The China Analyst September 2011

The China Analyst Now online at www.thebeijingaxis.com/tcaA knowledge tool by The Beijing Axis for executives with a China agenda September 2011 Building a new era Chinas business in the developing world Features Resources for Infrastructure: Chinas Role in Africas New Business Landscape 6 China and Latin America: Untapped Sources of Added Value 10 Rising Stars: China’s Emerging Construction Machinery Manufacturers 14 The New Scramble for Africa: Emerging Powers on the Emerging Continent 18 Regulars China Sourcing Strategy: A New Approach to Procurement 28 China Capital: Inbound/Outbound FDI & Financial Markets 32 Strategy: Mapping China in the Global Contracting Industry/CCC 36 Regional Focus: CHINA-AFRICA 42 Regional Focus: CHINA-AUSTRALIA 44 Regional Focus: CHINA-LATIN AMERICA 46 Regional Focus: CHINA-RUSSIA 50

Tanzania National Stadium Modern Sports Stadium Dar es Salaam, Tanzania Ndola, Zambia Capacity: 60,000 people Capacity: 40,000 people Completed in 2007 Construction to commence in 2011 EMBLEMS OF A NEW ERA Sheraton Hotel & Towers Dakar Grand Theatre Oran, Algeria Dakar, Senegal The first Sheraton hotel in Algeria Covers two hectares; capacity of 1,800 people Completed in 2002 Completed in 2011Notable Chinese Construction Projects in Africa Lom Pangar Hydropower Project African Union Conference Centre Cameroon Addis Ababa, Ethiopia Includes 30-megawatt power station Covers a floor area of 51,887 square metres Construction to commence soon Under construction

The China Analyst The Beijing AxisAt the Highest LevelReflecting on the momentous events happening in the world right now and in the last few turbulentyears, it is clear that the world is changing significantly. China is a big part of this change; in fact, its emer-gence has become instrumental to a new era that is affecting every region of the world, yet none moreso than the developing world. China is bringing unprecedented change to Latin America and Africa, anda changing business landscape brings new opportunities. In the last edition of The China Of course this edition also features all the usual sections on Analyst, we looked at the changing Chinas trade and investment, procurement, and regional busi- business landscape within China, ness. And I am also pleased to announce the launching of a focusing on certain key industries new website dedicated to The China Analyst, at www.thebeijin- and outlining the opportunities gaxis.com/tca, where the contents of this and previous editions that can still be found for foreign can be found in an interactive online format. companies. In this edition, we shift our focus to Chinas impact on the I trust our readers will enjoy this edition of The China Analyst, wider world, and especially on and as always we welcome your feedback. the regions where Chinas presence and influence have been Kobus van der Wath strongest, namely the developing Founder & Group Managing Director, The Beijing Axis world. kobus@thebeijingaxis.comAfrica and Latin America have experienced the most signifi- The China Analyst - September 2011cant impact of Chinas newfound engagement with thedeveloping world, an impact which the cover of this maga- Published by The Beijing Axiszine has boldly dubbed a new era. Chinas expanding reach 3806 Central Plazais having a profound impact on Africa. Here, Chinas brandof state-led capitalism is serving to breach a heritage of risk 18 Harbour Roadaversion by foreign investors, and in doing so, contribute to Wanchaieconomic growth in many parts of the continent. As our first Hong Kong, PRClead feature illustrates, by means of an essential exchange ofresources for infrastructure, China is playing a crucial role in Tel: +86 (0)10 6440 2106a new construction boom on the continent. Fax: +86 (0)10 6440 2672 www.thebeijingaxis.comWith a rapidly growing trade and investment relationship Executive Editor Kobus van der Wathin recent years, Chinas business with Latin America has to alarge extent been characterised by an exchange of resources kobus@thebeijingaxis.comfor manufactured goods. Yet as our second lead feature envi- Editor Barry van Wyksions, the relationship is now set to enter a new phase of barryvanwyk@thebeijingaxis.comhigher value added investment and trade, with wide impli-cations for Latin America. Editorial Board Lilian Luca luca@thebeijingaxis.comChina is not the only new player in these developing regions, Cheryl Tanghowever. In our fourth lead feature we outline the trade and cheryl@thebeijingaxis.cominvestment activities in Africa of the other BRICS nations,revealing how the likes of India and Brazil are in their own Javier Cuñatways contributing to the shaping of Africas new business javiercunat@thebeijingaxis.comlandscape. Dirk Kotze dirk@thebeijingaxis.comWith the business that these emerging nations, and espe-cially China, are doing in the developing world, the landscape To view the contents of previous editions of The China Analyst, see Previ-in regions such as Africa and Latin America is changing, and ous Editions on page 55. To subscribe free of charge to The China Analyst, please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca.opportunities for businesses are doing likewise. This editionof The China Analyst is also about these changes and oppor- For advertising opportunities, please contact Haiwei Huang attunities, and about how Chinas business in the developing haiweihuang@thebeijingaxis.com.world is indeed building a new era.4 The Beijing Axis

Table of Contents September 2011 6 FEATURES Resources for Infrastructure: Chinas Role in Africas New Business Landscape Chinese companies active in Africa are reshaping the continent’s business landscape, yet at its core the relationship rests on one simple although vital exchange. 10 FEATURES China and Latin America: Untapped Sources of Added Value Trade and investment between China and Latin America have increased ten-fold in the last decade, yet the two regions are now set to enter a new higher value added stage of their relationship. 14 FEATURES Rising Stars: China’s Emerging Construction Machinery Manufacturers Chinas three largest construction machinery manufacturers, XCMG, Sany and Zoomlion, have been successful in emerging markets and are aiming to catch up with global leaders in the industry. How did they do it? 18 FEATURES The New Scramble for Africa: Emerging Powers on the Emerging Continent Led by China, the BRICS nations are at the forefront of a new scramble for projects and deals in Africa. Yet apart from China, how are the other four BRICS doing in this new scramble on the continent? 22 MACROECONOMY Macroeconomic Monitor: Chinese Inflation - One of the Biggest Fears of 2011 With inflation having reached 6.5% in July 2011, this edition looks at the Chinese government’s monetary and fiscal policy options to fight a scourge for which Chinas central planners have a legendary fear. 24 NEWS China Business News Highlights Recent headline business stories in China, leading with the business deals following foreign trips by China’s leaders, Chinas power shortage in H1 2011, and Chinas latest construction marvels. 26 TRADE China Trade Roundup A review of China’s trade performance in Jan-Aug 2011, and an overview of Chinas trade in services. 28 PROCUREMENT China Sourcing Strategy: A New Approach to Procurement China procurement is changing, and procurement managers need to adapt to a new opportunity landscape. 32 INVESTMENT China Capital: Inbound/Outbound FDI & Financial Markets Analysis on the latest on FDI in China and OFDI by Chinese firms, and a review of Chinas OFDI approval processes. 36 STRATEGY Mapping China in the Global Contracting Industry In this edition we illustrate the presence of Chinas contractors in different markets of the world. 38 STRATEGY CCC: China Inc.s Leading EPC Contractor A closer look at the corporate strategy of arguably Chinas most internationalised contractor. 41 REGIONS Regional Overview: BRIICS A macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa. 42 REGIONS Regional Focus CHINA-AFRICA China-Africa trade and investment analysis, and the series Chinese Contractors in Africa, featuring CCECC. 44 REGIONS Regional Focus CHINA-AUSTRALIA China-Australia trade and investment analysis, and the series Australia State Watch, featuring Victoria. 46 REGIONS Regional Focus CHINA-LATIN AMERICA China-Latin America trade and investment analysis, and an interview with the Mexican Ambassador to China, Jorge Guajardo. 50 REGIONS Regional Focus CHINA-RUSSIA China-Russia trade and investment analysis, including the series China-Russia Resources Watch. 52 The Beijing Axis News - March-September 2011 The latest The Beijing Axis Group news. 54 EVENTS Upcoming Events A selection of upcoming China and global events focusing on the mining and engineering sectors.Back About The Beijing Axispage Company profile and contact information.

The China Analyst FeaturesResources for Infrastructure: Chinas Role in Africa’sNew Business LandscapeChinese companies active in Africa are reshaping the continent’s business landscape as part of a complexpartnership that has reignited and vastly expanded ties from a previous era. China’s ways of doing busi-ness in Africa today is different from all those of yesteryear, yet the broad engagement can be under-stood through the prism of one vital exchange: Resources for infrastructure. By Barry van WykI n the 1970s, China’s financing and construction of a 1,870 customers inland are on average 50% higher than the costs km-long railway giving landlocked Zambia access to the of shipping costs in other low-income developing regions. Tanzanian port of Dar es Salaam was a monument toChinese engagement and solidarity with Africa in a previous Yet now a new China with vastly different priorities and stra-era. In a flush of post-colonial exuberance, Africa was under- tegic outlook is back in Africa, where it is instrumental ingoing a construction boom. Drawing on colonial-era plans, Africa’s new construction boom that is reshaping the busi-various schools, hospitals and roads were being built in ness landscape on the continent. In contrast to its piecemealGhana, for example, and in the Democratic Republic of Congo interaction with African countries in previous decades, China(then Zaire), the Inga hydroelectric project was completed in is now comprehensively engaged with almost all of Africa’s 541977 at a cost of USD 260 million, while a 1,100 mile power countries – lending money, providing aid, trading, investing,line to Katanga also saw the light of day. and more than all else: building infrastructure and extracting resources. This over-simplified description of China’s businessYet when the Katanga line was eventually completed in 1982 in Africa goes to the heart of how Africa’s business landscapeat a cost of USD 1 billion, it was four times over the original is changing under the influence of a new superpower hungrybudget. Only 18% of Inga’s hydroelectric capacity and 20% for natural resources and well-suited to provide Africa withof the capacity of the new power lines were ever used, and something it is sorely in need of: infrastructure.the sharp fall in the price of cocoa in 1961 put paid to KwameNkrumah’s construction projects in Ghana. Designed to carry Levels of engagement: Trade and investmentfive million metric tonnes of cargo annually, with a lack of newinvestment, mounting debt, poor management and mainte- The China that built the railway in Africa in the 1970s is anance, moreover, Zambia’s new railway never carried more distant shadow of the China of today that routinely buildsthan 300,000. From being a symbol of a new era of Africa’s railways, roads, ports and other infrastructure in various partsdevelopment, this railway – badly managed and insufficiently of the world. In the 2000s, as the size of China’s economy inmaintained – became emblematic of Africa’s lost construc- quick succession surpassed that of Italy, France, the UK, andtion boom turned to protracted bust. Germany, China’s energy consumption expanded four times faster than expected to 16% of global demand in 2006. WhileInstead of a boom of new steel and concrete, Africa expe- China’s GDP expanded at an annual rate of 10% over 2000-rienced decades of lost growth. In 2008, the World Bank1 2008, its annual demand for industrial raw materials such asestimted that access to the most basic services in Africa steel (16%), aluminium (20%), copper (13%) and nickel (23%)increased only modestly between the early 1990s and the all grew even faster. In the ten years preceding 2008, China’searly 2000s, and only slightly in the last decade. Electricity, consumption of crude oil nearly doubled, and during thefor example, is still available to little more than 20% of Africa’s same period its consumption of copper and iron ore tripledtotal population, and piped water to just 12%. while that of aluminium quadrupled. Between 2000 and 2008, China accounted for two-thirds of the world’s entireCompounding the problem was the fact that Africa was growth in demand for steel and aluminium and virtually alllargely left to its own devices in terms of infrastructure in the growth in global demand for copper and nickel.1990s when both African and donor investment in infrastruc-ture was scaled back relative to other priorities such as child This rapid growth in China’s natural resource use contrib-immunisation and education, partly due to the mistaken uted to a windfall in trade between China and Africa, a majorbelief that private investors would step up to fill the infra- supplier of raw materials. Bilateral trade stood at just overstructure financing gap. As a result, while Africa’s construc- USD 10 billion in 2000, yet in 2010 it breached USD 125 billion,tion sector deteriorated, poor road, rail and harbour infra- exceeding Africa’s trade with any other partner, the closeststructure added 30-40% to the costs of goods traded among ones being the US with around USD 115 billion, France withAfrican countries, and the costs of moving foreign imports to around USD 66 billion, and the UK with around USD 31 billion (see chart on next page). This China-Africa trade pattern basi-1 See ‘Access, Affordability and Alternatives: Modern Infrastructure Servicesin Africa, Africa Infrastructure Country Diagnostic. The International Bank cally encompasses an exchange of a diverse range of Chinesefor Reconstruction and Development, World Bank, Feb. 2008 manufactured goods for African raw materials.6 The Beijing Axis

Features Features The China AnalystAfricas Major Trade Partners (USD bn, 2000-10) Major Investors in Africa OFDI Flow (USD bn, 2003-09) China UK US France150 France120 2003 US 2004 90 2005 2006 60 UK 2007 2008 30 2009 China 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 5 10 15 20Source: UN Comtrade; The Beijing Axis Analysis Source: OECD Statistical Database; China National Bureau of Stistics; The Beijing Axis AnalysisAlong with the US and emerging economies such as Brazil • Export credits to support national exporters. In 2009,and India, China’s imports from Africa are as expected char- China disbursed USD 29.6 billion in export creditacterised by a disproportionate share of oil and minerals. globallyChina’s trade with Africa has as a result been very lucra- • Natural resources-backed lines of credit, or the ‘Angolative for resource-rich African countries, and these African Mode’, where China’s Exim Bank uses natural resourcecommodity suppliers have become crucial suppliers for exports or preferential access to them as collateral forChina. South Africa is China’s only African trade partner from infrastructure projects and as a means to repay loanswhich it imports substantial amounts of products that are • Mixed credits, where financing packages combinenot resources, while China’s leading suppliers of oil (Angola), concessional and market rate loans, such as a mixtureManganese (South Africa), chromium (South Africa), cobalt of FDI and export credit3(the DRC), and platinum (South Africa) are all African. Laying down a methodology: The Angola ModeChinas annual flow of Outbound Foreign Direct Investment(OFDI) to Africa in recent years is still far in arrears of the US, As China’s engagement with Africa has deepened during theFrance and the UK (see chart above, right). In 2009, China’s last decade, its deals on the continent came to broadly fit aOFDI stock in Africa reached USD 9.3 billion, still marginally mould. As a country that recently emerged from civil war yetbehind that of Switzerland, the Netherlands and far behind that is rich in natural resources and sorely in need of infra-the US, France and the UK (which has the most invested stock structural renewal, Angola has become one of the biggestin Africa, namely USD 61.4 billion). Chinese investment in recipients of Chinese financing for infrastructure projects inAfrica reflects a similar predilection for resource-rich coun- Africa, one of China’s largest trading partners on the conti-tries as is the case with trade, and in 2009 a full 76% of Chinese nent, and a major source of its oil. In 2004 Angola signed aFDI in Africa was concentrated in resource-rich countries. In deal with China that would become emblematic of China’s2009, the main sectors for Chinese OFDI stock in Africa were ‘infrastructure for resources’ relationship with Africa.mining (30%), manufacturing (22%), and construction (16%). Angola received a USD 2 billion loan from a Chinese policyYet while Chinese levels of OFDI in Africa still lag far behind bank, China EximBank, for the development of infrastructure,those of Western countries, China and other emerging part- including electricity generation, telecom expansion, railwayners are following new paths of investing in Africa. Europe rehabilitation and water. As part of the repayment terms forand North America have typically relied on FDI and Official the loan, Angola agreed to supply China with 10,000 barrelsDevelopment Assistance (ODA) in Africa, but emerging of oil per day. In a pattern that would be repeated frequentlypowers such as China are adopting a more holistic approach afterwards, a Chinese construction/engineering companyto broaden their economic relationship with Africa that was awarded contracts for the infrastructure projects, whilecombines trade and investment with development coop- rights for extracting natural resources was afforded to aeration. Thus while developing partners such as China, Chinese oil company.India, South Korea and Brazil are not only engaging withAfrican countries that Western countries have avoided in the 3 Deborah Brautigam, author of ‘The Dragon’s Gift,’ has put China’s totalpast, they are also increasingly using alternative financing purely concessional loans, zero-interest loans and grant commitments tomethods. China in particular uses the following financing Africa at USD 2.1 billion in 2009, while she estimated China’s preferential export credit commitments to Africa for 2007-09 at around USD 2 billionmethods in Africa2: and non-concessional finance at around USD 5 billion annually. In sum, all2 For more detail see ‘African Economic Outlook 2011’, ADB, OECD, UNDP, China’s alternative financial flows to Africa reached an annual average com-UNECA, 2011, p. 112. mitment of USD 7.1 billion over 2007-09. The Beijing Axis 7

The China Analyst FeaturesInternational Contract Revenue in Africa, Chinas and Rest Chinese contractors have become highly competitiveof Worlds Share (USD mn, 2001-09) bidders for publicly tendered infrastructure projects. A 20072001 7.4% 92.6% survey of 35 Chinese construction companies active in Africa found that around 50% of Chinese projects in Africa were2002 9.9% 90.1% actually won via an international bidding process. The extent China of Chinese contractors success in Africa is illustrated in the2003 11.8% 88.2% fact that in 2001 China’s share of contract revenue in Africa2004 14.7% 85.3% Rest of World was a mere 7.4%, yet by 2009 this had climbed to 36.6% (see chart to the left), making it the dominant player, far ahead of2005 21.4% 78.6% Italy with 15% in second place and France with 10% in third.2006 28.4% 71.6% Africa is now China’s largest market in terms of contract revenue with 41.1%, even more than Asia with 36%. Similar2007 26.9% 73.1% to Chinese trade and investment in Africa, the revenue of2008 42.4% 57.6% Chinese contractors is highly concentrated in a few resource- rich countries. In 2009, the leading six countries (Algeria,2009 36.6% 63.4% Angola, Sudan, Nigeria, Libya and Ethiopia), mostly oil and gas-related economies, accounted for USD 18.1 billion or 71% 0 10,000 20,000 30,000 40,000 50,000 60,000Source: ENR; The Beijing Axis Analysis of China’s total revenue (see chart opposite page).Repaying loans for infrastructure development with natural Chinese contractors in Africa have been most successful inresources is not a new concept. The first reported example of civil infrastructure projects such as transport and construc-such a deal involving China in Africa was actually not 2004 in tion. As stated above, around 50% of Chinese contractorsAngola, but 2001 in the DRC when China provided USD 280 in Africa seem to prefer international bids, yet around 40%million for dam construction and received loan payments were accounted for by grants, concessional loan projects andin oil. After 2004, however, such deals became more widely other mechanisms in which the Chinese government play aused by China in Africa, and also expanded to other resources strong role. The case of Angola, where Chinese commercial,such as bauxite, chromium, and iron ore. It should be noted, investment and contracting activity has been vigorous forhowever, that the Angola mode is not the only mode of almost a decade now, can be held up as an example of theengagement for Chinese companies in Africa, yet they are progression of Chinese contracting over time. The establish-common in countries such as Angola, the DRC and Sudan ment of Angola’s first loan agreement with China Exim Bankwho have only recently emerged from conflict and instability. in March 2004 facilitated the entry of China’s large SOEs into Angola, and in the time since dozens of Chinese contractorsThe process of concluding Angola Mode deals is typically have established operations there.4borne out of intergovernmental agreements that deter-mine the purpose, amount, maturity and interest rate of the Although Chinese contractors typically still focus more onloan, followed by the signing of a loan agreement – often the lower value added part of the construction value chain,concessional in nature – between China Exim Bank and the their ability to undertake construction projects at cheaperborrower. The capital is then disbursed in tranches in terms prices have made them very competitive and, in the caseof project completion, and paid directly to Chinese contrac- of Angola, have broken the monopoly of Portuguese andtors in China, which are selected by Exim Bank and China’s Brazilian contractors. Due to the volume of their needs andMinistry of Commerce and sanctioned by the beneficiary the lack of quality products available for sourcing locally,government. With such a methodology in place, the main Chinese contractors bring most of their workers and mate-Chinese actors in Africa are rials from China (although in Angola some Chinese compa- • Lending agencies: China’s policy banks, China Exim nies have in the last few years begun to set up local factories Bank and China Development Bank through the to produce some industrial inputs). After a few years, mostly China-Africa Development (CAD) Fund private Chinese companies also began entering Angola, • Extractors and builders: Large state-owned enter- largely to subcontract from the larger companies and to set prises and some private ones operating in the extrac- up a procurement chain for providing equipment and mate- tive and construction/engineering industries rials from China. • Other business people: Small to medium-sized Chinese businesses and individual entrepreneurs that Windows of opportunity: Africa’s new business landscape may appear subsequently China is engaging with Africa like no other country has everGetting their hands dirty: Chinese contractors in Africa done before, and in the fundamental exchange of Africa’s resources for Chinese-built infrastructure, China is makingCollectively, these actors are re-shaping Africa’s business 4 For an assessment of the various estimates provided for the numberlandscape, yet none are doing so more obviously than China’s of Chinese state-owned and private companies in Angola, see L Corkin,construction and engineering contractors. Having originally ‘Chinese Construction Companies in Angola: A Local Linkages Perspective,’relied solely on Chinese government-financed projects, p. 17.8 The Beijing Axis

