 Feb 09 2009 China International Automotive Aftermarket Industry Fair Beijing
10th International Exhibition of Machinery and Accessories for Furniture Production,
17 - 20 Feb 09 Shanghai
Upholstery and Furnishings
International Exhibition of Machinery Components and Supplies for Timber Con-
17 - 20 Feb 09 Shanghai
struction
17 - 20 Feb 09 10th International Forestry and Woodworking Machinery and Suppliers Exhibition Shanghai

20 - 22 Feb 09 International Conference on Computer Modelling and Simulation (ICCMS 2009) Macau
20 - 23 Feb 09 8th China International Auto Accessories Commercial Expo Beijing
23 - 25 Feb 09 2009 China International Catalyst Industry Technique and Application Exposition Beijing
23 - 25 Feb 09 7th China (Guangzhou) International Auto Parts Expo 2009 Guangzhou
24 - 27 Feb 09 10th China International Machinery Industry Exhibition Ningbo
24 - 28 Feb 09 China International Concrete Technology and Equipment Expo Beijing
25 - 27 Feb 09 Infrastructure Project Finance Shanghai
China International Trade Fair for Auto Maintenance Technology and Equipment,
25 - 28 Feb 09 Beijing
Auto Parts and Accessories
26 - 27 Feb 09 14th Annual International IC-China Conference & Exhibition Shenzhen
26 - 28 Feb 09 First Chinese Forum on Intelligent Finance Beijing
27 - 28 Feb 09 2009 International Conference on Communication Software and Networks Macau
6th CTLtec ASIA: Coal Gasification, Liquefaction, Coal-Chemicals Projects & Tech-
3 - 4 Mar 09 Beijing
nologies
4 - 6 Mar 09 Pump, Valve & Pipe China Exhibition Guangzhou

4 - 7 Mar 09 China International Factory Automation & Instrument Exhibition Guangzhou

6 - 8 Mar 09 5th International Brand Forklift and Accessory Exhibition Guangzhou Guangzhou

12 - 13 Mar 09 2nd Annual China Petrochemical Summit 2009 Beijing

17 - 20 Mar 09 Asia Eco Green Building Congress 2009 Shanghai
18 - 19 Mar 09 16th Asia-Pacific CFO Roundtable Shanghai
18 - 21 Mar 09 China International Furniture Fair Guangzhou
25 - 27 Mar 09 2009 Flow Expo Guangzhou Guangzhou
27 - 30 Mar 09 China International Woodworking Machinery & Furniture Raw Materials Fair Guangzhou
4 - 11 Apr 09 Sign Expo Beijing
 47

Date Event Location

12 - 15 Apr 09 China Sourcing Fair - Electronics & Components Hong Kong
19 - 22 Apr 09 8th International Exhibition on Nuclear Power Industry 2009 Shanghai
20 - 23 Apr 09 China Sourcing Fair - Baby & Children's Products Hong Kong
21 - 23 Apr 09 Export Controls and Trade Compliance Asia Summit Beijing
22 - 28 Apr 09 13th Shanghai International Automobile Industry Exhibition Shanghai
6 - 8 May 09 SNEC 3rd (2009) International Photovoltaic Power Generation Expo Shanghai
7 - 8 May 09 2nd Energy Efficiency Asia 2009 Beijing
3 - 5 Jun 09 Mines and Money Asia 2009 Hong Kong
8 - 12 Jun 09 8th China International Consumer Goods Fair Ningbo
15th Shanghai Metallurgy Expo / 2nd China (Shanghai) International Steel Trade
11 - 13 Jun 09 Shanghai
Expo
16 Jun 09 China Structured Products Forum 2009 Beijing
17 - 18 Jun 09 Asia Mining Tunnelling Summit 2009 Beijing
18 - 20 Jun 09 9th China International Steel Construction Fair Beijing
14th China International Exhibition for Building Material, Building System, Construc-
18 - 20 Jun 09 Beijing
tion Machinery & Architecture
Inner Mon-
18 - 20 Jun 09 2009 China Inner Mongolia International Coal & Energy Industry Expo
golia
23 - 26 Jun 09 4th China International Metals Industry Fair 2009 Guangzhou