Features Features The China Analysta significant contribution to addressing a lasting struc- Leading Countries for Chinese Contractor Revenue in Africatural bottleneck in Africa. The ‘infrastructure for resources’ and Number of Chinese Contractors in Country (USD mn, 2009) 22deals it concludes in Africa are unique in the way they lock 6,000African countries into using their resources for infrastruc-ture – revenue never actually comes in, obviating the need 17 5,000for taxation. China is transcending conventional patterns ofengagement of straightforward FDI and ODI, and has insteadfashioned an elaborate system where a strong government 4,000role and alternative financing methods can overcome risk,and the leveraging of China’s own booming constructionindustry can see Chinese contractors building much-needed 3,000civil infrastructure as well as value-adding processing indus- 17tries such as refineries and petro-chemical complexes in 2,000 14 12Africa. 15China is a strong player in Africa both in upstream activi- 1,000 8 6 7 9ties such as exploration and extraction, as well as in down-stream activities such as processing. Chinas demand for 1 1 5 4 0oil and minerals has created a new level of competition for Algeria Angola Sudan Nigeria Libya Ethiopia Congo(B) Egypt DRC BotswanaAfrica’s resources, and has contributed to higher prices, to Source: China Statistical Yearbook 2010; The Beijing Axis Analysisthe benefit of Africa. In countries such as the DRC and Angolawhere previous failed construction booms have formed part more time in Africa they will become more aware of theirof protracted instability, China has undertaken projects own shortcomings and more receptive to the value offeredwhere many other investors have regarded the risk as being by foreign companies with the right knowledge and experi-too high. The sustainability and flexibility of China’s contem- ence. For such foreign companies, the challenge will be toporary engagement in Africa, moreover, should contribute utilise these opportunities in the right industries, at the rightsignificantly to Africa’s current construction boom not being time. China’s increased business in Africa has also createdas forlorn as the previous one, and that would make it a true demand for services essential to doing in business in Africa,new era for Africa. providing new opportunities for banks, law firms, and various other service providers.This is not to say that the impact of China in Africa is flawless,yet this should not be the expectation for something that is These are but a few examples of how China’s ‘infrastructurenot an exercise in altruism. Chinese projects in Africa are in for resources’ engagement is creating new business opportu-essence turnkey projects, in theory fulfilled by contractors nities for foreign firms in Africa. Yet perhaps the best oppor-who then sign off on the engagement, and hence the extent tunity of all is the fact that Africa itself is changing. As China’sof the true lasting value add on the ground in Africa is some- activities in Africa increases, Africa is gradually transformingtimes brought into question by some observers, especially itself from a perennial backwater to a new source of growthsince China exports a significant share of its labour to Africa. with diversifying economies, expanding consumer markets,Yet this could be changing, as we have seen, as Chinese and working infrastructure – making Africa open for businesscompanies seek to establish local manufacturing capabilities like never before.on the continent, in addition to establishing several specialeconomic zones and other forms of skills transfer. Barry van Wyk, Senior Consultant barryvanwyk@thebeijingaxis.comThe strong role played by government-to-government inter-action in Chinese deals in Africa has in practice often meantthat many of Africa’s mineral rights are sold in closed dealsand not in public auctions. Yet the increasing number ofChinese extractive companies and construction/engineeringcontractors in Africa has opened up a vast new opportunitylandscape for foreign companies on the continent, bothin terms of potential partnership and new clientele. Thusin areas where Chinese companies are still comparativelyless adept, such as consulting and industrial design, manyopportunities for partnerships are now open to foreign firms.Chinese firms in Africa still lack a deep understanding of localbusiness as well as cultural and regulatory issues, and hereagain foreign companies with experience in Africa can profit.Foreign companies could also explore joint bids with Chinesecompanies for construction projects. As Chinese firms spend The Beijing Axis 9

The China Analyst FeaturesChina and Latin America: Untapped Sources of AddedValueBilateral trade between China and Latin America has increased ten-fold in the last decade, preparingthe way for a massive wave of Chinese investment in the region in 2010. While both bilateral trade andinvestment are expected to increase further in the coming years, questions remain on how balancedand sustainable the relationship will be. This article argues that both regions are set to enter a new stageof their relationship that will be characterised by increasing Chinese investments in more value addedindustries and eventually higher value added exports from Latin America. By Javier CuñatO nly ten years ago, upon China’s entry into the World imports and 2% of its total exports (see charts below). Ten Trade Organisation (WTO), China was the world’s years later, trade between China and LatAm amounted to seventh-largest economy, growing at 7.3% y-o-y and USD 179.3 billion, a tenfold increase, with LatAm accountingaccounting for just over a tenth of global economic growth. In for 6.5% of China’s total imports and 5.6% of its total exports;2010, with a global financial crisis still persistent in the United and China accounting for 12.3% of LatAm’s total imports andStates (US) and Europe, China became the world’s second- 12.9% of LatAm’s total exports.largest economy, growing at 9.6% (H1 2011) and contrib-uting one-third to total world GDP growth. The emergence Overall, China is not only more important to LatAm today thanof China as a global economic power has greatly benefited ten years ago and vice versa, but the two regions are progres-the global economy. In China’s phenomenal rise, one thing sively becoming more dependent on each other as importantis clear: as China grows, other countries benefit. As China’s sources of growth compared to other regions, exemplified byexported-oriented economy keeps churning out increasingly the free trade agreements China has signed in recent years withhigher value added goods, other countries can now purchase Chile, Peru and Costa Rica. This trend became more evidentpreviously unattainable products at competitive prices. during the most recent financial crisis, during which China’s stimulus package and unrelenting demand for commoditiesYet this trend has also to varying degrees presented the helped LatAm’s exports to China counterbalance a decreaseregions and countries within China’s trade, investment and in demand from the US and Europe. For its part China foundgeopolitical radar with a number of challenges. Antidumping the perfect partner to serve its own demand, diversifyingand protectionist measures in the US and Europe, labour and its sources of fuel and metals needed to power and build itscommunity issues in Africa, and territorial disputes in Asia economy during the financial crisis and into the future.are just some examples. Latin America (LatAm), with its ownparticularities, is no exception. According to the Economic Commission for LatAm and the Caribbean (ECLAC), China today ranks among LatAm’s topThe relationship trading partners, particularly in countries such as Brazil, Chile, Peru and Argentina, where China accounts for 15%, 24%,When China entered the WTO, annual trade between China 16% and 9%, respectively, of each country’s total exports.and LatAm amounted to USD 14.4 billion, with LatAm Whats more, China is now the largest importer of goods andaccounting for 2.7% of China’s total imports and 2.9% of its services from Brazil and Chile, and the second-largest fromtotal exports; and China accounting for 2.3 % of LatAm’s total Peru, Argentina and Cuba. However, these exports remainChinas Trade with LatAm and the Caribbean (USD bn, Chinas Trade with LatAm and the Caribbean (%, 2001-10)2001-10)100 14% China as % of LatAm Exports China as % of LatAm Imports Exports 12% 80 LatAm as % of China Exports Imports 10% LatAm as % of China Imports 60 8% 6% 40 4% 20 2% 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: UN Comtrade; The Beijing Axis Analysis Source: UN Comtrade; The Beijing Axis Analysis10 The Beijing Axis

Features Features The China Analystconcentrated in raw materials such as copper, iron ore, and A survey by the China-Brazil Business Council (CBBC) revealedsoybeans, which account for nearly 60% of total exports. that 93% of Chinese investments in Brazil in 2010 were under-Similarly, China’s exports to LatAm are mainly electronic taken by state-owned companies, while 6% were undertakenitems, autoparts, equipment and machinery, and textiles. by companies belonging to provinces, and 1% by private companies. The survey also found that Chinese investmentsIndeed, the trade relationship between China and LatAm in 2010 totalled USD 12.6 billion (slightly higher than ECLAC’sis essentially built on the exchange of natural resources for figures), 82% of which involved mergers and acquisitions.manufactured goods or low value for high value added prod- Sinopec made the largest investment when it acquired a 40%ucts. While this makes a lot of sense from the countries factor stake in the Brazilian operations of Repsol-YPF for USD 7.1endowment and comparative advantage point of view, it also billion (see table on next page). Of Chinas total investmentpresents great challenges for LatAm manufacturers who have commitments in 2010, 95% were concentrated in the areasseen Chinese exports progressively replace their market shares of oil and gas, agribusiness, mining, and ironworks. However,at home, in other LatAm markets, and especially in the US. this trend appears to shifting in 2011, with announced Chinese investments in LatAm and the Caribbean thus far amountingRegarding investment, Chinas FDI stock in LatAm breached to USD 7.13 billion (see chart below), with a stronger focus onUSD 41 billion at the end of 2009, accounting for up to 18% higher value added industries.of total Chinese FDI stock in the world. LatAms investmentstock in China, on the other hand, dwarfs that number, hitting If the figures from 2010 and the announced figures of H1USD 112.6 billion in 2008, or roughly 14% of the total foreign 2011 are any indication, they show that China is becomingcapital absorbed by China. A closer look into the GDP figures increasingly entrenched throughout the region, possiblyfor both regions illustrates that current levels of Chinese FDI marking the start of a new phase of economic relationsin LatAm and the Caribbean are comparatively low. In addi- between China and LatAm which features stronger tradetion, they are mostly concentrated in tax havens such as the links that are accompanied by growing investment in notCayman Islands and British Virgin Islands, which accounted only natural resources, but also manufacturing, infrastruc-for 96.7% of all Chinese FDI into LatAm between 2003 and ture and services. As examples, Huawei, ZTE and Lenovo are2009. Excluding the two tax havens, LatAm only received becoming prominent investors in the telecommunicationsabout USD 126 million in Chinese FDI, or less than 1% of the and electronics sectors, and BYD, Chery and Geely are leadingannual total. Overall, there is Chinese under-investment in all the charge in the auto industry.sectors but especially in higher value added industries. The fundamental challenges facing the China-LatAm relation-2010 - Breakthrough ship are two-fold. Firstly, how to increase and diversify Chinese FDI in the region beyond raw materials to more value addedIn 2010, with an estimated investment of USD 15.25 billion, industries; and secondly how to improve trade by means ofChinas investment in LatAm was more than twice the amount exporting more value added LatAm goods. Both challenges, asit invested in the region in the period 2006–09, namely USD they unfold, will present substantial opportunities for both sides.7 billion. Chinas 9% share of FDI in the region now makesit the third-largest foreign investor in LatAm, trailing only Forever imbalanced? Unlikelythe US and the Netherlands, which accounted for 17% and13%, respectively (see chart below). By country, the main Over the long term, the greatest opportunity but also chal-destinations for Chinese FDI were Brazil, Argentina and Peru, lenge facing Chinese companies in LatAm is successful inte-all of which have established strong trade links with China. gration with the host economies. The model it is presentlyBrazil, China’s BRICS counterpart in the region, was by far the utilising in a number of countries, characterised by the acqui-biggest benefactor of this investment wave, with USD 9.6 sition of natural resource assets, the extraction and low valuebillion in Chinese FDI in 2010. added exports ‘back to China’, and under-developed community relations, has both a limited political and business shelfOrigin of FDI in LatAm and the Caribbean* (%, 2006-10) Chinas LatAm FDI Destinations by Country* (%, 2010-Q3 2011) USD 864.17 bn USD 112.63 bn USD 15.25 bn USD 7.13 bn100% 100 8% 10% Latin America Others Colombia 80% 80 30% 28% Caribbean Costa Rica Financial Mexico Centres 60 60% 7% Ecuador 10% Netherlands 5% Peru 13% China 4% 40 40% 2% Argentina 10% 9% UK 4% Brazil 5% 3% Japan 4% 20 20% Spain 25% 17% Canada 0 0% 2010 Q1-Q3 2011 US 2006-2009 2010 *Note: Data for 2010 is confirmed investments; data for 2011 is announced investments.Source: ECLAC; The Beijing Axis Analysis Source: ECLAC; The Beijing Axis Analysis The Beijing Axis 11

The China Analyst FeaturesMajor Announced Chinese Foreign Direct Investments in LatAm (2010-11) highlighted deals denote those in non-resources sectors Year Month Investor Status USD mn Partner/target Sector Subsector Country2010 Jan Honbridge Holdings Concluded 400 Sul-Americana de Metals Metals Iron ore Brazil2010 Feb Sany Heavy Industry Ongoing 200 Build a manufacturing plant Manufacturing Heavy machinery Brazil2010 Mar East China Mineral Concluded 1,200 Itaminas Metals Iron ore Brazil Expl. & Develop.2010 Mar CNOOC Concluded 3,100 Bridas Energy Oil Argentina2010 Mar State Grid Ongoing 1,050 Quadra Mining Metals Copper Chile2010 Apr WISCO Concluded 4,700 A JV steel mill Metals Steel Brazil2010 May State Grid Concluded 1,720 Cobra, Elecnor and Isolux Power Power grid Brazil2010 May Sinochem Concluded 3,070 Peregrino Field Energy Oil Brazil2010 Aug Tongling Nonferrous & Planning 3,000 A copper mine Metals Copper Ecuador China Railway Construction2010 Sep Chery Ongoing 400 n/a Transport Auto Brazil2010 Oct Sinopec Ongoing 7,190 Repsol/YPF Energy Oil Brazil2011 Jan CR Zongshen Concluded 80 Kasinski Transport Motorcycle Brazil2011 Mar Chongqing Grain Group Concluded 2,400 n/a Agriculture Soybeans Brazil2011 Apr Lenovo Ongoing 900 Positivo Electronics PC Brazil2011 Apr Huawei Ongoing 363 Build a plant Telecom Mobile phone, tablet PC Brazil2011 Apr ZTE Concluded 200 Build a plant Telecom Tablet PC Brazil2011 May Chongqing Polycomp Concluded 60 Owens Corning Plant Material Fiber glass Brazil International Corp.2011 May XCMG Concluded 200 n/a Manufacturing Heavy machinery Brazil2011 May Geely Concluded 10 Nordex Transport Auto Uruguay2011 Jun China CNR Corp Ongoing 127 T’Trans Transport Train Brazil2011 Jun Qingshan Mining Ongoing 3 JDC Mining Co Metals Gold, silver & copper Mexico2011 Jun TCL Ongoing 21 Radio Victoria Fueguina Telecom Mobile Argentina2011 Jul BOMCO Concluded n/a BRCP, Asperbras Energy Petroleum equipment Brazil2011 Aug ICBC Ongoing 600 Standard Bank Argentina Finance Banking Argentina2011 Aug Midea Group Ongoing 223 Carrier Corporation Manufacturing Home appliances Argentina, of UTC Group Brazil, Chile2011 Sep Taiyuan Steel, CITIC Ongoing 1,950 CBMM Metals Niobium Brazil Group and BaosteelTotal for Q1-Q3 2011 7,137Source: China Global Investment Tracker, Heritage Foundation, Carta da China No 56 June 2010, China-Brazil Business Council; Observatario Iberoamericano de Asia - Pacificoand press releases. Note highlighted deals denote those in non-resources sectors.life. While benefits of both existing and proposed Chinese construction equipment manufacturers, decided to put downinvestments are real, trade tensions from the LatAm side are roots in the region by investing USD 200 million in a manu-emerging and creating contradictions for both parties. We facturing plant in the Brazilian state of Sao Paulo. One yearsaw a good example of this at the beginning of 2011, when later, XCMG, its closest Chinese competitor, followed in itsthe Brazilian Finance Minister called for a revaluation of the footsteps. We have seen similar examples in the automobilerenminbi following a massive USD 15 billion flow of Chinese industry in Mexico, where Chinese automakers Zhongxing,investments into Brazil during 2010. Geely and Changan, through a partnership with Mexico’s Autopark, have all announced plans to establish auto-makingMore importantly, LatAm now more than ever represents an facilities. China’s ZTE has started manufacturing smartphonesopportunity for Chinese manufacturers to enlarge their global in Argentina together with local white goods manufacturerfootprints and market shares, especially in markets where BGH and has also announced it will start producing tablettheir international competitors have a significant presence. computers in Brazil. The list goes on in a number of high-Aware of China’s price advantages, constantly improving value-added industries (see table above). Leading Chinesetechnology standards and overall positive macroeconomic companies are looking at a number of LatAm countries asoutlook for the LatAm region (recently revised by the World key launchpads from which to market their products not onlyBank to 4.6% growth for 2010), Chinese manufacturing in other LatAm markets but also in North American markets.companies are realising that an export-oriented develop-ment strategy towards LatAm without a footprint is a dead- According to ECLAC, 90% of Chinas confirmed investmentend game. Various factors, i.e. consolidated market shares at in LatAm has targeted the extraction of natural resources.home, the need to better understand their customers in the Looking into China’s upgraded endowment factors overregion, and strong balance sheets built on export revenue the years, the scale, nature and international ambitions ofwith low production costs, have laid the foundation for its domestic champions together with recent Chinese OFDIcapital investments to grow and deepen in the years to come. figures in the region, one can expect an increasing number of Chinese manufacturing companies to invest in high valueIn February 2010, Sany Heavy Industry, one of China’s largest added industries in the region. While investments in oil,12 The Beijing Axis

Features Features The China Analystgas and mineral resources will remain at the top of Beijing’s challenge but probably one of the best opportunities for theagenda, less value added Chinese investments in LatAm region’s export diversification ambitions.going forward would not make much sense from a globalsupply chain point of view. If trade relations continue to Cross-border opportunities for LatAms exporters do notunfold as they have in the last decade, Chinese manufacturers only exist in the natural resources side of Chinese demandand infrastructure developers will need to integrate LatAm but also in food, beverages, agribusiness, leather and fabrics,in their supply chains in the long run as much as LatAm is plastics, chemicals, pharmaceuticals, machinery and elec-willing to. So expect this trend to intensify. tronics, among other sectors. While market entry strategies may vary greatly - from organic to inorganic growth, fromOver the long term, the greatest opportunity but also chal- JV partnerships to wholly foreign owned enterprises, fromlenge facing LatAm companies seeking to compete in China export development to assembling and/or manufacturing,is to diversify their exports towards more value added prod- from partnering with a local distributor(s) to developingucts. While a significant number of LatAm’s manufactured ones own distribution channels – one thing is clear: ignoringexports compete with products China itself produces, one the Chinese consumption market is neither possible nor wiseshould not forget that China is the world’s second-largest if one aims to remain competitive over the long term.importer of manufactured goods. So from a sectoral andproduct perspective, the challenge is not that there is no Final wordmarket for LatAms manufactured goods in China, but ratheridentifying what the specific products with the greatest If 2010 meant anything for China-LatAm trade and invest-potential are and how to market them effectively. ment relationship, it was change. We are leaving behind a stage in the relationship characterised by booming bilateralThe Chinese market is more complex than any other market trade, few investments and strong unbalances, and enteringof comparable size, and therefore requires an on-the-ground, a new stage characterised by the utilisation of new sourcescustomised and dedicated strategic approach. Even though of added value. This stage will not only be characterised byChina is a large market for a number of products, entering the trade but also by increasing Chinese investments in moreChinese market is not an easy task and profits are usually the value added industries and eventually higher value addedresult of a long-term investment in understanding the Chinese exports from LatAm. If this happens, and we think it will, theculture, the specifics of your market and network building. exchange of natural resources for manufactured goods willJust as one cannot ignore that the emergence of Chinese prove to be not the trend itself but the catalyst and continu-manufacturing companies is disrupting domestic competition ation of a bigger trend. Both regions are set to take stepsin a number of industries in LatAm, and increasingly in more towards a more balanced, sustainable, value added andcapital and technological-intensive products, one cannot mutually beneficial relationship. While Chinese OFDI figuresignore that the Chinese marketplace represents a tremendous for 2010 and H1 2011 provide some hints, it is still uncertainopportunity for international companies. China ranks among which countries, sectors and companies will be the protago-the worlds largest consumers and importers of power gener- nists in the coming decade.ating equipment, aircraft and parts, computers and industrialmachinery, agricultural products, consumer and luxury goods How do LatAm companies look at China and how do Chineseamong a large spectrum of sectors and products. companies look at LatAm? While the challenges involved in business transactions are complex, a change in perceptionBrazilian aircraft company Embraer, along with Mexican will be key as old perceptions have on many occasions beenbread maker Bimbo, are just two examples of successful as unbalanced as the trade and investment relationship.LatAm ventures in the Chinese market. Embraer, which China should not be perceived as a neo-colonial power asopened its first office in Beijing in 2000, continued with the much as LatAm is no one’s backyard. The first, and most prob-construction of a spare parts distribution centre at Beijing ably the biggest, barriers that LatAm companies face whenInternational Airport, and the signing of a joint venture with engaging with China are not that different than what theAviation Industry Corporation of China in 2003. Embraer Chinese face when engaging with LatAm. These are culture,has delivered more than 70 aircraft in China and has already language, protocol, and lack of information, and they impactachieved a 52% share of China’s market for aircraft with up how we understand the opportunities and challenges.to 120 seats in 2009. With two plants in China, Bimbo is apioneer in marketing packaged baked goods in China, espe- Working out the information deficits and bringing the marketcially in Beijing and Tianjin, and is expanding to other cities. realities to the corporate landscape in China and LatAm will further assist and facilitate mutually beneficial and moreDespite such precedents, LatAm’s business presence in China value added trade and investment. Government bodies,is still mainly dominated by the so-called multilatinas, with a industry associations, chambers of commerce, corporatestrong component coming from the natural resources sector, players and service providers must work in that direction.while LatAms small and medium-sized enterprises lag behindtheir counterparts in terms of presence and market penetra- The rules are changing but the game is just beginning.tion. As LatAm becomes increasingly integrated with China,bringing the region’s small and medium-sized enterprises to Javier Cuñat, General Manager: Beijing Axis Strategythe Chinese market not only represents a major competitive javiercunat@thebeijingaxis.com The Beijing Axis 13

The China Analyst FeaturesRising Stars: China’s Emerging Construction MachineryManufacturersBuoyed by increasing demand, especially in emerging markets, Chinas construction machinery playershave been actively enhancing their international reach and catching up with their foreign counterparts.China’s three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlinesthe different strategies adopted by these rising stars and their global expansion plans. By Ankit KhaitanS tarting from a mere USD 1 billion worth of sales in 1999, Global Market Share of Construction Machinery Industry in China’s construction machinery industry saw a decade Terms of Sales Volume (2002 vs. 2009) of high growth with sales reaching USD 60 billion in North Europe Japan Others China America2010. This phenomenal growth in demand was fuelled byrapid growth in both the developed coastal areas of China 100and more recently, inland areas. In developed areas, the 16%genesis of growth was local governments’ expansion of small 29%cities, while in inland China it was a growing market for infra- 80 10%structure and housing. Currently, for every 1% increase in theurbanisation rate, 13 million people move from rural areas to 4%cities, but this number still lags far behind that of developed 60 28% 13%countries and the global average. The Chinese governmenthas set a clear target of achieving an urbanisation rate of 60%by 2020, indicating that China still has a long way to go in 22%this regard. 40 28%Another key demand driver for construction machinery isthe strong growth in fixed asset investments spurred mostly 20by downstream segments, including infrastructure and 32%property investments. For instance, social housing, though 18%comparatively smaller investments, is significant in construc-tion project volume and substantially increases the need for 0 2002 2009equipment. Additionally, demand from foreign markets has Source: CCMA; Off-Highway Researchalso grown, allowing China’s construction machinery exportsto experience rapid growth in recent years. Together, these comprehensive production lines. In contrast, Zoomlionfactors have bolstered the development of the construction is China’s second-largest, and the world’s tenth-largest,machinery industry in China, making it the world’s fastest- construction machinery manufacturer. It emerged outgrowing and third-largest market and catapulting the three of Changsha Construction Machinery Research Institute,largest players onto the world stage. a leading state-owned research institution focusing on construction machinery, effectively affording it a strongBeginnings competitive advantage.According to a report by Off-Highway Research (a consul- Consolidation and government supporttancy specialising in the research and analysis of interna-tional construction), China’s share of the global construc- Though the industry in China is highly fragmented with overtion machinery market jumped from 18% in 2002 to 32% 900 companies vying for market share, a majority of themin 2009 in terms of sales volume (see chart above, right). only manufacture components or engage in sub-assemblyChina’s three leading pioneers in this regard are Sany Heavy due to the hefty upfront financial investments that areIndustry, Zoomlion and XCMG, which have emerged as the required. In addition, intense competition between boththree dominant manufacturers that together account for domestic and foreign participants as well as rising demandabout 30% of the market in China, larger than the top three for improved and advanced technology have forced smallforeign companies active in China (see chart on next page). operators to either be acquired by more established playersIndeed, these three are now ranked in the top ten in terms of or simply exit the game.sales revenue globally. In fact, the large in-house companies have supplementedOut of these, Sany and XCMG only started operating in the organic growth and scaled up rapidly through consolida-early 1990s but quickly transformed themselves from being tion. In the past decade, Sany has acquired assets from itssingle product machinery companies to ones that boast parent company to expand its capabilities while Zoomlion14 The Beijing Axis

Features Features The China AnalystApproximate Market Share of Chinas Construction balanced between its two largest segments, concrete andMachinery Industry (2010) crane machinery, contributing 43% and 34% to total revenue, Caterpillar Volvo XCMG Zoomlion respectively, in 2010 (see chart on next page). Komatsu Hitachi XGMA Other Chinese Sany leads the local market for truck mounted concrete Kobelco Sany Heavy Other Foreign pumps and full hydraulic rollers; its production of pump trucks is one of the best in the world. Compared to Zoomlion, it is less diverse and its most important segment, concrete, 10% 9% alone contributes more than 60% of its total sales revenue. 7% Nonetheless, after Sany acquired the excavator and truck 5% crane businesses from its parent, its level of business diver- 4% sification started closing in on Zoomlion’s, with product 32% 1% categories expanding to include concrete machinery, road 11% construction machinery, excavator, pile driving machinery, hoisting machinery and port machinery. 8% 3% 11% XCMG is the world’s largest manufacturer of truck cranes,Source: CCMA which account for most of its total revenue. The comprehensive line of products it offers includes construction mobilehas targeted third parties to scale up its product offerings. cranes, crawler cranes, wheel loaders, concrete boom pumps,For example, Zoomlion acquired Hunan Puyuan Construction piling rigs, aerial fire trucks, asphalt pavers and cold millingMachinerys truck crane business and Zhongbiao’s environ- machines.mental and sanitation machinery business in 2003. Over the years, Chinese companies in various industries haveThis consolidation is being further encouraged by the successfully moved up the value chain by offering a widegovernment, who is actively promoting consolidation in range of products and the construction machinery industrythe industry to avoid disorderly competition among local is no different. Foreign companies have historically servedmanufacturers. Furthermore, equipment manufacturing is the Chinese excavator market by leveraging their strongone of the seven strategic emerging industries identified in expertise and precision quality. Yet according to CCMA data,the 12th Five Year Plan that the government will focus on so Chinese companies now control one-third of the global exca-as to foster the development of a sound market environment; vator market, up from 22% in 2006. Such strategic moveshence consolidation will be an ongoing trend in the industry have undeniably boosted their overall competitiveness andgoing forward. Chinese construction machinery manufac- allowed them to capture market share from their foreignturers are also afforded tax breaks and other incentives from competitors in China and in other emerging markets.local Chinese governments, enabling them to take a longterm view of the market rather than just focusing on short Going global – M&A and partnershipterm profits. The global presence of US-based Caterpillar and JapansIt is worth noting that foreign enterprises have had little Komatsu has been strong for decades as they beganopportunity to compete against local competitors in this expanding abroad early on when growth in their domesticconsolidation drive due to regulatory restrictions, and have markets slowed with urbanisation reaching a saturationbeen unable to acquire majority stakes in joint ventures with point. Following a similar strategy, Zoomlion, Sany anddomestic firms. This has allowed local rivals to gather market XCMG have been encouraged to expand into foreign marketsshare from foreign companies and at the same time narrow because of their solid positions in the Chinese market, world-the capability and quality gap by integrating independent class products, sustainable low cost advantage and China’senterprises’ abilities via strategic acquisitions. Moreover, expansive infrastructure projects. Sany in particular has ledforeign enterprises have simply not been able to increase domestic equipment manufacturers in overseas expansion.production fast enough to meet rising demand, diluting theirmarket shares. However, the three differ in their overseas expansion strategies. Zoomlion focuses on a direct M&A route to expand,Different specialisations integrating its costs and scaling its position in China while leveraging its target’s distribution network and technicalThe product portfolios of China’s three largest industry players capacities. CIFA, a global manufacturer based in Italy, was amostly overlap, yet there is diversity in their product offerings very strategic acquisition for Zoomlion that strengthened theand this unique characteristic defines some of the dynamics latters R&D capabilities and helped increase its global marketin the industry. Zoomlion has the worlds most diverse range share. In contrast, Sany has preferred to expand by buildingof products including concrete machinery, tower cranes, its own plants in foreign countries. For instance, Sany recentlyroad and earthmoving machinery, environmental sanitation built research and development centres in Brazil (2010) andmachinery, and bulk material transportation equipment. Germany (2009) as part of an ambitious international expan-Despite such a diversified portfolio, revenue sources are sion plan. Also, it is the first Chinese construction machinery The Beijing Axis 15

The China Analyst FeaturesXCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1 and enter the top five global construction machinery compa-2010) nies. For its part, Sany plans to scale up rapidly to achieve Concrete Excavators Mechanical these numbers as soon as 2012. To accomplish this, Sany is Machinery Scrapers building plants in overseas markets with great potential such Environmental as Indonesia, North African countries and South Africa, a stra- Crane Machinery Machinery Compaction tegic step that will open new channels to market its prod- Road and Piling ucts. Zoomlion is following similar tactics and expanding Machinery Others quickly to acquire brands, technology and distribution100 6% channels, with a keen focus on emerging markets. Similarly, 7% 9% 4% XCMG recently announced the acquisition of two European 12% 3% suppliers, marking its first international acquisitions aimed 20% 3%80 12% at boosting its value chain and extending its technological 10% capabilities in key component production.60 12% 37% China’s three leading construction machinery manufacturers seem well placed to achieve these goals, yet each of them still40 have much potential to improve their technology. To be sure, 69% to enhance their competitive position, Chinese machinery manufacturers are constantly upgrading their technological20 52% 44% capabilities and focusing on technical innovation, but they still have some ground to cover before they start taking on the world leaders. That said, these firms have demonstrated 0 a remarkable ability to incorporate technology and quickly XCMG Sany ZoomlionSource: CCMA; Bloomberg adapt. As a case in point, Sany invented the first 66-metre truck-mounted concrete pump in the world.player to set up factories in India and the US, where it recentlyopened a USD 60 million assembly plant which in August Chinese construction machinery manufacturers are set to2011 started assembling trucks mounted with concrete- become some of the largest beneficiaries of the infrastruc-pumping equipment. XCMG, Chinas largest construction ture boom in emerging markets where competitive prices aremachinery maker, has opted to cooperate with foreign capital key, and with improving technology and evolving interna-and foster close partnerships with overseas dealers. The tional expansion plans, the likes of XCMG, Sany and Zoomliongroup has already established close cooperation with nearly are gearing up for bigger challenges.100 dealers who help sell its products all over the world, butmost notably in emerging markets such as Indonesia, Brazil Ankit Khaitan, Consultantand Russia. ankitkhaitan@thebeijingaxis.comAmong these key differences, there is one commonalitythat exists in the internationalisation strategy of all three ofChina’s major machinery manufacturers - they have beenaggressively marketing their product overseas though newdistributing channels with a core focus on emerging markets,namely Brazil, Russia, India and Africa. Emerging markets aresweet spots for these companies because it is difficult toaccess developed US and European markets where dominantand established players, such as Caterpillar, emphasise theirvalue-added after sales services. Emerging markets, on theother hand, are more price sensitive, and prices of machineryequipment from Chinese manufactures are typically 15-20%below foreign competitors, providing buyers in emergingmarkets with a considerable overall cost saving. Anotherimportant reason is that, like China, these countries areexperiencing a similar urbanisation process and are conse-quently investing a lot towards infrastructure improvement,providing Chinese enterprises a potential market to tap into.Reaching higher: The years aheadXCMG, Zoomlion and Sany have revealed their sales targetsfor the 12th Five Year Plan period (2011-15). XCMG andZoomlion aim to achieve USD 20 billion each in sales by 201516 The Beijing Axis

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The China Analyst FeaturesThe New Scramble For Africa: Emerging Powers on theEmerging ContinentThe BRICS of China, India, Brazil, Russia and South Africa – and China in particular – are at the forefrontof a new scramble for projects and deals in Africa. Each one brings to the continent its own distinct busi-ness nous, yet collectively the BRICS are instrumental in transforming Africa’s business fortunes. Leavingaside China’s dominant position in Africa, this article focuses on the activities of the other BRICS nationson the continent. By guest contributor Charlie PistoriusT he global balance of power is shifting into the hands BRICS Trade Profile (As a % of Country Total, 2009) of the rapidly industrialising emerging growth giants, 60 especially the BRICS block of economies: Brazil, Russia,India, China and South Africa. The BRICs (excluding South 50Africa as the smallest strategic member) are today fuelling Africathe global recovery with their huge demand requirements, 40 Developed Economieshigh growth multiples and vast deployment of capital.Explosive population growth and rapid urbanisation in 30 Emerging Economiesthese economies have engendered a vital demand for food South, Eastand energy security, and an urgent need for capital stock 20 & Southeast Asiabuild-up, in particular transport, power, communication and Latin Americahousing infrastructure. In Africa the emerging BRICS have 10latched onto China’s coattails in seeking commercial favour 0and opportunity, although each with their own individual China India Brazil Russia SA BRICSmodus operandi and business methodology. Yet they all have Source: UNCTAD Statistical Yearbook 2010the same purpose, namely to secure a foothold in Africa’svast and rich resource offerings. But the story is not merely is impressive. Between 2000 to year-end 2009, India origi-one described by an exchange of outgoing raw materials in nated the majority of deals, 812 in all; China managed 450;return for inbound capital, tools and cheap final products. As Russian firms undertook 436 deals; South Africa at least 237;the floodgates for broader and more ingrained partnerships and Brazil 190. For the year 2010 up to the end of May 2011,are opening, so too will Africa’s story change in its balance of China led the way by undertaking 195 new deals, followedtrade and investment. by India with 183, Russia 102, Brazil 51, and South Africa 40, according to UNCTAD’s World Investment Report (2011).The BRICS Way The trade relationship between the emerging economiesThe large BRICS economies (as well as other emerging players and Africa is, however, the one that best defines the scalesuch as South Korea and Turkey), all have the same compara- of their overall commitment and interest on the continent.tive advantage in their outward engagement: they are able Collective bilateral trade between the BRICS and Africa forto access large pools of finance and cash reserves (mostly instance ballooned from a mere USD 24.3 billion in 2000through state incentives and subsidised support), and they to USD 193.4 billion in 2010 - though Chinas share of USDalso uphold a version of the Developmental State Model that 123.3 billion alone makes up 64% of the total. Of Africa’s totalencourages a statist approach to business - explicit in the trade volume with the world, the BRICS collectively accountcase of China - that enables private enterprise and mercan- for an impressive 22%, which hardly measured 10% in 2000.tile commerce, rather than perpetuating poor management Shockingly however, South Africa’s intra-Africa trade onlyapproaches which translates into an unproductive utilisation measured 2.3% of Africa’s global total in 2009, dropping toof strategic assets. 1.5% in 2010 (see chart on next page).As a bloc, the BRICS global outward FDI stock build-up Brazil: Not only Lusophone specialistsincreased substantially from USD 134 billion in 2000 to overUSD 1,085 billion in 2010 – only a small smattering of this To date Brazil’s multinational firms have mostly been involvedwas, however, destined for Africa (roughly 2.7%). Developed in Africa’s construction and upstream exploration andeconomies still provide the largest vested interest of capital energy production. The likes of Petrobras, which is one ofstock in Africa – roughly 40% originates from the European the global oil and gas leaders with 2009 revenues of overeconomies. Since 2000, the majority of BRICS outward invest- USD 118 billion, has staked increasing claims in Africa, espe-ments in Africa has been in cross-border M&A. Considered cially in Nigeria, Senegal and Angola, while also maintainingpurely by this measure, the number of BRICS engagements exploration activity in Mozambique and Tanzania. Brazilian18 The Beijing Axis

Features Features The China AnalystRelative Share of Country/Bloc’s Bilateral Trade with Africa state-aligned enterprises to acquire resource assets. As a(As a % of Africa’s global total, 2000 vs. 2009) country it consumed effectively the same barrels per day of oil60 as all of Africa did in 2009, just edging out Brazil. Russian firms retain a skilled advantage in the extractive industries, and it is therefore expected that their recalibrated African focus will be50 grounded in fixed investments and M&A activity, rather than trade. Invested stock in Africa will very likely more than triple from current levels – roughly USD 5 billion.40 2000 (Total: USD 246.4 billion) The enterprises that have shown most interest in Africa’s 2009 (Total: USD 673.3 billion) mineral resource sector to date has been the likes of Norilsk30 Nickel (the world’s largest nickel and palladium producer, as well as one of the largest in platinum and copper); Alrosa, which has diamond interests in Angola (where it is building20 a hydroelectric dam backed by a concession to explore for offshore oil and gas), Namibia (where it too is building an10 electric plant) and the DRC; UC RusAl (the worlds largest aluminium producer) has revenue capacity in Angola, Guinea, Nigeria, South Africa and Botswana; and Severstal, which is 0 preying heavily on West African gold deposits, already under- EU BRICS Emer- China US India South Brazil South Turkey Russia UAE Indo- took a USD 2.5 billion iron ore mining project in Liberia. ging Korea Africa nesia PartnersSource: Africa Economic Outlook 2011 In the energy sector, Russia’s state-owned oil and gas major Gazprom (with 2009 revenues over USD 141 billion) and Lukoilcompanies hold a comparative advantage in Lusophone (with revenues exceeding USD 86 billion), have both soughtcountries Angola and Mozambique. Mining giant Vale, the interests in Namibia’s gas fields, Tanzania’s offshore blocks,world’s second-largest diversified mining company, has an and West African deep-water exploration and midstreamover USD 150 billion market capitalisation and wide foot- activity (Gazprom for instance invested in a production-print in Africa – extracting coal and iron ore while exploring sharing agreement with Nigerian State Oil Company worthuntapped copper, nickel, platinum and diamond deposits USD 2.5 billion). Renaissance Capital, a leading Russianin the frontier economies of Mozambique, Angola, Guinea, investment and equity firm, entered Sub-Saharan Africa inLiberia and Zambia. 2006, and has since organised a number of Africa’s largest IPOs and owns 25% of Nigerias Ecobank, with branches inBrazil’s African focus has shifted in line with other emerging 11 African countries. Renaissance also established a USD 1giants, though it still trails far behind China. In the seven billion pure Africa Fund and deployed USD 500 million intoyears to 2009, Brazil invested in 25 Greenfield projects. Vale, Africa thus far. To date it has offices in South Africa, Nigeria,for instance, is planning to invest USD 15-20 billion in Africa Kenya, Zimbabwe, Zambia and Ghana, and now also offersover the next five years , and is leading the way forward for their gambit of sophisticated financial services in Rwanda.Brazilian interests in Africa. Petrobras has already deployedUSD 2 billion into Africa, also putting aside a further USD India: Versatile player3 billion for deepwater exploration off Nigeria and Angola.Brazil’s own Odebrecht Mining Services is its preferred India is a vital partner in Africa, and shares close cultural links,contractor for operations in Africa – which in 2009 accounted especially in the eastern part of the continent. India’s tradefor over USD 2.4 billion in revenues, or 10% of its total earn- basket with Africa is broad and rising rapidly. From close toings. Brazil currently only sports a low level of bilateral trade, USD 40 billion in 2010, bilateral trade in 2011 is expectedhovering close to the USD 20 billion mark in 2010. It is widely to exceed the USD 50 billion mark and more than doubleestimated that Brazil’s trade will be hiked up by more than by 2015. Duty free trade deals have been signed with 34 of100% by 2015, reaching USD 45 billion. Its investment stock Africa’s least developed countries. Liberalisation of India’sin Africa will also be upped from between USD 8-12 billion in foreign exchange market has opened up the floodgates for2010 (only an approximate 7% of its total global stock), rising direct investments abroad, deploying most of its capital intogradually to USD 15 billion by 2015. developed (rather than emerging) markets. Cumulatively, India’s invested stock in Africa is currently estimated to beRussia: Energy giant over USD 15 billion, more than China’s. Multinational companies such as the diversified industrial giant Tata, a leadingRussian firms with the largest foothold in Africa have been player in the steel and automotive sector (among many), havefocused on energy and mineral resource acquisitions. Growing made substantial acquisitions globally and in Africa. The end-global energy concerns and profit-seeking motives have destinations in Africa that takes the bulk of India’s interest arefueled Russia’s geo-strategic positioning in resources. Russia mostly in the COMESA1 block, as well as in Nigeria.has leveraged its Cold War relations with Africa and pursuedproactive government incentives to urge its champion 1 The Common Market for Eastern and Southern Africa, with 20 members on the continent. The Beijing Axis 19