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

5th China International Coal Equipment and Mine Technical Equipment Exhibition
28 - 30 Jun 09 Beijing
2009
10 - 11 Jul 09 2009 International Conference on Information Engineering Shanxi

SUGGESTED READING China Entrepreneur (Fernandez & Underwood, 2009)

China Entrepreneur: Voices of Experience from 40 International Business Pio-

neers gives China-bound entrepreneurs and small business owners the opportu-
nity to learn from experienced China hands before bringing their businesses to
the world’s largest and most dynamic consumer market. China Entrepreneurs
delivers street-tested advice on launching, growing, and operating your own
business in China. Authors Juan Antonio Fernandez, professor of Management
at the China Europe International Business School (CEIBS), and Laurie Under-
wood, journalist and Director of External Communication at CEIBS, use their
combined 26 years of China experience to interview 40 successful international
entrepreneurs who have built businesses in China. These entrepreneurs share
their first-hand advice, anecdotes and best practices in tackling the challenges
of succeeding in China, from negotiating with government agencies and gaining
necessary start-up approvals, to hiring and keeping the right staff, to collecting
payments and safeguarding intellectual property. Yet China Entrepreneur also
balances the practical business advice with insights from experienced China
consultants who have risen to prominence in the Chinese business environment.

China Entrepreneur features THE BEIJING AXIS Founder & Group Managing
Director, Kobus van der Wath, as one of the 40 foreign China entrepreneurs
included in the book.
48

Careers at THE BEIJING AXIS

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

LEAD CONSULTANT
(CHINA CAPITAL ADVISORS)

Beijing: 1 position
Role
• Lead multiple advisory assign-
ments in the Investment Advisory
Division of THE BEIJING AXIS
• Project manage assignments and
ensure quality and time objec-
tives are met - and ensure pro-
fessional ‘best practice’ stan-
dards across assigned projects
• Valuation, modelling, participate
in overall investment process
• Manage 1-2 deal-team consult-
ants and analysts
• Be a thought leader and promote
the development of learning proc-
esses and platforms
• Improve process efficiencies, op-
timise workflow and control costs
• Client relationship management
• Ensure alignment of Division’s
objectives with those of the
Group
• Multi-sector assignments with
emphasis on resources, mining
and industry
• Significant (international) travel
Requirements
• Superior analytical and problem-
solving ability: valuation, deal
structuring
• Ability to work with diverse cul-
tures and backgrounds
• Interest in and knowledge of
China’s cross-border business
engagement
• Sound judgement, maturity and a
systematic mind
• Conceptual thinking and attention
to detail
• MBA/CFA/CA or legal back-
ground preferred with more than
3 years experience in finance/
consulting
• Native English written and verbal
communication skills essential
• Mandarin not essential but re-
garded as an advantage
• Willingness to travel
Going Places: THE BEIJING AXIS is an entrepreneurial firm and welcomes
applications from persons with a well-grounded knowledge of their pro-
fessional fields in a China context. We offer a rewarding experience, inter-
national exposure and highly competitive remuneration.
CONSULTANT / ANALYSTS SOURCING ENGINEER
(CHINA STRATEGY GROUP) (CHINA SOURCING UNIT)
Beijing: 1 Consultant position Beijing: 1 position
Beijing, Singapore, Perth, Johan-
nesburg: 4 Analyst positions • Employed in the China Sourcing
Unit of THE BEIJING AXIS
• Employed in the Strategy Divi- • Strong sourcing (or manufactur-
sion of THE BEIJING AXIS ing) project management skills
• Sound analytical and problem- • Focus: Project manage sourcing
solving skills schedules (i.e. ensure that spe-
• Ability to work in teams with col- cialised capital equipment is
leagues from diverse cultures manufactured to required stan-
and backgrounds dards and delivered on time);
• Strong experience in the formu- technical QA/QC knowledge;
lation and execution of research expediting experience and strong
methodologies and analysis supplier management skills
• A business and/or technical de- • Provide support and technical
gree with a post-graduate quali- advice and expertise to China
fication Sourcing Unit colleagues and
• Minimum 3 years experience in department
an appropriate or related field • A degree in engineering, prefera-
• Excellent communication skills, bly mechanical/mining-related
including both spoken and writ- with a minimum of 10-years work
ten English ability experience in appropriate field
• Mandarin not essential, but re- • Excellent English and Mandarin
garded as an advantage written and spoken ability
• Willingness to travel • Willingness to travel