The China Analyst FeaturesIndia in Africa is characterised by a diverse engagement, Africas Trade Coupling with BRICS (As % of Country’sunlike Russia and Brazil, and perhaps even more than China. Global Total, 1995 vs. 2005 vs. 2009)Indian interests in Africa have created a particular niche in 15telecoms, pharmaceuticals, hospitality, automotive and thebanking sector. Unlike the other BRICS, and in stark contrast 12to China’s engagement model, the Indian multinationalenterprises that are most active in Africa are private sectorones, with the Indian government offering strategic support, 9yet not driving the engagement. In mining and energy, aswell as the aforementioned sectors, Indian firms have signedlarge deals in more than 30 African countries – from infra- 1995 6structure and pharmaceutical projects in Senegal, to power, 2005finance and automotive projects in Ghana, and automotive, 2009energy and power infrastructure in Sudan, to the full spec- 3trum of sectoral engagement in Kenya, South Africa, Nigeria,Zambia, Uganda, Tanzania, and in North Africa. 0 China India Brazil Russia SAIndia’s mineral companies have been proactive in Africa. Source: UNCTAD Statistical Yearbook 2010Vendanta has signed multibillion dollar deals to investin Liberia’s iron ore, also directing over USD 1 billion into complimentary economic structure and geographic prox-Zambia’s Copperbelt, and hence retains a leading position in imity which allows it to tap in to the multilateral tradeAfrica’s zinc and cobalt production. Tata too has spent billions agreements such as the Southern African Developmentin Cote d’Ivoire, Guinea and Liberia acquiring iron ore, and in Community (SADEC) or the Common Market for Eastern andAngola it has explored diamond deposits. Other Indian enter- Southern Africa (COMESA), while also playing an active roleprises are acquiring uranium from Namibia, while investin the continent’s politics by retaining a major voting sharements in Mozambique encompass coal, copper and iron ore. in the African Development Bank, while in its capacity asState-owned National Mineral Development Corp. (NMDC) African Union stalwart, it pushes initiatives such as the Newhas a market capitalisation of over USD 40 billion, and is Partnership for African Development (NEPAD).eager to make inroads across Africa’s commodity sector. South Africa’s intra-Africa trade has fluctuated betweenIn the oil and gas space, India’s ONGC Videsh Ltd. has made USD 14 and 15 billion over the past few years, accountinga mark in Sudan where it opened the Khartoum-Port Sudan for roughly 13% of its total trade with the continent in 2009,petroleum pipeline back in 2005; while another major, up from a 10% share in 2005 when its intra-African tradethe Indian Oil Corp. (with nearly USD 63 billion in 2009 with Africa was USD 9.7 billion. Yet this number was downrevenue), and Reliance Industry at half the size, has pegged significantly to a decade low in 2010, to only 8.7% of Souththe African market as an untapped frontier for exploration. Africa’s global total - which is striking if one considers SouthIn the power sector, National Thermal Power Corp. (NTPC), Africa’s total trade grew 41% y-o-y in 2010 to reach newIndia’s largest power company, has secured over 3 million highs, though its intra-Africa share has dwindled. To put thistonnes per annum of liquefied natural gas (LNG) in Nigeria in in context, the other BRICS’ trade profile with Africa is led byexchange for building power plants. In the telecoms space, India with 6.7% of its global bilateral trade in Africa, Brazila record-breaking USD 10.7 billion acquisition was made by with 6.1%, China’s 4.1% and Russia’s small 1.8%. South Africa’sIndia’s Bharti Airtel (India’s largest domestic telecoms firm) of total bilateral trade contributes roughly 40% of its entire GDP,Kuwaiti Zain Africa telecommunications operations, thereby far more than Brazil’s comparative 14%, Russia’s 30%, andbecoming the world’s seventh-largest telecoms company, India’s 27%, but still less than China’s 50%.and giving it a wide pan-African footprint. Subsequent to thedeal, Bharti said it would invest an additional USD 1 billion to Roughly one-fifth of Africa’s active FDI stock sits in Southexpand its African operations in 2011. Africa, and nearly 90% of all African portfolio flows go through the Johannesburg Stock Exchange – making SouthThe objectives of India in Africa are, however, similar to Africa a hugely important financial intermediary and conduit,China’s: being highly diversified across all sectors of the with the role of deepening growth in Africa’s equity capitalAfrican economy, and with a very long investment time- and investment. South Africa is also the largest emergingframe. Both countries are similarly seeking to secure energy market investor of FDI in Africa, accounting for roughly 17%resources and land for agribusiness and food production, and of Africa’s internal investment stock, and over 70% of intra-for India, Sub-Saharan Africa is seen as a new frontier market Africa flows, with USD 2.6 billion per year (which is nearlyfor its skilled workers, especially in the service sectors where double China’s official FDI flows to Africa). The share of stockIndia Inc. holds a global comparative advantage. by South African enterprises has increased from a mere 5% of Africa’s total to about 22% currently.South Africa: Gateway to the continent While SSA’s total bilateral trade with China is four times theSouth Africa has a relative advantage in SSA in sharing a size of South Africa’s share, the latter’s relationship is deemed20 The Beijing Axis

Features Features The China Analystmore complimentary in nature, with technologically-intensive Africas Trade Coupling with BRICS (Bilateral, USD bn)products and managerial know-how its greatest exports into 150the continent. Yet South Africa’s import basket is no different 1995than any other actor. It is dominated by mineral resources andenergy-related products, mostly oil (76% of total imports). 120 2000 2005A number of SA Inc. players have been able to profit andestablish a solid footprint in Africa. Local telecommunica- 90 2009tions leader MTN has arguably been one of the only compa- 2010nies from South Africa to break into the difficult FrancophileAfrican marketplace. In all, MTN has been able to tap into the 60continent’s half a billion-plus mobile subscriber base, aidingits USD 11 billion 2010 revenues with operations throughout13 non-domestic African countries. 30Financial services group Standard Bank is the continent’slargest banking group by assets, with 2010 revenues of USD16.6 billion via 17 African markets outside South Africa. Their 0 China India Brazil Russia SAnon-domestic African exposure grew to almost 10% of its Source: UNCTAD Statistical Yearbook 2010portfolio given the stronger growth potential compared to itsown saturated home market. Multinational brewer SAB Miller The BRICS countries, however, still lack a coherent engage-has a strong presence in more than 10 African countries’ beer ment strategy in Africa, without which there is great risk inand beverage industries. Logistics major Imperial Holdings crowding out local investment and sector competition andis facilitating capital deployment in huge projects in central, exacerbating the resource curse that has plagued the conti-east and southern Africa and amassed nearly USD 6.8 billion nent for so long. The commodity super cycle and changingof revenues in 2010. Leading South African construction fortunes of the developing world means a greater depend-and engineering company Aveng recorded almost USD 4.4 ence on food and resource security from Africa. The absencebillion in revenues in 2010 with operations in over 15 African of a specific BRICS Way leaves bilateral self-interest of thecountries. On the mining front, South African majors Anglo respective parties in a far greater seat of power, and henceAmerican, AngloGold Ashanti and De Beers collectively oper- will not translate into clear win-win outcomes for Africans.ated mines in 11 African countries, while mid-cap companies Unless a synchronised BRICS Way is sought, Africa will againsuch as African Rainbow Minerals (with a vastly diversified face a ‘race to the bottom’ with inequitable distribution ofresource portfolio, mainly in South Africa) and copper and wealth and opportunities.cobalt miner Metorex (recently acquired by Chinese minerJinchuan for USD 1.32 billion) are both hungry to expand into The BRICS’ stepped up involvement in Africa has, however,Africa, and are already owners of lucrative assets in Namibia, unleashed African competitiveness in the global commerceZambia and the DRC. space, brought to the fore new models for Africa’s continued development, opened up the taps to source financing forConclusion projects, and has hence brought an invaluable pool of technical expertise and know-how with it. Practical cooperationAfrica’s new coupling with China and the emerging BRICS with the BRICS partners is bound to address the fragmentedeconomies is the driving force of growth on the continent, lack of regional integration, and given the commodity priceand those African economies that align with the development booms, a reciprocal spillover effect is set to offer Africans aof the emerging markets is set to meet great success. Africa new lease on life.itself is increasingly looking to adopt the DevelopmentalState as a growth model, taking from each of the BRICS a Chinas engagement strategy in Africa has paradoxicallytenet that suits their own needs. Yet notably this economic ramped up interest from other emerging players, and tradi-development model is not aligned to a Western mode of free- tional partners alike. Not faltering in the midst of the globalmarket capitalism, instead one with both statist and socialist financial crisis, Chinese capital and physical efforts in Africa isdevelopmental pillars. It is perfectly evident that China and constantly being stepped. Whether others are threatened bythe rest of the BRICS are in Africa to stay, their vested time China gaining increasing market share and favour in Africa,horizon is seriously long-term, in excess of a hundred years, or merely waking up to Africa’s growing status as a resourcetheir ability to stomach risky environments and projects and consumer destination.... the simple fact is that it is Africa’shas unleashed dormant or flailing assets, opening up new time, and more competition and enabling commercial part-markets and opportunities. Their method of development nerships will leave Africans with greater hope, economicassistance has circumvented the previous resource curse means of production, and a tangible grasp on prosperity.fears and shown African stakeholders the impact of (espe-cially) Chinese capital and means - building essential infra- Charlie Pistorius, Emerging and Frontier Market Analyststructure to become the continent’s most enabling actor ofits socioeconomic development. Charlie Pistorius is a research analyst with Frontier Advisory (Pty) Ltd. The Beijing Axis 21

The China Analyst MacroeconomyMacroeconomic Monitor: Chinese Inflation - One of theBiggest Fears of 2011Inflation in China reached a peak of 6.5% in July, before dipping slightly to 6.2% in August - possiblyheralding a receding of high inflation. Yet high inflation remains a key theme in 2011, and this editionlooks at the Chinese government’s monetary and fiscal policy options for fighting a scourge for whichChinas central planners have a legendary fear. By Dirk Kotze China Consumer Price Index (Jan 2008–Aug 2011)W ith around six months to go before the official appointment of China’s next generation of leaders, 120 stubbornly high inflation is high on the nationalagenda in 2011. Inflation has a somewhat mystified and over-blown role in the Chinese body politic. It is an article of faith 110among many China watchers that inflation has, throughoutChinese history, been the cause of many a revolution ordynastic change, and that this is what causes the CommunistParty’s diligent attention to the issue. It is true that infla- 100tion is generally a scourge without which any governmentcan do, but by the history of social upheavals around theworld, China’s current inflation is tame by comparison. More 90concerning is that, in a world of macroeconomic instabilityand uncertainty, the persistence of inflation ties the govern-ment’s hands in employing other policy tools at a time whenthe latter are sorely needed. 80 J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A 08 09 10 11Problematic pork prices Source: National Bureau of Statistics of China. Note: Previous year = 100.In July, China’s Consumer Price Index (CPI, the main inflation labour from the countryside runs out) and rising electricityindicator), reached a high of 6.5% compared to the same prices.time last year (see chart to the right), with the main culpritbeing rising food prices. Foodstuffs comprise around 30% Consumers rarely see inflation in terms of averages, butof China’s National Bureau of Statistics’ (NBS) CPI calcula- rather in a biased way through exorbitant and very visibletion (see chart on the following page), and the 14.8% rise increases in the prices of certain items. As such, consumersin the selected basket of food items in July was of particular of pork (i.e. almost all Chinese people) may feel that the porkconcern for Chinese policy makers. Firstly, food is a basic price represents all price rises, while the temporary spike instaple for survival, so whereas the poor can opt out of buying vegetable prices may be seen as everlasting, not only duringexpensive movie tickets, they cannot opt out of buying food floods. This is the source of widespread scepticism of the offi-– there is no escape from this type of inflation. Secondly, as cial inflation figures, and the problem of perception is thethe poor typically buy food with small mark-ups, inflation most serious political fallout of inflation.is passed on to the poorer consumer, while those retailersselling to the rich can generally absorb inflation. Food infla- Taking recourse to interest ratestion thus amounts to a regressive tax on the entire popula-tion, a development that is all the more concerning in the For Chinas central planners, inflation presents a similarlycontext of widening income disparities. restricting ‘no way out’ scenario. Chinas policy makers had it good for a long time, able to tweak and cajole an obedientAs with the inflationary spike that occurred in China in 2007, economy. In the tumult of the post-2008 world, however,the biggest culprit in July’s CPI figures was again the price of there is considerably less certainty, and even less predict-pork, China’s staple meat. According to the NBS, the July price ability. As a tool for stimulating the economy, the loweringwas 56.7% higher than a year before, contributing by most of interest rates must for the time being be put on the back-estimates some 2 to 3 percentage points to CPI. Vegetable burner, a reality that dawns at a very inauspicious time, givenprices also saw a spike over the last year, but these were more the expiry of QE2 in the US, the drift in the Euro sovereignseasonal, as summer floods severely hampered harvests debt crisis, and not to mention the ending of China’s ownacross southern and eastern China. China also suffers from post-crisis stimulus efforts. Furthermore, the Peoples Bankstructural inflationary pressures, such as shrinking excess of China has not only been restrained from lowering interestcapacity, rising wages brought about by the emergence of rates, but has actually raised them three times already inthe Lewisian Turning Point (the point at which excess cheap 2011, and could possibly raise them again before the end22 The Beijing Axis

Macroeconomy Features Features The China Analystof the year. Reserve requirement ratios (RRR) have also been China CPI Weighting (%, Q1 2011)increased nine times since October 2010, without any effect Tobacco & Liquorin stalling rising CPI. 3.4% Fruit &Raising the reserve ratio for banks causes the latter to restrict Vegetables Residence 4.7% 17.4%lending by effectively shrinking their loanable funds. This Householdrestricts liquidity in the economy, but one of the major causes 5.6%of inflation in China is the negative real interest rates that Meat & Poultryhave existed since February 2010. It makes more sense to 7.0%invest spare cash than to let it languish in low interest bankaccounts, while persistently rising inflation increases negative Clothing Other Foodreal interest rates. This in turn causes more liquidity to enter 8.6% 16.0%the economy, thereby raising inflation and so completing avicious circle. This problem can only be addressed by raisingdeposit rates through raising interest rates. Healthcare 9.6% Transport & LeisureRoom to maneuvre 14.0% Communication 10.4%The obvious question is how the Chinese government canmaintain robust and stable economic growth with so little Source: Nomura; The Beijing Axis Analysisroom to manoeuvre on monetary policy. Yet the situation isnot so bleak after all, given that Beijing actually does have US debt, leaving the US Treasury no choice but to stimulatesufficient flexibility on fiscal policy. A good example of this growth by buying its own bonds. This will, as in the case ofis the building of 10 million subsidised housing units before QE1 and QE2, cause a rise in commodity prices, a surge ofthe end of the year. Part of the planned building of 36 million speculative capital inflow into China and increased infla-units included in the 12th Five Year Plan (2011-2015), the USD tionary pressure. At the same time, if a serious slowdown in111 billion budgeted for these first 10 million units is certain the rest of the world should occur, the Chinese governmentto serve as a major guarantor of economic growth in Q3 2011 now has significantly less leeway to stimulate itself out of aand beyond. A tax cut for middle-income earners, effective 1 slump.September, is also likely to have a positive effect on domesticconsumption. Existing rules on compulsory deposits for resi- Ironically, as the rest of the world looks toward China as adential purchases (30% deposit for first home, 40% deposit source of economic stability, the Chinese economy is argu-for second and further homes) could be relaxed, given that ably more vulnerable to the vagaries of economic policy-the property bubble is showing signs of deflating. The value making in Europe and the US. In China, inflation and theof homes sold in July was RMB 348.7 billion (USD 65.9 billion), reduced efficacy of interest rates and other monetary toolscompared with RMB 499.2 billion in June, a drop of 30% may be a source of frustration to policy makers, but theirmonth-on-month. hands are by no means tied behind their backs. Yet a collapse in economic confidence in developed economies may causeIn fact, several other macroeconomic realities are also playing the Chinese government to have to roll up its sleeves higher,out in favour of Chinas policy makers. A recent drop in and that is when Chinese inflation will become everyone‘scommodity prices will reduce imported inflation, while the problem.ongoing appreciation of the renminbi will reduce inflationarypressure from the trade surplus. Nevertheless, adjustments of Luckily for China, the problem may be receding, as illustratedcontrolled prices are usually slow in China, and the National by the drop in inflation in August. The efforts of the govern-Development and Reform Commission (NDRC) recently ment to slow the economy will likely see restrained growth inscoffed at suggestions that it should lower fuel prices after prices for the rest of 2011. Yet inflation has been a recurringa slump in oil prices. The suggested hike in interest rates to problem over the last few decades in China, and the dip indampen inflation may also come rather late, as utterances August may yet be more of a temporary respite.by officials have hinted that the Chinese government aimsto wait out the current unstable global macroeconomic Dirk Kotze, Director & General Manager: Africasituation. dirk@thebeijingaxis.comWorst threats without, not withinAt this point, the gravest threats to China’s internal macro-economic stability are external. The adoption of a flawed‘deal’ by US lawmakers to raise the debt ceiling in exchangefor cuts in expenditure has made a third round of quantitativeeasing inevitable. The S&P credit downgrade that followedthe deal will see global markets more reticent to invest in The Beijing Axis 23

The China Analyst NewsChina Business News HighlightsInflation has remained a thorny issue in China, even amid intense monetary tightening measures. Anuncertain global economic outlook due to the ongoing debt crisis in the Euro zone and the recent down-grade of the US debt rating, along with a large scale power crisis during the busy summer season arethreatening to slow Chinas growth in the second half of 2011. However, looking to diversify its exportdestinations and build upon its status as the world’s second-largest economy, China has continued toincrease its footprint around the world, with Premier Wen Jiabao signing USD 15 billion worth of dealsin Germany in June along with an additional USD 4.3 billion worth in the UK.HeadlinesBusiness and diplomacy Large-scale power shortagesIn April, Spanish Prime Minister Jose Luis Rodriguez China has thus far managed to avoid a severe power crisis,Zapatero visited China and announced that Spanish and as local governments have been proactive in passing restric-Chinese enterprises had signed eight deals worth USD 1.44 tions to reduce strain on power grid systems due to a steepbillion. Agreements mainly cover the finance, wind energy, rise in power demand during the peak summer season,helicopter and valve manufacturing industries, with China with China thus far witnessing an increase of 12-14% y-o-y.also expressing it would continue to buy Spain’s government Earlier in the year, officials had stated that China was on thedebt. verge of its worst electricity shortages in years, a capacity gap of around 30-40 gigawatts, due to soaring coal pricesOn 28 June, trade deals worth USD 4.3 billion, including a and severe droughts which had significantly reduced ChinasUSD 2.46 billion agreement on building a clean coal plant hydropower capabilities, straining the country’s power grids.between China Energy Conservation and EnvironmentalProtection Group and British Seamwell International Ltd, were Power shortage fears and related power restrictions are somesigned by Premier Wen Jiaobao and British Prime Minister of the factors which have kept China’s official PurchasingDavid Cameron. The two leaders signed 12 agreements in Manager’s Index (PMI) hovering around the 50 mark or ontotal and expressed their desire to double bilateral trade to the verge of contraction. In July, the figure was 50.7.USD 100 billion by 2015. Chinas nouveau richeWen Jiaobao then went on to Germany, where he andGerman Chancellor Angela Markel signed deals worth more In the beginning of June, it was reported that China nowthan USD 15 billion, with plans to double bilateral trade to boasts more than one million millionaires, moving ChinaUSD 284 billion. into third place among countries worldwide with the most millionaire households, trailing only Japan and the US.President Hu Jintao had earlier paid a visit to Ukraine in whichhe and Ukrainian President Viktor Yanukovich signed USD It was also reported in June that China is considering reducing3.5 billion worth of deals covering the industrial, energy, import tariffs on luxury goods, which would further boostinfrastructure and agricultural sectors. consumption among this fast growing segment. China’s middle class ranks also continue to swell with China Mobile,Creeping inflation the worlds largest mobile carrier, reporting in April that its customer base had exceeded 600 million.The most important indicator in China’s economy remainsthe Consumer Price Index (CPI), which in July reached 6.5%, In August, China also became the world’s largest PC market,its highest rate in over three years. In July, China experienced surpassing the US, with 18.5 million units sold in China inits biggest monthly trade surplus since January 2009, fuelled Q2 2011, compared with 17.8 million units sold in the US,by record exports of USD 175.1 billion. further signalling Chinese consumers’ relentless appetite for electronic products.Given the large trade surplus China registered in July, Chinascurrency, the renminbi, had continued to scale new highs New construction marvelsagainst the US dollar, moving past 6.4 to the dollar in Augustfor the first time in 17 years. Chinas currency will likely In June, Beijing published a timetable for the construction ofcontinue its appreciation into the second half of 2011. The a new airport, with the inaugural flight expected to take offChinese currency has risen 6.8% against the US dollar since in October 2017. In July, China also opened the Jiaozhou BayJune 2010, when China ended the renminbis de-facto peg Bridge, the worlds longest cross-sea bridge at 42 km, whichto the dollar. links Chinas eastern port city of Qingdao to Huangdao island.24 The Beijing Axis

News The China AnalystSector NewsEnergyIn April, a Chinese official acknowledged that China is on theverge of overtaking the US to become the worlds biggestconsumer of energy. To keep up with demand, Chinasnatural gas imports more than doubled to 6.3 billion cubicmeters in Q1 2011 from a year earlier. China also plans toinvest RMB 400 billion (USD 62.54 billion) in the constructionof four hydroelectric dams to boost the share of non-fossilfuels in national energy consumption. Wind power is alsoa part of this strategy as China will boost its offshore windpower installed capacity to five gigawatts to form a completetechnological and industrial chain. Higher still: The Consumer Price Index reached 6.5% in China in July 2011, the highest rate in over three years (Reuters)Chinese companies going global The Industrial & Commercial Bank of China announced inIn April, Australian renewable energy company CBD Energy August that it was buying an 80% stake in South AfricasLtd announced it had finalised a joint venture with China Standard Bank Ltd.’s Argentine unit.Datang Renewable Power Co., Chinas second-largest wind-power producer by capacity, and solar equipment maker Also in August, Heilongjiang Beidahuang Nongken GroupBaodin Tianwei Baobian Electric Co., to develop approxi- Co., China’s biggest agricultural company, announced itsmately USD 6.34 billion worth of wind and solar energy plans to invest USD 1.5 billion to develop farms and expandprojects in Australia. The new entity, called AusChina Energy a port in Argentina’s southern region to help ensure foodGroup, seeks to take advantage of equipment and funding supplies for 20 years.from the Chinese enterprises to lower overall project costs,which will enable their wind energy assets to reach grid price FDI in Chinaparity with coal-fired power within three years. In August, Coca-Cola announced plans to invest an additionalIn April, Shanghai Electric Group Co. announced it had won a USD 4 billion in China over the next three years starting fromUSD 1.1 billion contract to expand a natural gas-fired power 2012. The additional investment will be used to expand theplant currently under construction in Zubaidiyeh, south- companys product lines, infrastructure and distributioneast of Baghdad. The company also announced in April that systems as well as invest in cold drinks equipment.they had signed an agreement with KSK Energy of India toexport 125 units of 2 MW wind turbines to India, which marks In July, Nestle, the world’s largest food company, offeredShanghai Electric’s first major international wind turbine sale. to buy 60% of Chinese candy and pastries group Hsu FuThe company expects India to become its largest export Chi International for about USD 1.7 billion, a move aimedmarket, absorbing half its exports including wind turbines at helping it achieve its target of 45% of sales coming fromand thermal power units. emerging markets within 10 years.In July, China National Offshore Oil Corp. (CNOOC) agreed to Retailacquire Opti Canada Inc. for USD 2.1 billion in cash and debt,which is expected to strengthen CNOOCs Canadian presence Bailian Group, Chinas largest retailer, aims to expand itsin the oil sands business and increase their reserves. e-commerce platform and open more than 800 outlets across China over the next five years as it seeks to become a FortuneIn July, the Mongolian government announced it had 500 company. Bailian expects to achieve annual revenue ofawarded Shenhua Group Corp Ltd, China’s largest mining RMB 180 billion (USD 28.14 billion) by 2015.company measured by output, with a 40% share in devel-oping Mongolia’s Tavan Tolgoi coalfield, the world’s largest It was reported in August that Apple is currently in talks withuntapped source of coal. The open-pit mine will help China China Mobile, the world’s largest carrier by subscribers, tofurther diversify its energy resources and meet its growing officially introduce the iPhone on the carrier’s home-growndemand for coking coal. TDSCDMA network. A mutually beneficial deal would help Apple meet upwardly mobile Chinese consumers’ growingIt was reported in August that Chinas state-owned Bright demands for its products, while helping China Mobile attractFood Group agreed to buy a 75% stake in Australian branded more 3G subscribers. Although it seems unlikely that Applefood business Manassen Foods, giving it an enterprise value will meet its target of opening 25 stores in the mainland byof USD 516 million. The deal marks Bright Food’s largest over- 2012, its four existing stores are the most heavily traffickedseas acquisition, as it looks to expand its dairy, sugar, wine, Apple stores in the world.food industry and agriculture businesses overseas. The Beijing Axis 25

The China Analyst TradeChina Trade Roundup: Chinas Trade in ServicesIn this edition of China Trade Roundup we review the major trends of China’s trade performance in thefirst eight months of 2011, and we also take a closer look at the major trends in Chinas trade in services.Chinas Trade Profile in Jan-Aug 2011Chinas Total Monthly Imports/Exports (USD bn, 2009-Aug 2011) Signs of a Gradual Receding of Chinas Export Advantage180 Exports160 According to Chinas General Administration of Customs Imports140 (GAC), in the first eight months of 2011, China’s total foreign120 trade in terms of value topped USD 2.35 trillion, which was100 25.4% higher year-on-year. Exports were up by 23.6% to USD 1,222.63 billion, while imports increased by 27.5% to USD 80 1,129.90 billion. Chinas trade surplus in the first eight months 60 of 2011 decreased 10.8% y-o-y to USD 92.73 billion. 40 20 In August, exports and imports collectively reached USD 0 328.87 billion, up 27.1% year-on-year. Imports were up by J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A 30.2% year-on-year and hit a record monthly high of USD 09 10 11Source: China Customs; The Beijing Axis Analysis 155.56 billion in the same month, while exports reached USD 173.32 billion, up 24.5%. Chinas Monthly Trade y-o-y Growth Rates (%, 2009-Aug 2011) In August, China recorded a trade surplus of USD 17.75 billion, 90 down from the USD 31.48 billion posted in July, illustrating 80 Exports 70 that China is seeking more balanced trade. 60 Imports 50 In the first eight months of 2011, Chinas ordinary trade 40 reached USD 1,242.69 billion, up 32.1% y-o-y (see chart 30 20 below). Exports reached USD 592.61 billion, up 30.5% year- 10 on-year, higher than the 23.6% growth rate of total exports, 0 while imports reached USD 650.02 billion, up 33.7% year--10 on-year, higher than the 27.5% growth rate of total imports.-20-30-40 The trade deficit of ordinary trade reached USD 57.35-50 billion, up 81.3%. The second-largest segment involved the J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A processing and assembling of imported materials, which 09 10 11Source: China Customs; The Beijing Axis Analysis totally reached USD 710.84 billion, up 15.8%.Chinas Trade by Type (USD bn, Jan-Aug 2011) Imports Exports Total Trade (USD mn) As % of Total 1,242.69 52.82% Ordinary trade 710.84 30.22% Processing with imported materials 135.23 5.75% Processing & assembling with materials provided abroad 121.01 5.14% Entrepot trade by bonded area 80.23 3.41% Customs warehousing trade 20.97 0.89% Border trade 11.94 0.51% Equipment or materials invested by foreign-invested enterprises 9.50 0.40% Contracting projects 3.83 0.16% Goods on lease 0.67 0.03% Equipment imported for export processing zones 15.64 0.66% Others800 600 400 200 0 200 400 600Source: China Customs; The Beijing Axis Analysis26 The Beijing Axis

Trade The China AnalystChinas Trade in ServicesRapid Growth, Great Potential Total Chinese Labourers Employed Outside of Mainland China, Top Ten Countries/Regions at End-2009Chinas services trade has experienced rapid growth sincethe early 1990s, increasing from just under USD 10 billion Russiain 1990 to USD 286.7 billion in 2009 (see chart below, left). 21,457 9In 2009, Chinas services trade was the fourth-largest in the Japanworld, behind the US (USD 801 billion), Germany (USD 470 S.Korea 162,556billion), and the UK (USD 400 billion). Chinas services trade 37,220 Algeria Libya UAE 1grew almost uninterruptedly up to 2009, yet in this year the 49,631 24,155 34,067 5global financial crisis contributed to a y-o-y decline of 5.8%, 4 8 10 6 Macao 3the first y-o-y decline since 1998. In 2008, China had experi- 49,999 Saudi Arabiaenced y-o-y growth of 21.4% in its services trade. 20,944 Singapore 2 Angola 83,769Despite growing rapidly for close to three decades, Chinas 7 31,072services trade in 2009 still constituted only 11.5% of Chinastotal trade, the lowest of all the major economies andsubstantially below the world average of 20.4%. In contrast Total Chinese labourers employed overseas, end-2009:to the manufacturing sector, the service sector is character- 777,619 (Top ten countries above account for 66.2%)ised by high added value, a smaller environmental impact Source: MOFCOM; The Beijing Axis Analysis. Note: Countries in North, Central and South America do not feature in the top ten.and a higher potential for job creation. Hence the 12th FiveYear Plan of 2011-2015 placed direct emphasis on increasingthe proportion of the services trade in Chinas total trade, While China has consistently had a negative trade balancewith a projection for Chinas services trade to reach USD 600 for transportation services, 2009 was an anomaly for travelbillion in 2015. services as China had maintained a positive trade balance before 2009. Interestingly, China had a negative trade balanceTrends for construction services until 2001, after which Chinas exports increased substantially to eventually reach USD 5.97 billion inThe chart below illustrates that China has consistently been 2008 before receding again to USD 3.60 billion in 2009.a net importer of services. A large proportion of Chinasservice imports has been devoted to the transportation Destinations of Chinese Services and Overseas Employmentindustry. In 2009, China had a negative trade balance of USD-29.51 billion for transportation services, followed by USD As the map above illustrates, four of the five leading coun--10.64 billion for royalties & license fees services, USD -9.71 tries for Chinese employment outside the mainland arebillion for insurance services, and USD -4.03 billion for travel other Asian countries and regions, namely Japan, Singapore,(see chart below, right). The only industries in which China Macao and South Korea. Such employment includes workerswas a net exporter in 2009 were other business services seconded for contracted projects or for labour service. Three(USD 5.92 billion), consulting (USD 5.21 billion), construc- African countries that are also strong trade and investmenttion services (USD 3.60 billion), computer and information partners of China also feature on the list, namely Algeria,services (USD 3.28 billion), and advertising & media (USD Libya and Angola. In the Middle East, Saudi Arabia and the0.36 billion). United Arab Emirates also feature in the top ten.Chinas Imports and Exports of Services (USD bn, 1999-2009) Chinas Services Trade by Sector (USD bn, 2009) Exports Imports y-o-y growth rate, % (rhs) Exports Exports y-o-y growth rate, % (rhs) Imports Exports y-o-y growth rate, % (rhs) Imports Imports y-o-y growth rate, % (rhs) 50 40180 40 25 40160 10 30 -5140 30 -20120 20 20 -35100 10 -50 80 10 -65 60 0 0 -80 Transportation Royalties & Travel License fees Consulting media audiovisual Other business services Information Services 40 Insurance Communication Financial Advertising, Film, Computer & Construction -10 20 0 -20 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: MOFCOM; The Beijing Axis Analysis Source: MOFCOM; The Beijing Axis Analysis The Beijing Axis 27

The China Analyst ProcurementChina Sourcing Strategy: A New Approach to ProcurementChinas procurement environment is changing under the weight of both old and new trends, andprocurement managers worldwide must adapt to a new opportunity landscape. A different approachis now required that takes advantage of Chinas more sophisticated manufacturing base. By Lilian LucaF or the past 10-15 years, China has been the undisputed Chinas Machinery and Equipment Exports, Share in darling of purchasing managers worldwide. The goods Developed Countries (USD bn, 2000, 2005, 2010) Chinese suppliers export to the EU and US range from 2000 2005 2010apparel and electronics to heavy machinery, all of whichhave grown steadily in the past decades to place China in 150the number one spot for overall exports volume. Exports In 2000, machinery andof machinery and equipment to developed countries have 125 equipment imports from China only accountedparticularly enjoyed rapid growth over the past ten years for 4% of the US’ total(see chart to the right). But since 2006-07, new issues such as 100 machinery and equipment imports,an appreciating currency and increasing labour costs have while in 2010, this figure 75 increased to 26%started to impact both the real and perceived competitive-ness of China as a source of manufactured goods. How should 50a procurement manager re-assess China in the light of theseand other changes? How can they assure that competitive 25advantage is gained by investing in a China sourcing opera-tion? How to benefit from the long-term trends and evolving 0 US Japan Germany Australialandscape of China’s manufacturing base? Source: UN Comtrade; The Beijing Axis AnalysisOld news: Labour and currency issues restrictions such as export bans or export quotas, and also reducing VAT export rebates and in some cases placingLabour cost increases and rapid rises in input prices, mostly export duties on certain commodity-type products, espe-for commodities and energy, were a significant problem for cially energy-intensive goods or low-value-added processedthe Chinese manufacturing industry in the years preceding raw materials.the global financial crisis. The crisis provided a brief respite,with declining exports and capacity utilisation releasing On the other hand, newly emerging or existing sources ofupward pressures on prices and wages. But since early 2010, manufactured goods, such as Vietnam, Thailand, Malaysia,the trend has resumed, with labour costs increasing by 14.3% Indonesia, and the Philippines, have started to look compara-in real terms in 2010, and PPI inflation reaching 5.5%. Not tively better from a labour cost perspective. Governmentsonly is labour becoming more expensive, but there is also a across the region have started implementing some of theshortage of experienced white collar workers, engineers and policies that brought success to China’s leading export manu-managers which are increasingly in high demand. facturing industries, and are offering increasingly attractive investment incentives to manufacturers. ProcurementIn addition, the Chinese government is allowing the gradual managers across the globe are under pressure to evaluateappreciation of the renminbi, with has risen by 21% against these up and coming low-cost countries, and determine thethe US dollar over the past five years. With pressure from best approach for avoiding increasing costs in China andthe US and other developed countries for China to further taking advantage of these opportunities.appreciate its currency, this trend is likely to continue forthe foreseeable future. Other trends that are not new but Estimating the extent of changecontinue to plague the Chinese manufacturing base areintellectual property protection; weakly defined and poorly From our experience in China and our understanding ofimplemented quality management processes; governance China’s manufacturing strengths and weaknesses, none ofissues in supplier selection and management; and incon- the trends described above are surprising. They all fit intosistent product quality. the mould of the long term income rise of China’s population, as well as government policy goals of increasing theNew trends value added of local manufacturing, reducing the country’s energy and raw materials dependency, and shifting theThere are also more recent discernable trends which are growth engine of the economy away from export-orientednegatively affecting the pricing and availability of Chinese manufacturing towards a more balanced portfolio of invest-exports. The government is increasingly implementing trade ments, including boosting local consumption and the service28 The Beijing Axis

Procurement The China Analystexports are forecasted by MEPS to fall by 37% this year, while Annual Average Wages and Labour Productivity* in Chinaseamless tube exports will only see a modest 8% growth. (USD, 2000-10) Labour ProductivityTo better understand how to take advantage of this shiftingChina procurement equation, we need to re-assess the key Average Wages 8,000elements of China’s traditional manufacturing competitive-ness. What began 30 years ago as a cheap labour outsourcing 7,000base for unsophisticated goods has changed dramatically to 6,000become a continent-scale country of widely varying costs,standards, capabilities and business environments. 5,000 USD 5,823 CAGR 16.24% 4,000In terms of labour costs, cost to company per employee is USD 4,270increasing across China due to uneven supply, high demand, 3,000 CAGR 16.95%inflationary pressure, organised labour demands, and 2,000growing social spending requirements. But Western Chinastill offers large pockets of very reasonable wages for skilled 1,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010and semi-skilled labour, and foreign and local manufacturers Source: China National Bureau of Statistics. * Note: Labour productivity=GDP/No. ofin China are increasingly taking advantage of this. While it is employees.true that wages are rising quickly in coastal regions, labourproductivity gains due to investment and technical upgrades, China through the establishment of a China procurementespecially in the machinery industry, have kept pace with the operation? At the same time, how can we move to the nextrise in labour costs (see chart to the right). level and take full advantage of an increasingly sophisticated manufacturing base?Chinese exporters of manufactured goods are also takingadvantage of the massive local market. The demand for new A new approach: Drawing in the supplier and sourcingplants, equipment, infrastructure – often one third to half of goods of increasing complexityworld demand – has created significant economies of scaleand of scope for most of Chinas manufacturing sub-indus- The structural changes in China’s competitiveness across thetries. The competitiveness and innovation in the construc- sourcing spectrum will require procurement managers totion machinery sector, for example, have primarily been shift some of their commodity spending from China to otherdriven by the country’s infrastructure build-up over the past LCCs, while increasing their orders of machinery, complex15-20 years. The same effect has benefited the producers of parts and high-value added consumables in China. In oursteel commodities and structural steel, construction mate- view, the key to taking full advantage of a broader spectrumrials, trucks, barges, electrical equipment, power generation of cost and feature innovation present in the Chinese marketequipment, etc. The infrastructure build-up and procurement is to move from a customer-supplier model of price-baseddemand, initially fuelled by foreign-invested companies and sourcing with strictly dictated specifications and standardswith some assistance from government procurement poli- to a partnership-based approach where the supplier takes ancies, government-approved projects, and the availability active part in the overall project and in specifications design.and low cost of land and capital, have generated a highly This would entail a structured and patient exchange of ideas,competitive and increasingly sophisticated plethora of local a deeper understanding of Chinese manufacturing practicesproducers that are now dominating the Chinese market and and standards, and above all, an open mind from both theaiming for global expansion. customer and the supplier.The size and growth of China’s manufactured goods market Commercial practices would also require modifications.is in effect supporting a self-sustaining cycle of cut-throat Contract management with Chinese suppliers generallycompetition that features innovation, capacity expansion and relies less on contract enforcement and more on relationshipupgrading, and ‘learning by doing’. Suppliers and clusters of management, so many of the standard contractual clausessuppliers compete with each other but an engineering talent traditionally used by international procurement teams arepool and the related innovation usually travels freely and either not applicable or not enforceable in China, and thuscontributes to China’s overall manufacturing competitive- create unnecessary burdens on suppliers and ultimatelyness. They take advantage of the more than 600,000 students increase the total costs of the contract.who graduate with engineering degrees every year, excellenttransport infrastructure, especially in coastal regions, and Ultimately, a sophisticated foreign buyer of Chinese capitalgenerally supportive government policies favouring Chinese equipment will probably need to adopt a number of Chinesehigh value added manufacturing. As industries across China standards, practices and approaches – all without compro-consolidate and manufacturers grow and become more mising quality, environmental and labour protection stand-assertive in their quest for value-added production and ards, or good governance.profitability at home and abroad, firms sourcing from Chinamust address the following question: How can we protect Lilian Luca, MD: Beijing Axis Procurementand consolidate our savings in sourcing capital goods from luca@thebeijingaxis.com The Beijing Axis 29