THE BEIJING AXIS News
Community
THE BEIJING AXIS would like to
extend warm wishes to all its valued
clients, stakeholders and readers of
The China Analyst for a healthy,
happy, successful and prosperous
2009, and Year of the Ox!
Learning & Getting Around
THE BEIJING AXIS Founder &
Group Managing Director, Kobus
van der Wath, has been included in
a new book, China Entrepreneur:
Voices of Experience from 40 In-
ternational Business Pioneers, as
one of the 40 entrepreneurs. The
book, by Fernandez & Underwood,
was published in early 2009.
Jackie Li, Business Development
Manager for South Africa, delivered
a presentation on Low-cost Country
Sourcing from China at a Global
Sourcing Conference in Pretoria,
SA, on 7-8 October 2008.
Kobus van der Wath, Group MD,
and Mitch Cosani, Corporate Office
Manager, attended a DTI-organised
SA Expo in HK on 2/3 Oct, Beijing
on 8/9 Oct, and Shanghai on 14 Oct.
On 15 October 2008, Kobus van der
Wath delivered a presentation enti-
tled ‘Working with China B2B’ at the
CIPSA Annual Procurement Con-
ference in Melbourne.
China Business Development Man-
ager Haiwei Huang and Senior Strat-
egy Consultants Javier Cuñat and
William Dey Chao participated in the
Second China-Latin America Busi-
ness Summit in Harbin, Heilongji-
ang, on 20-21 October 2008.
On 11-13 November a number of
TBA staff from both the Beijing and
Johannesburg offices attended
China Mining 2008 in Beijing.
Kobus van der Wath was actively
involved in both delivering a presen-
tation entitled: ‘China Inc. Goes
Global’ as well as co-chairing an
Outbound Mining Investment Forum.
TBA staff attended Mining Invest-
ment Seminars held by the Cana-
dian, South African and Australian
governments on 11 & 12 Nov 2008
in Beijing.
Kobus van der Wath attended the
Global China Business Meeting in
Barcelona, Spain from 17-19 No-
vember 2008. The event is the fore-
most annual gathering of Chinese
business leaders and their global
counterparts in Europe and is at-
tended by CEOs and business lead-
ers from leading organisations.
On 18-19 November 2008, Jackie Li
attended the Africa Investment Fo-
rum at Gallagher Estate, SA.
PricewaterhouseCoopers, in asso-
ciation with TBA, hosted a workshop
on 26 Nov 2008 in Bryanston, SA.
The workshop was entitled Strate-
gic Imperatives in Times of Finan-
cial and Economic Turbulence
and Kobus van der Wath and Jackie
Li delivered presentations on how
SA companies can improve their
strategies and implementation suc-
cess when operating in China.
In January 2009 Kobus van der
W a t h h o s t e d ‘C h in a i n 2 0 0 9 ’
Roundtables in Vietnam, Thailand
and Singapore.
TBA will be further represented at a
number of events in China, South
Africa, Australia and Canada in
January, February and March 2009;
some of these include:
• Mining Indaba 2009 in Cape
Town, SA, where Kobus van der
Wath has been invited to deliver
a presentation on China’s role in
the resource sector (9-12 Feb 09)
• Macquarie China-Day Seminar
in CT (6 Feb 09)
• China Business Roundtable in
Singapore by Kobus van der
Wath on 20 Feb 09
• China Business Roundtable in
Perth by Kobus van der Wath on
24 Feb 09
• Business Seminar at The Capital
Club in Beijing: ‘China Inc Goes
Global—Africa’s Important in
China’s International Engage-
ment’ (26 Feb 2009)
• PDAC 2009 in Toronto, Canada,
(1-4 Mar 09) where Kobus van
der Wath has been invited to de-
liver a keynote presentation
• Minerals Processing 2009 in
Perth, Australia (24-25 Mar 2009)
49
• Asia Mining Congress 2009 in
Singapore (23-27 Mar 2009)
• The International Mining Equip-
ment Fair in Handan, China (27-
29 Mar 2009)
• The 4th China International
Metals Industry Fair 2009 in
Guangzhou (31 Mar 2009)
Team Developments
Cheryl Tang, Director and previ-
ously Head of Operations in the Bei-
jing office, was appointed as the Bei-
jing General Manager in October
2008. In this position Cheryl is re-
sponsible for managing all aspects
of the day-to-day running of the Bei-
jing office.
Lilian Luca, previously solely re-
sponsible for Russia and CIS, has
been asked to take on additional
responsibility as Director of the
Group Corporate Office from the
beginning of 2009.
Javier Cuñat, previously working as
a Senior Consultant in the Beijing
office, has been appointed as Man-
ager of the China Strategy Group,
effective from the start of Feb 2009.
Mitch Cosani, currently at the end
of a 6-month secondment to the Bei-
jing office, returns to Johannesburg
where he will assume responsibility
as Manager of the office.
Elena Zhou joined the Beijing office
in October as Senior Consultant in
the Finance & Admin Dept. Elena is
a CPA from the Chinese Institute of
Certified Public Accountants.
TBA welcomed Christine Kirk to the
Beijing office in Nov last year as an
Executive Assistant in the Group
Corporate Office. Christine previ-
ously worked for a number of lead-
ing international companies and also
lived in Germany and SA.
Jason Gao joined in Dec in Beijing
as an intern. Jason is currently com-
pleting post-graduate studies in In-
ternational Relations at the China
Univ. of Political Science and Law.
We welcome them, congratulate
them and wish them all the very best
and continued success in the next
stage of their careers with TBA.
50