The China Analyst ProcurementHow to Procure from China #8 - Commercial Process, Contracting andContract ManagementThe Beijing Axis Procurement Process Flow encapsulates the full extent of project engagement, fromthe point of first enquiry to the range of services in the solution process and benefits provided for thecustomer. In this edition we focus more closely on step 8 of the Beijing Axis Procurement Process Flow:Commercial Process, Contracting and Contract Management.The Process Flow and Service Delivery Platform of Beijing Axis Procurement • Overall Project Management • Holistic Risk Management • Strategic Relationship Management Strategic Sourcing Analysis Procurement 1 2 3 4 h h h Initial Scoping, Supplier Needs Analysis & Systematic Industry Supplier Evaluation, Supplier Pre-Qualification, Evaluation, Due Diligence China Procurement Search & Supplier Application of Due Diligence & Competitive Identification high-level filters & Final Selection Analysis Final Selection Engagement Commercial 8 7 6 5 g g g Supplier Engagement, Process, Site Inspection, Supplier Site Inspections, Sample Contracting Tender Evaluation Sample Testing Engagement, RFQ & and Contract and Standards Tendering (SOI, RFP) Testing, Contracting Management Supply Chain Process 9 Quality 10 11 Coordination & 12 h h h Mgmt & Transaction Monitoring, Management (QA/ Assistance On Site Transaction Logistics Support QA, Expediting, Third- Monitoring QC), Expediting Management (Material Mgmt, and Third-Party Commissioning, Party Mgmt & Logistics Management etc.)Beijing Axis Procurement Guidelines for Commercial • Additional services during the commissioning stageProcess, Contracting and Contract Management Contracting: At this stage Beijing Axis Procurement will assistWith the tendering process closed and the winning supplier the buyer and the supplier with drafting and modifying theidentified, the process moves to the next step of negoti- English or bilingual contract. It is important to note thatating and signing the supply agreement, and onwards to the lengthy, wordy contracts will unnecessarily delay the signingcontract management stage. process while adding little in terms of protecting the buyer, so we generally advise buyers on removing from standard termsCommercial process: Ideally, the supplier has received a draft and conditions items that are less relevant or not enforceableof the commercial terms and conditions as part of the RFP and in a Chinese business context. For some large Chinese manu-has either agreed or qualified most of the clauses in the tender facturers, design and manufacturing departments might onlydocuments. However, many Chinese suppliers will not have follow what has been agreed in the contract instead of whatread the commercial terms carefully until they are awarded. has been said before the signing due to gaps in companies’ internal coordination. To avoid this risk, sufficient technicalAt this stage Beijing Axis Procurement will not only assist requirements should be included in the contract.the buyer in negotiating specific clauses that were unclearor not in agreement, but also read out the commercial terms Contract management: After the contract is signed, Beijing Axiswith the suppliers to avoid misunderstanding. Examples can Procurement will put in place a project management teaminclude: assisted by required processes and an IT platform to monitor • Finalising scope of supply including outsourced parts the manufacturing schedule and inspection and testing • Supplier responsibilities regarding delivery point and plan, coordinate and communicate with all involved parties, performance undertakings of goods communicate and register all modifications to the contract, • Insurance and notify the parties about any delays or non-conformances. • Penalties Beijing Axis Procurement will also visit the suppliers regularly • Payment terms and submit progress reports frequently to the buyer. • Bank guarantees • Warranty By Beijing Axis Procurement30 The Beijing Axis

The China Analyst InvestmentChina Capital: Inbound/Outbound FDI & Financial MarketsIn H1 2011, FDI to China amounted to USD 60.9 bn, up by 18.4% year-on-year. This increase was mainlydriven by investment from other Asian countries, which was up by 23.9%, while investment from theUnited States was down by 22.3%. China’s outbound investment in this period reached USD 23.9 bn,registering 34% growth year-on-year. Significant investments occurred both in the Resources andNon-resources sectors. By Beijing Axis CapitalForeign Direct Investment in China Monthly Inbound FDI in China and y-o-y Growth Rate (rhs) (USD bn, Jul 2010-Jun 2011) 15 40Summary• In H1 2011, Foreign Direct Investment (FDI) in China 35 amounted to USD 60.9 bn, up by 18.4% y-o-y 12• In this period, wholly foreign-owned enterprises were 30 the major vehicles of investment in China, accounting for around 80% both of the approved FDI cases and the 9 25 total actually utilised capital• In H1 2011, FDI in China primarily originated from other 20 Asian countries/regions, accounting for more than 85% 6 of the total investment. Hong Kong, as the main bridge 15 for inbound investment to mainland China, is still the 10 largest source of capital, contributing USD 40 bn or 3 65.7% of total FDI 5• Besides Hong Kong, Taiwan continues to be a notable source of FDI to mainland China, contributing USD 3.79 0 0 bn. Other top investors to China in this period included Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Source: MOFCOM; The Beijing Axis Analysis Japan (USD 3.51 bn), Singapore (USD 3.20 bn), and the US (USD 1.68 bn) and the operator of a leading online TV service (PPTV), for USD 244 mnNotable FDI Deals in China in H1 2011 • In February, Lyon-based SEB Group, the world’s largest• In January, China Timber Resources Group Ltd., a Hong manufacturer of countertop kitchen appliances, report- Kong-based timber company, reportedly agreed to edly agreed to raise its stake in Zhejiang Supor Co., a acquire a 66% stake in Zhunxing Heavy Haul Expressway Hangzhou-based manufacturer of cookware and small Co. Ltd., a toll expressway operator based in Inner electric housewares, from 51.31% to 71.31%, for USD 526 Mongolia Autonomous Region, for USD 455 mn mn• In February, Softbank Corp., a Tokyo-based company • In March, Rhodia SA, the French specialty chemical engaged in telecommunications and e-commerce, manufacturer, completed its acquisition of a chemical acquired a 35% stake in China’s SynaCast Corporation, or facility owned by Jiangsu province-based Suzhou HiPro PPLive, a Shanghai-based online video media company Polymers Company for USD 489 mnAnnual Inbound FDI in China (USD bn, 2003-H1 2011) FDI in China by Source Country/Region (H1 2011)120 Nertherlands USD 0.35 bn110 France USD 0.42 bn Germany USD 0.68 bn Others100 UK USD 0.92 bn USD 5.08 bn S. Korea USD 1.27 bn 90 US USD 1.68 bn 80 Singarpore 70 USD 3.2 bn 60 Japan USD 50 USD 3.51 bn Hong Kong Taiwan, PRC USD 40 bn 40 USD 3.97 bn 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 H1Source: MOFCOM; The Beijing Axis Analysis 2011 Source: MOFCOM; The Beijing Axis Analysis32 The Beijing Axis

Investment The China Analyst• Novartis AG, the Swiss healthcare giant, announced its Chinas Annual Outbound FDI and y-o-y Growth Rate (rhs) acquisition of an 85% stake in privately-held Zhejiang (USD bn, 2004-H1 2011) Tianyuan Bio-Pharmaceutical Co. Ltd., a Zhejiang prov- 60 150 ince-based vaccines company. Although final financial details were not disclosed, it was valued at more than 50 USD 100 mn 120• In April, Win Hanverky sold its major assets to Nike Inc.s wholly-owned subsidiaries, Nike Global Services Pte. 40 Limited and Umbro International Limited, for USD 214.5 mn 90• In June, the Dutch electronics giant Royal Philips Electronics Inc. was reportedly in advanced talks with 30 Shanghai POVOS Enterprise Co. Ltd. for acquiring the 60 latter for USD 386 mn 20 30Chinese Outbound Foreign Direct Investment 10Summary 0 0• In H1 2011, China’s OFDI amounted to USD 23.9 bn, 2004 2005 2006 2007 2008 2009 2010 H1 2011 which was 34% higher y-o-y Source: MOFCOM; The Beijing Axis Analysis• In H1 2011, Beijing Axis Capital followed 75 overseas investment activities by Chinese companies (including International for USD 651 mn ongoing transactions and concluded deals of previously • In May, China National Chemical Corporation (CNCC) announced transactions) concluded an agreement with MA Industries, an Israeli• In terms of numbers of deals, Europe rose to become farm chemical company, to buy a 60% interest in MA for the most attractive region for Chinese investors with USD 1.44 bn 24 deals. North America slipped to second place with • In June, v Securities, China’s biggest stockbroker and one 17 deals while it ranked first in H2 2010. China had of its leading investment banks, agreed to pay USD 374 14 investments in other Asian countries, while the mn to acquire a 19.9% stake in CLSA, a Hong Kong-based commonly perceived Chinese OFDI destinations, Africa brokerage and investment group, and its European and Australia, accounted for a much smaller portion with counterpart, Credit Agricole Cheuvreux 5 and 9 investments, respectively• In terms of deal size, Australia and Europe saw the two largest deals in both the Energy & Resources sector and China Financial Markets Non-resources sector, excluding financial non-disclosed deals. There were also mega deals (more than USD 1 China’s Stock Markets in H1 2011 billion in terms of deal value) in Asia, Africa, and Latin • Despite an initial drop at the beginning of the year, China’s America stock markets surged in Q1 2011. However, they have• Non-resources deals accounted for nearly 61% in terms slumped significantly from mid-April to mid-September, of the number of deals. Manufacturing, Agriculture, although there was a short period of recovery from mid- Technology were among the most important sectors June to mid-July • The Growth Enterprise Market declined to its lowest pointNotable Chinese OFDI Deals in H1 2011 ever, around 790, by the end of H1 2011, yet it recovered• In January, China National Bluestar Group signed an agreement with Norway-based energy company Elkem Shanghai Stock Exchange Index (Jan-Sep 2011) AS to acquire Elkem’s silicon operation for USD 2 bn 3,000• In February, China National Offshore Oil Corporation (CNOOC) agreed to buy 33.3% of an oil and gas project owned by US-based Chesapeake Energy Corporation for 2,750 USD 570 mn• In March, Bright Food, China’s largest food company, made an offer of USD 2.3 bn to purchase 50% of Yoplait, 2,500 a French food company• In April, the Shanghai based Shanghai Pengxin Group Ltd. agreed to pay USD 158 mn to buy 16 dairy and dry 2,250 stock farms in New Zealand’s North Island• In May, Baiyin Non-ferrous Group, a mining subsidiary of China’s CITIC Group, together with the China-Africa 2,000 Development Fund (CADFund), agreed to acquire a 60% 4 14 1 15 1 15 1 15 3 16 1 15 1 15 1 15 1 13 Jan Feb Mar Apr May Jun Jul Aug Sep to 75% interest of Australia-based Company Gold One Source: Shanghai Stock Exchange The Beijing Axis 33

The China Analyst InvestmentShenzhen Stock Exchange Index (Jan-Sep 2011) the approval of outbound investment to pass down more14,000 approval authority to local governments in order to better facilitate the approval process for overseas investments. Yet13,000 despite the relaxation of the approval authority, Chinese companies still need to go through the following procedures before implementing their outbound investments:12,000 China OFDI Approval Processes11,000 • Approval of the State-Owned Assets Supervision and Administration Commission (SASAC): State-owned enterprises require approval from SASAC, while local SOEs10,000 require approval from provincial or municipal SASAC. Private companies are not subject to approval from SASAC 9,000 • Submission of a report to the State Administration of Foreign Exchange (SAFE) or its subsidiaries: Chinese companies need to report and explain the source of 8,000 4 14 1 15 1 15 1 15 3 16 1 15 1 15 1 15 1 13 investment capital to SAFE for further approval Jan Feb Mar Apr May Jun Jul Aug Sep • Approval of National Development and ReformSource: Shenzhen Stock Exchange Commission (NDRC): Resources-related investment above USD 300 mn, or Non-resources related investment and fluctuated around 900 from July to mid-September above USD 100 mn needs to be approved by the NDRC.• China’s main exchange, the Shanghai Stock Exchange, Investments under the above mentioned values are to declined from 2,852 to 2,677 in January, followed by a be approved by local governments 14% rise to 3,057 in the middle of April. However, since • Approval of Ministry of Commerce: Chinese companies then, it has dropped to 2,491 as of mid-September, repre- are required to file their application to MOFCOM if the senting an 18.5% decline investment is valued above USD 100 mn or the invest-• The Shenzhen Stock Exchange Index decreased from ment flows to countries that have not established diplo- 12,714 at the beginning of the year to 11,466 by the end matic relations with China of January, a near 10% decline. It then climbed to 13,158 • Other institutes, including the Ministry of Industry in March and stayed relatively flat until the middle of and Information Technology, the Banking Regulatory April, followed by a near 18% decrease to 10,775 by late Commission, the Insurance Regulatory Commission, and June. July saw a rise to a high of 12,438 on the 11th, but the Securities Regulatory Commission might also partici- by mid-September the Index had declined to 10,775 pate in the approval process. For example, the Securities• The Growth Enterprise Market Index decreased from Regulatory Commission monitors the corporate restruc- 1,155 to 978 at the end of January and recovered to turing and new placement of listed companies 1,117 in February. However, since then, it declined to 792 by late June, the lowest point since its launching in SOEs vs. Private Investors Shenzhen, representing a 31% slump. It then recovered • It is notable that SOEs and private investors in China have to about 900 since July and has fluctuated around that different strategic considerations for overseas invest- level till mid-September 2011 ments. Although SOEs continue to dominate outward• Under the current market circumstances, there are investment by volume, private investors have emerged few sectors outperforming the market. The Coal & Oil, to take a notable share in terms of the large investments Non-ferrous, and Ferrous sectors complied with the • SOEs focus more on scale and long-term strategic consid- general market, surging in Q1 yet slumping since then erations, and as a result they emphasise the overall eval-• Despite the generally bearish market this year, until mid- uation of overseas investment opportunities September 2011, the Food & Beverage and End Fund • However, recently the Chinese government has strength- sectors have experienced a steady period without strong ened the risk-control of SOEs due to increasing cases of fluctuations financial losses incurred in China’s overseas investments • On the other hand, due to more restricted access to financing, private investors regard short to medium termChina OFDI Approval Processes and the Emer- profit potential and cash flow as more important. In addi-gence of Private Chinese Investors tion, private companies are always seen to cooperate with SOEs, which in the resources sector means off-take and further development of the assetIn order to continue to raise its standing on the global stage • While SOEs were the only vehicle of large-scale outboundin terms of economic development, the Chinese govern- investments in 2005, private investors have emerged toment has been encouraging domestic enterprises to expand take a share in large-scale investments since then. Inoverseas, especially in the sectors of Energy, Resources, H1 2011, large-scale investments conducted by privateManufacturing, and High Technology. A visible current investors accounted for 11% of the total large-scaletrend in China is for national authorities responsible for investment volume34 The Beijing Axis

Investment The China Analyst Selected Chinese Outbound Investment Activity, January-August 2011 # Date Target / New Company Target Acquirer / Investor Acquirer / Investor Industry Value Stake Status Country (English Name) (Chinese Name) 1 Aug-11 Carrier Corporation of UTC Group Brazil, Midea Group Manufacturing USD 223.3 mn 51.00% Ongoing Argentina, Chile 2 Aug-11 Standard Banks Argentina operations Argentina ICBC Financial USD 600 mn n/a Ongoing 3 Aug-11 GE SeaCo. America Hainan Airlines Leasing USD 1 bn n/a Ongoing 4 Aug-11 Syntech Resources Pty & Australia Yanzhou Coal Mining Co Resources: Coal USD 203 mn n/a Ongoing Syntech Holdings II Pty 5 Jul-11 OPTI Canada Canada CNOOC Resources: Oil & Gas USD 2.1 bn n/a Ongoing 6 Jul-11 Sundance Resources Australia Hanlong Group Resources: Iron Ore USD 1.3 bn 81.4% Ongoing (already held 18.6%) 7 Jul-11 Panasonic Corp Japan Haier Group Manufacturing USD 128.3 mn 100.00% Ongoing 8 Jul-11 Tully Sugar Australia COFCO Food USD 147 mn 99.00% Concluded 9 Jul-11 Bannerman Resources Australia Hanlong Group Resources: Uranium USD 155 mn 100.00% Ongoing 10 Jul-11 Metorex South Africa Jinchuan Resources: Copper USD 1.32 bn 100.00% Ongoing 11 Jul-11 INEOS Refinery I Ltd. & UK PetroChina Resources: Oil & Gas USD 1.015 50.1% and Concluded INEOS Refinery II Ltd. 49.9% 12 Jun-11 Malaysian Lion Groups Amsteel Mills Malaysia Baosteel Manufacturing USD 1 bn n/a Ongoing 13 Jun-11 Sberbank Russia China Investment Corp. Financial USD 200 bn 5.00% Ongoing 14 Jun-11 CLSA Hong Kong CITIC Securities Financial USD 374 mn 19.90% Ongoing 15 Jun-11 Hyproca Dairy Netherlands Ausnutria Dairy Agricultural n/a 51.00% Ongoing 16 Jun-11 Aurora Holdings Limited South Africa Two mining companies Resources: Gold USD 100 mn 65.00% Ongoing 17 May-11 CP Vietnam Livestock Corporation Vietnam CP Pokphand Agricultural n/a 70.82% Ongoing 18 May-11 Folli Follie Greece Fosun Jewelry retail USD 123.2 mn 9.50% Ongoing 19 May-11 All Wealthy Capital Ltd British Virgin Nanjing Steel Resources: Iron ore USD 50 mn 10.00% Concluded Islands 20 May-11 Gold One International Australia Baiyin Non-Ferrous Resources: Gold USD 651 mn 60-75% Ongoing & CADFund & uranium 21 May-11 Spyker Netherlands Pangda Automobile Trade Automobile USD 92 mn 24.00% Ongoing 22 May-11 NH Hotel Spain Hainan Airlines Hotel USD 617 mn 20.00% Ongoing 23 May-11 Whitehaven Coal Australia Yanzhou Coal Mining Resources: Coal USD 3.7 bn n/a Ongoing 24 May-11 The Rank Group Plc Europe Guoco Group IT USD 110 mn 40.84% Ongoing 25 May-11 Divalane Russia Yonghui Group Resources: Coal USD 90 mn 60.00% Ongoing 26 May-11 Huta Stalowa Wola Poland Guangxi Liugong Machinery Machinery USD 94 mn n/a Ongoing 27 May-11 MA Industries Israel CNCC Farm Chemicals USD 1.43 bn 60.00% Ongoing 28 May-11 Tonkolili Iron Ore Project Sierra Leone Shandong Iron & Steel Resources: Iron ore USD 1.5 bn 25.00% Ongoing 29 May-11 Noront Resources Ltd. Canada Baosteel Resources: Chrome USD 30.7 mn 9.90% Ongoing & nickle 30 Apr-11 Chad International Airport Chad China CAMC Engineering Construction USD 1 bn n/a Ongoing 31 Apr-11 Origin ConocoPhilips LNG Projects Australia Sinopec Resources: Oil & gas n/a 15.00% Ongoing 32 Apr-11 Trenaco SA Switzerland Siberian Mining Resources: Coal USD 15 mn 70.00% Ongoing 33 Apr-11 MagIndustries Canada Evergreen Industries Group Chemical USD 120.3 mn n/a Ongoing 34 Apr-11 An Industry Park of Agriculture Brazil Red Dragon Company Agriculture USD 200 mn n/a Ongoing 35 Apr-11 Patuca River Hydroelectric Power Plant Honduras China’s Sinohydro Energy USD 50.5 mn n/a Ongoing 36 Apr-11 Reta Region Wind Power Argentina XCMC China Energy USD 200 mn n/a Concluded 37 Apr-11 Bank of East Asias U.S. Unit US ICBC Financial USD 140 mn 80.00% Ongoing 38 Apr-11 16 dairy and dry stock farms New Zealand Shanghai Pengxin Group Agriculture USD 158 mn 100.00% Ongoing 39 Mar-11 AES-VCM Mong Duong Power Co. Ltd Vietnam CIC Power n/a 19.00% Concluded 40 Mar-11 Jinduicheng Xise Co. Ltd Canada Fosun Resources: Zinc USD 45 mn 12.00% Ongoing & nickel 41 Mar-11 Yoplait France Bright Food Food USD 2.3 bn 50.00% Ongoing 42 Feb-11 WEIGL Sweden Beijing Automotive Industry Automobile USD 45 mn 100.00% Concluded 43 Feb-11 USS Maching Center UK Ansteel and Stemcor Steel n/a 66.66% Ongoing 44 Feb-11 Century Iron Mines Corp Canada Wuhan Steel Resources: Iron ore USD 58 mn 25.00% Ongoing 45 Feb-11 Emir Oil LLC Kazakhstan MIE Holdings Resources: Oil & gas USD 170 mn 100.00% Ongoing 46 Feb-11 Riot Games US Tencent Technology IT USD 400 mn n/a Concluded 47 Jan-11 Chesapeake Energy Corporation US CNOOC Resources: Oil & gas USD 570 mn 33.30% Ongoing 48 Jan-11 Liquefied Natural Gas Ltd. Australia CHCEC Construction n/a 19.90% Ongoing 49 Jan-11 KHD Humboldt Wedag International AG Germany CATIC Beijing Machinery USD 60 mn 20.00% Ongoing 50 Jan-11 BorsodChem Zrt. Hungary Wanhua Industrial Group Chemical USD 1.69 bn 58.00% Concluded 51 Jan-11 Adriana Resourcess Lac Otelnuk Project Canada WISCO Resources: Iron ore USD 120.7 mn 60.00% Ongoing 52 Jan-11 Aurobindo (Datong) Bio Pharma India CNPG Medical n/a 80.50% Concluded 53 Jan-11 Elkem AS Norway China National BlueStar Energy USD 2 bn 100.00% Ongoing 54 Jan-11 Easy Time Trading (Ratio Knitting) Hong Kong China Post E-commerce Textile USD 55 mn 100.00% Concluded 55 Jan-11 Sheraton Universal Hotel US Shenzhen New World Real estate USD 90 mn 100.00% ConcludedSource: Various media; Company reports; The Beijing Axis Analysis The Beijing Axis 35

The China Analyst Strategy Strategy The China AnalystMapping China in the Global Contracting IndustryA map of the global contracting industry illustrates the rapid pace of growth of construction activity on the African continent, the region where the contracting industry had the highest CAGR between 2004 and 2009 (32%).Yet Africas growth is closely followed by the Middle East (25%) and Latin America (24%). In these developing regions of the world, the largest revenues are being earned by Chinese contractors. Thus in the fastest-growingregions, Chinese contractors are effectively leveraging their low cost advantage to capture market share. In the developed regions of Canada, the US and Europe, however, the Chinese presence has grown only marginally. ByThe Beijing Axis KM & Research Unit Canada 22% 0% 0.4% 5 13 Europe 11% 2004 2009 Middle East Total four Chinese companies 1.6% in 2009 0.4% Total 35 Chinese companies 2004 2009 in 2009 Total 20 Chinese companies 10.8% in 2009 66 101 4.1% US 25% 9% 0.8% 0.5% 2004 2009 23 77 Asia 2004 2009 25 24.9% Total four Chinese companies 34 in 2009 19% 16.8% Africa 36.6% 30 32% 73 Latin America Fasted growing 14 markets with with 2004 2009 5% fastest growing Total 46 24% Chinese presence Chinese companies in 2009 1.6% 57 19 14.7% 2004 2009 27 Total 47 Chinese companies in 2009 Total 19 Chinese companies in 2009 2004 2009 Total Revenue of ENR 225†, USD bn Chinese Companies’ Share of Total Revenue in Region Total Revenue CAGR*, 2004 to 2009 LEGEND 2009 Total Revenue 2004 2004 2004 2009 Total Revenue 2009Source: ENR. Notes: *Compound Annual Growth Rate. †Refers to the Top 225 Global Contractors as identified annually by Engineering News-Record.36 The Beijing Axis The Beijing Axis 37

The China Analyst Strategy StrategyCCC: China Inc.s Leading EPC ContractorNow boasting one-sixth of global construction industry market share, Chinese contractors and designfirms have become influential players and often the benchmark in the international construction market,whether in terms of quality, price or efficiency. CCC, arguably the most internationalised of the Chinesecontractors, is probably Chinas most internationalised contactor. Here we take a closer look at CCC’scompetitive advantages and growth strategy. By Javier CuñatA total of 50 Chinese international contractors made China Communications Construction Group (CCCG), the it into the 2011 edition of ENR’s (Engineering News parent company of CCC, was established in late 2005 with Record) ‘Top 225 International Contractors’ list. In other the merger of CHEC (China Harbour Engineering Company)words, roughly one out of every five of the most globally and CRBC (China Road and Bridge Corporation). The twocompetitive contractors hails from mainland China. Despite companies, previously owned by SASAC, were at one pointthe global financial crisis, Chinese contractors are progres- the leading transportation-related infrastructure design andsively increasing their global market share, especially in the construction groups in China, each with more than 50 yearsemerging markets of Asia and Africa. The global financial of operating history. CHEC was then one of China’s leadingcrisis, in fact, gave Chinese contractors an opportunity to SOEs focused on dredging, design and construction ofenhance their international profiles by leveraging their ready ports and port machinery manufacturing, while CRBC was aaccess to project financing. leading SOE involved in the design and construction of roads and bridges. Further restructuring took place in 2006 whenCommunications Construction Co Ltd. (CCC), incorporated CCC was established as a joint-stock company. As a result,in 2006, is the fourth-largest contractor in China in terms CCCG became the immediate parent of CCC and all core busi-of revenue, and is principally engaged in the construction ness units were transferred to CCC. This was a very strategicof transportation infrastructure and port machinery manu- move as it allowed CCC to raise funds for future internationalfacturing. It is the countrys largest port construction and expansion.design entity, as well as the top dredging company. It is alsoa leading manager of road and bridge projects in China and Since both CHEC and CRBC belonged to the Ministry ofa global champion in crane manufacturing through its two Communications and their business and management stylessubsidiaries, SPMP, and A-share-listed ZPMC. As the most were similar, their merger was successful. This enabled theminternationalised of Chinese international contractors, CCC to develop a certain synergy with the consolidated entityis not only a well-recognised brand in China but also over- dramatically increasing its competitiveness in bidding forseas, where it has executed projects of increasing scale and larger and more complex projects. This in turn improved thecomplexity. overall operating efficiency and profitability of the company.How has CCC achieved this scale and capabilities in such After restructuring, SASAC achieved its main objective: thea short period of time? What have been their competitive establishment of a full-service, vertically-integrated trans-advantages and their growth strategy? What does it mean for portation infrastructure construction group capable ofinternational contractors facing increased competition from fulfilling monopolistic positions in some sectors domesti-China at home and in other markets? cally. The combined strength of both companies signalled a breakthrough in China’s drive to create competitive ‘globalBorne of reform champions’. Before the merger, CHEC and CRBC were ranked 31st and 48th, respectively, among the world’s largest globalThe establishment of CCC was a milestone in China’s reform contractors, while after the merger, CCCG catapulted to 20thof its state owned enterprises (SOEs) and the result of SASACs overall. CCC is now China’s largest international contractor,(the State-owned Assets Supervision and Administration with over USD 7 billion in international revenue.Commission of the State Council) strategic planning. AfterChina’s accession to the WTO in 2001, international contrac- A vertically integrated business modeltors started taking a more active interest in China’s fastgrowing economy as a target market. This presented substan- A vertically integrated business model is CCCs core competi-tial challenges to Chinese contractors, as China suffered from tive advantage. Today, CCC is active in infrastructure construc-a highly fragmented industry landscape; competition was tion, infrastructure design, dredging and port machineryalready fierce at home and relied on less-advanced technolo- manufacturing, and relies on its in-house capabilities togies. In order to improve industry efficiency and productivity, execute EPC projects, with very little sub-contracting. ThisSASAC urged a number of strategic mergers and acquisitions approach has enabled CCC to allocate resources more effi-with the goal of establishing some 30-50 large SOEs capable ciently, reduce costs over time, achieve economies of scaleof competing against their international peers. This marked and most importantly, increase its competitive profile andthe beginning of CCC. market share in the domestic and foreign markets.38 The Beijing Axis

Strategy Strategy The China AnalystCCC Revenue by Region (USD bn, 2006 vs. 2010) CCC Revenue by Business Unit (%, 2006 vs. 2010)50 USD 14.4 bn USD 40.3 bn Overseas China 100% USD 40.3 bn40 80% Other CAGR = 29.3%30 Port Machinery 60% Manufacturing CCC relied on China’s infrastructure Dredging20 boom to 40% USD 14.4 bn weather the Infrastructure global financial crisis Design10 Infrastructure 20% Construction 0 2006 2010 0 2006 2010Source: CCC Annual Reports; The Beijing Axis Analysis. Note: China does not include Source: CCC Annual Reports; The Beijing Axis AnalysisHong Kong and Macao.As Chinas largest port constructor, CCC enjoys synergistic Examples of large and complex projects that CCC is currentlybenefits though its dredging operations, which are usually conducting overseas include the Island and Tunnel of the Hongcomplementary services to port construction projects. Kong-Zhuhai-Macau Bridge, Phase II of Sri Lanka HambantotaIn addition, as one of the China’s leading road and bridge Port, Cameroon Kribi Deepwater Port, and Serbia Belgradeconstruction entities, CCC is able to build roads and bridges Zemun-Borca Bridge. In 2010, new contracts or overseas infra-that connect port areas with inland cities and provinces. structure projects accounted for about 19% of CCCs total valueSimilarly, as China’s industry leader for port, road and bridge of new infrastructure construction contracts.design, CCC’s infrastructure design capabilities are comple-mented by its construction business, enabling the company Significance for international contractorsto construct high-end projects of increasing scale andcomplexity. Because of its superior operating scale, CCC has So what are the strategies that foreign companies can formu-more pricing flexibility, increasing its average profit margins. late and implement in order to counter such core competitive advantages? The case of CCC has illustrated the following:Through its two port machinery manufacturing subsidiaries, • Competing against Chinese international contrac-moreover, CCC can also undertake all the procurement for a tors in bidding for international projects may workproject, which provides a very unique competitive and price in the short term in more developed markets but theadvantage over its competitors. Shanghai Zhenhua Port long term view is uncertain. Although they often lackMachinery Co. Ltd (ZPMC) and Shanghai Port Machinery Plant specific local knowledge and face local protectionismCo. Ltd (SPMP), both owned by CCC, have transformed the hurdles, they are quickly catching up with interna-group into a world leader in its areas of business. Individually, tional best practices, regularly hiring local experts toShanghai-listed ZPMC is the worlds largest container crane overcome these challengesmanufacturer with a global market share of about 76% in • Engaging with China is becoming a matter ofterms of units ordered, according to 2010 figures. survival. The trend of competitive Chinese enterprises expanding into emerging markets guarantees thisIn recent years CCC has seen further integration across its • It is vital to understand the past, present and futurevalue chain, mainly through inorganic growth, and is moving of China’s contractors. Core advantages and practicesinto new business areas and accessing new complemen- will determine the success of foreign players in globaltary markets. CCC is now also engaged in road and bridge construction markets in the long run. They must adaptconstruction machinery manufacturing, logistics services to China, as China has already adapted to themand trading of construction-related materials and equip- • Corporate partnership is key, but meaningless withoutment, among other areas. The company’s investment busi- risk mitigation, flexibility and a proper China strategyness is gradually becoming a new source of growth. In short, international contractors must develop creativeFinally, the most significant factor in CCC’s overall competi- China-engagement strategies to adapt to a shifting competi-tiveness is the use of China’s state-backed banking institu- tive landscape. What added value can international contrac-tions, the so-called ‘EPC+F’ business model. CCC has direct tors offer over their Chinese counterparts and how can theseaccess to some of China’s financial institutions, such as Exim be sustained in the long run? International contractors mustBank or Sinosure, that provide discounted loans and sources answer such critical questions today so that they can remainof finance for CCC’s overseas projects. In fact, this is one of competitive tomorrow.the main challenges that international contractors face whenbidding for international projects. Javier Cuñat, General Manager: Beijing Axis Strategy javiercunat@thebeijingaxis.com The Beijing Axis 39

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Regions The China AnalystRegional Overview: BRIICSBrazil, India, Indonesia and China going strong; Russia and South Africa still lagging behind • With the economy of Brazil showing signs of slowing after expanding in 2010 at its fastest pace in 24 years, President Dilma Rousseff must manage expectations in the years ahead as Brazil tries to break through bottlenecks and upgrade its infrastructure ahead of the 2014 World Cup and 2016 Olympic Games • The economy of Russia grew less than expected in H1 2011 (even amid high oil prices) due to the effects of more than USD 30 bn in capital flight, largely attributed to uncertainties surrounding the upcoming 2012 presidential elections • Exports from India have been steadily growing and are on course to reach the government’s target of USD 300 bn for the current fiscal year, driven by increased government support to exporters to tap into new markets in Latin America and Africa. However, local reforms aimed at empowering Indian industries to become more competitive over the long term along with monetary tightening measures are threatening to slow growth moving forward • The GDP of Indonesia is projected to grow nearly 7% in 2011, driven by soaring domestic consumption, global demand for Indonesian coal, tin, copper, and palm oil, increased FDI and a sound macroeconomic policy. Yet gold-driven inflation is starting to spread through the economy • In China, the economy grew by 9.6% y-o-y during H1 2011 as China seeks to become less reliant on the economies of the US and Europe and diversify its export markets. Consumer inflation, especially for food, remains the most pressing concern, and policymakers are increasingly willing to use the renminbi’s continued appreciation against the US dollar as an inflation fighting tool, a move which also pushes Chinese manufacturers to move up the value chain and encour- ages domestic consumption • Economic growth in South Africa slowed sharply in Q2 2011 to 1.3% from 4.5% in Q1, which can be largely attributed to the ongoing sovereign debt crisis in Europe and an overall weakened global economic outlook. With an unemployment rate hovering above 25% of the labour force, South Africa might lower interest rates to regain recovery momentum, fuel investment and increase exports from its contracting manufacturing sector Russia 140 mn Legend USD 1,895 bn Population, 2011E USD 13,543 China GDP, 2011E 1,348 mn GDP per capita, 2011E India USD 6,516 bn 1,233 mn USD 4,833 USD 1,704 bn Brazil USD 1,382 Indonesia 195 mn South Africa 238 mn USD 2,421 bn 50 mn USD 823 bn USD 12,423 USD 383 bn USD 3,465 USD 7,585Source: IMFBRIICS Real GDP Growth (%, 2010-H1 2011) BRIICS Inflation and Unemployment (%, June 2011)12 Inflation Unemployment rate* 2010 H1 2011 9.40% 9.00% 10 6.87% 6.50% 6.80%10 5.30% 8.62% 5 6.50% 6.00% 4.10% 4.61% 8 0 Inverted scale 6 -5 -10 4 -15 2 -20 0 -25 China India Indonesia Brazil South Africa Russia 25.70%Source: Trading Economics; China NBS; IMF Source: Trading Economics. * Note Unemployment: China (Mar), India (Mar), Indonesia (Feb) The Beijing Axis 41

The China Analyst RegionsRegional Focus: CHINA-AFRICAIn 2010, China-Africa trade surpassed the USD 100 billion mark for the first time, and despite the politicalturmoil in North Africa, trade in H1 2011 is around 30% higher y-o-y. We also review the major China-Africa deals in H1 2011, and profile China Civil Engineering Construction Corporation, one of Chinasleading EPC contractors in Africa.China-Africa Briefing: China Eyeing Unrest in North Africa; Building Relations with the Sudans; FirstChina-Africa NGO forum • China is paying close attention to the political situation in North Africa and the potential impact on China’s resource security in the region. Libya in particular is one of Chinas leading suppliers of crude oil in Africa; in 2010 Libya exported roughly USD 4.5 billion worth of oil to China. Over the years, China has invested billions of dollars in infrastructure projects in Libya, which China is urging the emerging post-Gaddafi government to protect during the transition period • During a meeting in late June, President Hu Jintao and his Sudanese counterpart Umar al-Bashir signed agreements on infrastructure and equipment loans and for economic and technological cooperation. On 9 July, China also welcomed the independence of South Sudan, which holds three-fourths of old unified Sudan’s oil reserves. President Hu also pledged to develop China’s mutually beneficial relationship with the continent’s newest country • In late August, around 200 representatives from 20 Chinese and 100 African non-governmental organisations gathered in Nairobi, Kenya for the first China-Africa NGO forum. The two-day forum, with the theme Enhance partnership and promote friendship between China and Africa, featured discussions on climate change and food security, NGOs cred- ibility and transparency, and the relationship between governments, NGOs, businesses and communitiesChina-Africa TradeTotal Trade biggest African exporters to China (South Africa, Angola,• In H1 2011, China’s total trade with Africa reached USD Sudan, Libya and Congo) accounted for just over 80% of 78.96 bn, up 29% y-o-y. South Africa and Angola were Chinese imports from the continent during this period China’s largest trading partners (see chart below to the right). Chinas imports from Africa experienced rapid China Exports to Africa y-o-y growth in H1 2011, yet Chinas exports to Africa • Chinese exports to Africa in H1 2011 totalled USD 32.60 decreased slightly bn, down 1.65% y-o-y • China Customs data for Q1 2011 showed that the fiveChina Imports from Africa most popular export destinations for Chinese goods• Chinese imports from Africa in H1 2011 totalled USD in Africa were South Africa, Nigeria, Egypt, Liberia and 46.34 bn, up 65.3% y-o-y Algeria. These five countries accounted for 54% of the• China Customs data for Q1 2011 showed that the five totalChina-Africa Trade (USD bn, 2001-H1 2011) Chinas Africa Trade by Country (USD bn, Q1 2010 vs.80 Q1 2011) China Imports from Africa Imports Q1 2010 Imports Q1 2011 Exports Q1 2010 Exports Q1 201170 China Exports to Africa Others60 DRC50 Liberia Algeria40 Congo Brazzaville Egypt30 Libya20 Nigeria Sudan10 Angola 0 South Africa 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 H1 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 2011Source: China National Bureau of Statistics; CEIC; The Beijing Axis Analysis Source: CEIC; The Beijing Axis Analysis42 The Beijing Axis

Regions The China AnalystChina-Africa InvestmentTrends Minerals announced that it had signed an agreement• Based on the major China-Africa investment activities in with Ganzhou Qiandong Rare Earth Group (GQD) to H1 2011, Chinas investment appetite in Africa remained build a rare earths separation plant in South Africa, to strongest in three sectors namely Oil & Gas, Mining, and be followed later by the building of a mine Infrastructure (see our China OFDI dealsheet in the China • A consortium of Chinese investors is currently bidding for Capital Section for details on specific deals) Gold One International Ltd., estimated to be the lowest cost gold producer in South Africa, for about USD 642Major Recent Deals and Developments mn. In early August, Gold One obtained approval from• In May, the government of Chad and Chinese engi- SA’s competition authorities for the buyout neering firm CAMC signed a USD 1 bn agreement for • In August, Chinese steel producer Shandong Steel the construction of a new international airport north Corporation completed the acquisition of a 25% stake in of the capital N’Djamena. The new airport will have an the Sierra Leone-based Tonkolili iron ore project for USD ultra modern terminal, and the project also includes the 1.5 bn, which is owned by London-listed Africa-focused construction of a 40 km motorway between the airport mining giant African Minerals Ltd and the capital • In August, a contract of USD 526 million was signed• In May, China’s Export-Import (Exim) Bank granted between the China Water and Electric Company (CWE) Cameroon a loan of USD 542 mn for the construction of and the Guinean government for the construction of a the 210 MW Memve’ele hydropower dam on the Ntem dam in the countrys capital Conakry. The construction of River. The Memve’ele dam is expected to be completed the dam is expected to take 24 months within five years • In August, China Development Bank agreed to lend• In June, Kenya signed a concessional loan agreement Ghana – Africa’s newest oil producer – USD 800 million worth around USD 110 mn with China. The loan will to build natural gas infrastructure be used to build the third referral hospital at Kenyatta • On a state visit to China in August, Mozambican University in the capital city of Nairobi President Armando Guebuza signed ten cooperation• In June, Chinese bank ICBC granted a USD 285 mn loan to agreements with Chinese President Hu Jintao. Included Zambia for the development of a new electricity trans- among these was an agreement for Chinese firm China mission line. The new line will connect Zambia’s power Kingho to finance the construction of a new railway line grids with those in Tanzania and Kenya linking the town of Maotize in western Mozambique to• In July, Canadian rare earths miner Great Western the port of BeiraChinese Contractors in Africa: China Civil Engineering Construction CorporationBrief Country Profile• Established in 1979, China Civil Engineering Construction Corporation (CCECC) is one of China’s leading contractors for international projects, with over 80% of its revenues coming from overseas projects. CCECC is active in 40 countries and regions and has established more than 20 offices overseas• CCECC was transformed into a state-owned enterprise for project contracting out of the earlier Foreign Aid Department of the Ministry of Railways (which participated in China’s then largest foreign-aid project in Africa, the TAZARA railway)• Its range of services include international contracting for railway construction, civil engineering design & consultancy, real estate development, trading, industrial investment and hotel managementCCECC Selected Major Projects in AfricaNigeria Djibouti• Abuja-Kaduna railway project (USD • Djibouti Industrial and Commercial 874 mn; 2011-14) School (USD 10 mn; 1991-93)• Construction/Rehabilitation of Nigerian Rwanda railway system (USD 528 mn; • Stadium of Rwanda (USD 21 mn; 1995-2000) 1984-88)Botswana Tanzania• Rehabilitation of Botswana railway • Kahama and Shinyanga water supply (USD 40.56 mn; 1996-99) project contract no. 4 (USD 47 mn;Uganda 2005-06)• Rehabilitation of Nakivubo drainage • 140km track renewal on central line channel (USD 14.55 mn; 2000-03) (USD 6.25 mn; 2005-06)Source: CCECC company website The Beijing Axis 43