About THE BEIJING AXIS

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

China Strategy Group China Sourcing Group China Capital Advisors

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

Strategy Formulation Strategic Sourcing Corporate Finance Origination

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

Strategy Implementation Supply Chain Management Financial Advisory

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

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

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

Johannesburg, South Africa Moscow, Russia/CIS Perth, Australia Latin America Desk
Michele (Mitch) Cosani Lilian Luca Jim Hu Javier Cuñat (in Beijing)
Manager: Johannesburg Office Director: Russia/CIS & Senior Consultant Manager
michelecosani@thebeijingaxis.com Group Corporate Office jimhu@thebeijingaxis.com javiercunat@thebeijingaxis.com
luca@thebeijingaxis.com
Jackie Li
Manager: Business Development
jackieli@thebeijingaxis.com
+27 (0)11 201 2550
+27 (0)11 201 2508
 51

THE CHINA ANALYST Previous Editions

October 2008 July 2008
Regulars Regulars
China Sourcing Strategy China Sourcing Strategy
Macroeconomic Monitor Macroeconomic Monitor
China Sourcing Blog Highlights China Sourcing Blog Highlights
China Facts, Figures & China Facts, Figures &
Forecasts Forecasts
China Trade Roundup China Trade Roundup
Financial Markets Financial Markets
China OFDI and M&A China OFDI and M&A
The C in BRICS The C in BRICS
China Business Highlights China Business Highlights
Features Features
China Inc. Goes Global: The Long Road Ahead The Scramble for Australia
China companies are making headlines with foreign acqui- We take a look as China’s Australian mining moves from
sitions, yet what are the drivers of this trend? trade to investment.
Taking a Step Into Latin America Sourcing High-Value Industrial Products from China
China is intensifying its relationship with LatAm. We exam- The era of Chinese high-value industrial exports is fast
ine the current critical juncture between these regions. approaching, yet pitfalls and peculiarities remain.

April 2008 January 2008

Regulars Regulars
China in Statistics China in Statistics
Statistics in the News Statistics in the News
China Business News China Business News
China Perspectives China Perspectives
China Sourcing Blog Highlights China Sourcing Blog Highlights
Upcoming Events Upcoming Events

Features Features
Putting China’s Urban Billion into Perspective The Next Generation of Chinese Resource Companies
To the business community China’s population is an oppor- The original trailblazers are still making headlines for big-
tunity, yet to the government it is serious challenge. ticket deals, but what are the new kids on the block up to?
Africa & China: How Long will the Honeymoon Last? China’s Reaction to BHP’s Bid for Rio Tinto
As Chinese involvement in Africa grows, is there reason to BHP’s bid turned into a guessing game, yet the Chinese
be concerned about the sustainability of the relationship? reaction was no more than a shrug, and for good reason.
To view or download a copy of current or previous editions of The China Analyst, visit our website at www.thebeijingaxis.com.

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

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