The China Analyst RegionsRegional Focus: CHINA-AUSTRALIAAustralia continues to ride the resource boom, posting a GDP growth rate of 2.3% in 2009-10. Bilateraltrade with largest trade partner China increased by more than 45% from 2009 to 2010, reaching USD 88.1bn. Investment activities remain robust with sustained interest in mining and increasing interest in agro-processing, renewable energy and other sectors. However, concerns loom over a fluctuating Australianeconomy, over-reliance on China and skill shortages.China-Australia Briefing: New carbon pricing scheme in Australia; Active cross-border investment climate • Australia has finally established a carbon pricing scheme that will be applied to all energy use except private cars and some other categories of transport. The AUD 23 (USD 25, EUR 17) per tonne carbon dioxide government-determined price (expected to rise to AUD 25.4 in 2014-15) is currently higher than the European emissions trading price and will affect 500 companies that are considered the biggest polluters in Australia. China declared its own plan of implementing an emissions trading scheme by 2015, setting a target of cutting its energy intensity by 16% and reducing its carbon intensity by 17% from 2011 to 2015 • The recently released Foreign Investment Review Board (FIRB) Annual Report for 2009-10 established that the board approved 4,401 proposals during the year, a drop of 18% from the 5,352 approvals in 2008-09. China had the most approvals with 1,766, followed by Malaysia with 524 and the UK with 410. However, in terms of value, the US was the largest foreign investor in Australia with USD 34.50 bn, followed by the UK with USD 25.29 bn and China with USD 14.38 bn. China’s total investment approval value decreased by 27.51% from USD 19.83 bn in 2008-2009; however, China’s interest in the mineral exploration and development sector remained robust at USD 10.76 bn or 74.84% of the totalChina-Australia TradeTotal Trade China Annual and Monthly Trade with Australia (USD bn)• Sino-Australian total trade increased by almost 47% from China exports to Australia (lhs) USD 60.1 bn in 2009 to USD 88.1 bn in 2010, according China imports from Australia (lhs) to China Customs (CC); whereas the Australian Bureau of Annual/monthly trade balance (rhs) Statistics (ABS) puts the increase at 45% from USD 62.1 80 0 8 0 bn in 2009 to USD 90.2 bn in 2010 70 -5 7• Trade figures for 2011 seem poised to break the 2010 60 6 -1 record as H1 2011 trade of USD 51.75 has surpassed -10 50 5 2010’s halfway mark of USD 37.72 bn -15 -2• In monthly terms, CC put China’s highest trade deficit 40 4 -20 with Australia yet in January 2011 at USD 4.45 bn. Said 30 3 -3 month saw China exporting USD 2.79 bn worth of goods 20 -25 2 to Australia while importing USD 7.24 bn worth of goods. 10 -30 -4 1 According to ABS, China’s highest trade deficit with 0 -35 0 -5 Australia occurred in March 2011 when China exported 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May .05 2010 2011 USD 2.91 bn to Australia while importing USD 5.86 bn, Source: China Customs; The Beijing Axis Analysis. Note: Balance = Chinese exports to Australia - Chinese imports from Australia, hence negative scale. resulting in a trade deficit of USD 2.96 bn Australia Annual and Monthly Trade with China (USD bn)China Imports from Australia• In Jan–May 2011, China’s imports from Australia totalled Australian exports to China (lhs) USD 29.93 bn according to CC (USD 26.38 bn based on Australian imports from China (lhs) ABS), with a high of USD 7.24 bn in January 2011 Monthly trade balance (rhs)• A USD 94 bn supply deal has been signed between 60 20 6 3 China Petroleum & Chemical Corporation (Sinopec) 50 5 and Australia Pacific LNG, a joint venture between 15 ConocoPhillips and Origin Energy, to supply China with 40 4 2 a further 4.3 million tonnes of LNG annually for 20 years. 10 30 Sinopec will pay USD 1.66 bn for a 15% stake in the said 3 5 joint venture 20 2 1 0China Exports to Australia 10 1• In Jan–May 2011, China’s exports to Australia totalled 0 -5 USD 12.53 bn according to CC (USD 16.11 bn based on 2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011. 5 0 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 0 ABS), with a high of USD 2.79 bn in January 2011 Source: Australian Bureau of Statistics; The Beijing Axis Analysis44 The Beijing Axis

Regions The China AnalystAustralia State Watch: VictoriaState Trade Profile; Trade with China Victoria Trade with China (USD bn, Jan 2010-May 2011• With a real gross state product (GSP) of USD 211.59 bn 1,200 Exports to China (lhs) Monthly trade balance (rhs) -400 in 2008-09, Victoria is Australia’s second-largest state Imports from China (lhs) economy 1,000• It is a net importer with exports of USD 17.55 bn and imports of USD 51.37 bn in 2009-10• Main exports in 2009-10 were food and live animals 800 -600 (28.5%), followed by machinery and transport equipment (19.6%) 600• Main mineral commodities produced are brown coal, petroleum and gas• Key industries as shares of GSP are financial and insur- 400 -800 ance services (12.5%), manufacturing (10.5%) and ownership of dwellings (7.7%) 200• In 2009-10, China was Victorias largest trading partner, with total trade amounting USD 11.35 bn, followed by the United States with USD 6.66 bn and Japan with USD 0 J F M A M J J A S O N D J F M A M -1,000 5.89 bn 2010 2011 Source: Australian Bureau of Statistics; The Beijing Axis AnalysisChina-Australia InvestmentMajor Recent Deals and Developments Approved Chinese Investments in Australia by Sector• In June, it was reported that Australian coking coal (USD, 2009-10) producer Caledon Resources had agreed to be bought Manufacturing Services USD 174.83 mn by Guangdong Rising Assets Management for USD 507 USD 633.11 mn mn. Caledon Resources has two coal mines in Queensland• In July, ASE-listed MetroCoal announced that China Coal Resource processing USD 671.08 mn Import & Export Company (CCIEC) had received approval from the Chinese government to form a USD 33 mn joint venture with MetroCoal in which CCIEC will acquire Real estate a 51% stake in MetroCoals Columboola mining area in USD 2.13 bn Queensland• In July, Zijin Mining Group confirmed that it will invest an additional USD 30 mn in Australian miner and explorer Norton Gold Fields Limited. The Chinese gold miner Mineral exploration currently holds 16.98% of Nortons total equity Total: USD 14.37 bn & development• In July, Northwest Nonferrous International Investment USD 10.76 bn acquired a controlling stake of 48.7% in Synergy Metals, an ASE-listed company engaging in mineral prospecting Source: FIRB; The Beijing Axis Analysis for USD 13.8 mn• In August, Yanzhou Coal completed its USD 222.3 mn acquisition of Syntech Resources. The Australian coal miner owns Carnaby Downs mine – a 700 million metric ton thermal coal project in Queensland’s Surat Basin. China’s third-largest coal producer is also reportedly in the running for Whitehaven Coal, one of Australia’s largest remaining independent miners, along with India’s Aditya Birla Group and Peabody Energy of the US• In August, China Nonferrous Metal Industry Foreign Engineering and Construction Co. stated that it would increase its stake in Terramin Australia Ltd, a base metal production company with an operating mine in South Australia and other advanced projects in Australia, from 14.38% to 19.86%. Terramin made it clear that it will use the USD 5 mn sale proceeds to develop two zinc and lead mining projects• China Datang Corporation Renewable Power Co Ltd has finalised a JV with Australian company CBD Energy Limited and Hebei-based Baoding Tianwei Baobian Electric Co Ltd. Under the agreement, Datang will hold a stake of 63.75% in the JV, called AusChina Energy Group, while CBD Energy will hold 23.75% and Baoding Tianwei will hold the remaining 12.50%. With an investment of USD 3.19 bn, the JV is expected to establish wind farm and solar power plants in three years, with the goal of becoming a major player in the renewable energy market in Australia• Shanghai’s Bright Food Group has agreed to buy a 75% stake in Champ Private Equity’s Manassen Foods Australia Pty Ltd. The famed White Rabbit candy owner is eager to increase its overseas sales and footprint and has been looking at various acquisition targets for the past few months• In August, Insurance Australia Group agreed to pay USD 103.3 mn for a 20% strategic stake in Chinese general insurer Bohai Property Insurance Pty Ltd. The Beijing Axis 45

The China Analyst RegionsRegional Focus: CHINA-LATIN AMERICAChina has continued to strengthen its political and economic ties with Latin America in 2011. An officialvisit to the region by one of China’s leading political figures, along with continued trade and investmentgrowth are indicative of strengthening strategic ties between China and Latin America. In this edition,we revisit China’s relationship with Mexico, including an interview with the Ambassador of Mexico toChina, Jorge Guajardo.China-LatAm Briefing: High Level State Visits Solidifying Political and Economic Ties • In June, Chinese Vice President Xi Jinping travelled to Uruguay, Cuba and Chile on official visits. In Chile, Xi delivered a speech at the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC), where he stated that countries in the Latin American and Caribbean regions have become more dynamic in their diplomatic activities and have emerged as a new force in global governance • In Uruguay, Chinese Vice President Xi Jinping signed 17 accords with Uruguay in the fields of economy, trade, investment, culture, social welfare, industry and tourism. China is now Uruguay’s second-largest trade partner in the region, behind Brazil • In Cuba, Havana and Beijing are currently implementing important cooperation projects in the fields of tourism, telecommunications, transportation, biotechnology and energy. China is also Cuba’s second-largest trade partner behind Venezuela, with Chinas main exports to Cuba largely revolving around infrastructure-related industries • In April, Brazil’s new President Dilma Rousseff, along with her counterpart Hu Jintao, pledged to further develop the two countries’ strategic relationship during the former’s state visit to Beijing. The meeting resulted in the signing of approximately 20 trade agreements worth a total of USD 1 bn, as well as a number of large-scale investment proposals. China became Brazil’s largest investor as well as the second-largest importer of Brazilian goods in 2011China-LatAm TradeTotal Trade amounted to USD 49.3 bn, an increase of 30% y-o-y• In H1 2011, China’s total bilateral trade with LatAm • Approximately 86% of LatAm’s exports to China in H1 reached USD 93.1 bn, an increase of 35% y-o-y 2011 originated from just three countries: Brazil (45%),• Brazil, Mexico and Chile were China’s largest trading part- Chile (19%) and Venezuela (12%) ners in LatAm, accounting for 33%, 16% and 16%, respectively, of China’s total trade with the region during H1 2011 China Exports to LatAm• China’s trade deficit with the region fell to USD 5.5 bn in • China’s total exports to LatAm in H1 2011 reached USD H1 2011, a decrease of 20% y-o-y 43.8 bn, an increase of 41% y-o-y • In H1 2011, nearly 70% of China’s exports to the regionChina Imports from LatAm were concentrated in Brazil (33%), Mexico (24%) and• Chinas total imports from Latin America during H1 2011 Chile (11%)China-LatAm* Trade (USD bn, 2003-H1 2011) Chinas LatAm* Trade by Country (USD bn, H1 10 vs. H1 11)100 Imports H1 2010 Imports H1 2011 Exports H1 2010 Exports H1 2011 China exports to LatAm Bolivia 80 Cuba China imports from LatAm Paraguay Uruguay 60 Ecuador Peru 40 Venezuela Colombia Argentina 20 Chile Mexico Brazil 0 2003 2004 2005 2006 2007 2008 2009 2010 H1 2011 15 12 9 6 3 0 5 10 15 20 25Source: China National Bureau of Statistics; CEIC; The Beijing Axis Analysis Source: CEIC; The Beijing Axis Analysis* Note: LatAm here refers to the Latin American Integration Association (LAIA). LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador,Mexico, Paraguay, Peru, Uruguay and Venezuela.46 The Beijing Axis

Regions The China AnalystChina-LatAm InvestmentTrends auto manufacturing facility in Brazil• While foreign investment in Latin America grew by 40% • In June 2011 it was announced that China’s ZTE was in 2010 to USD 113 bn, 2011 has seen further growth, going to start producing its own Android-based tablets driven by the official visit from China’s Vice-President Xi in Brazil. ZTE plans to invest a total of USD 250 mn in its Jinping earlier in the year which resulted in millions of operations in Brazil and expects to employ some 2,500 dollars worth of trade and investment deals in the region people in the country by 2014• Current developments in the global economy, particu- • Ecuador announced in June that its loans from China will larly in the financial markets, will also prompt Chinese reach at least USD 3 bn in 2011 and the government’s oil enterprises to take better advantage of relatively bargain revenue forecast will exceed the fiscal budget by some prices and acquire companies and assets abroad to satisfy USD 60 mn, reassuring investors that South America’s Chinas demand for resources as well as gain access to seventh-biggest economy will be able to keep servicing new markets abroad. Latin America is expected to be one its debt of the regions that will benefit the most from this trend • In August 2011, Chinese home appliances and electronics manufacturer Midea announced plans to investMajor Recent Deals and Developments USD 223.3 mn to acquire a 51% stake in the Latin• In April 2011, the Export-Import Bank of China (China American air-conditioning business of Carrier, a US home Exim Bank), announced that it will formally launch a appliances provider yuan-denominated sovereign fund targeting Latin • In August 2011, the Industrial and Commercial Bank of America before the end of 2011. The USD 1 bn fund will China Ltd., China’s largest commercial bank, stated that mainly focus on infrastructure construction in collabora- it would buy an 80% stake in Standard Bank Argentina tion with the Inter-American Development Bank SA for USD 600 mn• In May 2011, Chery Automobile Co. announced that it • In August 2011, Argentina’s Mining Secretary announced will break new ground in Latin America with its USD that the government is in discussion with Chinese inves- 200 mn factory in Venezuela, which is expected to start tors over the building of a USD 750 mn copper refinery. producing vehicles for the regional market later this The proposed project would process copper concen- year. Chery had previously signed a cooperative agree- trates into 210,000 tons of cathode copper and 700,000 ment with China Development Bank and the Venezuelan tons of sulphuric acid per year. The names of the poten- government to set up the new factory, which will be tial Chinese investors have yet to be disclosed Chery’s second-largest in Latin America, following itsChina-LatAm Country Watch: MexicoBrief Country Profile China Trade with Mexico (USD bn, 2000-H1 2011)• Mexico is one of the largest and most developed coun- 20 tries in Latin America, boasting a GDP of USD 1.4 tn Chinese exports to Mexico (2010) and a GDP per capita of USD 9,580• Mexicos economy rebounded strongly from the 15 Chinese imports from Mexico effects of the global financial crisis, when its economy contracted by 6.1% (2009). In 2010, Mexico’s economy grew by 5.5% 10China-Mexico Bilateral Ties• China and Mexico are potential competitors competing in the US and Latin American markets, yet over the past 5 decade their relationship has become more strategic as they are important sources of growth for one another• China has expressed interest in intensifying its investment in Mexico in the fields of agriculture, mining, and 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 H1 manufacturing among other sectors. Chinese manufac- 2011 turers can especially save on logistics costs by setting up Source: UN Comtrade; CEIC; The Beijing Axis Analysis operations in Mexico• China’s total trade with Mexico reached USD 24.7 bn in (29%), machinery (22%) and optical, photo and technical 2010, an increase of 30% y-o-y; bilateral trade between equipment (11%) made up the bulk of China’s exports the two countries has been growing at a compound • China’s total imports from Mexico increased by 77% annual growth rate of 30% since 2000 y-o-y to approximately USD 6.9 bn in 2010. Electronic• China’s total exports to Mexico in 2010 reached USD 17.8 equipment (28%), mineral ores (20%) and motor vehicles bn, an increase of 45% y-o-y. Electronic components (11%) were the main exports to China The Beijing Axis 47

The China Analyst RegionsSeizing Every Opportunity: Ambassador of Mexico to China, Jorge Guajardo,on Mexicos Thriving Business Relationship with ChinaAmbassador Jorge Guajardo is seeing the best ever economic relations between Mexico and China,but he sees much more potential for the future. Bilateral trade has increased substantially, and Mexicancompanies such as Grupo Bimbo and Softtek have found success in China. Yet Mexico, he believes, isnow more ready than ever to be one of Chinas main partners in the region. around USD 400 million. Something similar occurs with Mexican investment in China. The official figure is over USD 100 million, but actual investment is around USD 400 million. However, these investments have been made by well-known companies such as Grupo Bimbo and GRUMA from Mexico and Lenovo and Huawei from China, so we are confident that investment will grow rapidly in the coming years. Can you cite some case studies of Mexican businesses in China? Which Mexican companies have been successful in China? I will give you a few examples. Grupo Bimbo is the largest producer of bread in the world, with a history that goes back to 1945 in Mexico City. Bimbo bought a small Spanish bread company in Beijing in 2006. It has since tripled the size of its business, bought new brands and expanded to half a dozen cities, including Shanghai. Softtek is an IT company based in Monterrey, Mexico. It arrived in Beijing in 2007 and has been working with high level clients from China and other countries since then. Just to mention two examples of this, they provided IT support for the Australian delegation during the Beijing Olympics and the US Pavilion at the Shanghai 2010 World Expo.The Ambassador of Mexico to China, Jorge Guajardo Nemak is one of the world’s leading manufacturers of aluminiumP lease provide an overview of the China-Mexico trade components for automobile motors, with state-of-the-art tech- and investment relationship. nology. They have a plant in Nanjing and supply the leading Economic relations between Mexico and China are at their car manufacturers in China, both local and international. I ambest level in history, but there is still huge potential to develop sure that in the near term, both the number and the success ofthem further over the short, medium and long term. Last year, Mexican companies investing in China will increase.trade between the two countries amounted to almost USD 50billion; Mexican exports to China reached USD 4.2 billion while What are Mexico’s main competitive advantages as animports reached USD 45.7 billion, leaving Mexico with a big investment destination in Latin America?deficit. However, many Chinese products imported by Mexico Mexico has unique advantages. It has the largest Spanishconsist of components and parts of other products that are speaking market in the world, with a population of 112 million,assembled in Mexico and then exported to third countries, almost equal to that of Argentina, Colombia and Venezuelamainly the US. combined. It has one of the highest standards of living in the region, and its GDP per capita is around 40% higher than Brazil’s.China is Mexico’s second-largest trading partner. It is Mexico’s The economic future of the country is promising. For instance,second-largest source of imports behind the US, and the third- according to a Goldman Sachs forecast, Mexico will be the fifth-largest destination of Mexican exports behind the US and largest economy in the world in 2050, behind only China, the US,Canada. In 2010, total trade grew 43.4% and Chinese imports India and Brazil.from Mexico expanded by a full 90%. In the first five months of2011, exports have grown almost a further 50%. Mexico has a wide net of free trade agreements, covering 44 countries, including the US, Canada, the European Union andInvestment is still modest. Official figures indicate that Chinese Japan, collectively covering two-thirds of the world’s GDP andinvestment in Mexico is around USD 130 million, but if we over a billion people. It has a unique geographic position, with aconsider investments made by Chinese companies through 3,300km-long border with the US, and long coastlines along thesubsidiaries based in third countries, the total investment is two largest oceans in the world, the Atlantic and Pacific.48 The Beijing Axis

Regions The China AnalystThe Mexican economy is not only big, but also sophisticated,and its open to foreign trade and investment. Mexico has signedAgreements to Promote and Protect Foreign Investment with 25 Success Stories ofcountries, and Treaties to Avoid Double Taxation with 36 econo-mies, including China in both cases. Chinese Investment in MexicoWhat are the opportunities for Chinese companies in In the last ten years, several Chinese companies haveMexico? And the challenges? made successful investments in Mexico, paving the wayWe have identified several sectors with opportunities for Chinese for more companies to explore the opportunities that layinvestment in Mexico. The most promising are automotive, new ahead in the second-largest economy in Latin America.and renewable energy, mining, infrastructure construction and Among the top Chinese investors in Mexico is Huawei.electric & electronic products. Let me elaborate on three sectors: The worlds leading producer of telecommunicationsautomotive, infrastructure construction and mining. equipment has been in Mexico since 2001, where it has established its regional headquarters for Latin America.Mexico is the fifth-largest exporter of automobiles in the world Huawei sells its products to the major telecommunica-and ranks among the ten leading manufacturers. Eight of the tion carriers in Mexico and in 2009 arranged for USD 1.2ten leading original equipment manufacturers in the world have billion in credit from the China Development Bank toassembly plants in Mexico. Through its free trade agreements increase its supply to Telcel and Telmex, large telecom-network, exporters of cars and auto parts established in Mexico munications firms in Mexico.have access to the main markets in the Americas, Europe and Japan. Lenovo landed in Mexico in 2007 with an investment ofThe administration of President Felipe Calderón has invested USD 20 million to establish a PC factory in Monterrey. The factory has a production capacity of 5 million units a yearheavily in infrastructure construction to upgrade the commu- that are sold in the local market, but are also exported tonication, transportation and logistics capabilities of Mexico. the US and Latin America.Investment in infrastructure has increased from 3% to 5% ofGDP and the projects are open to international companies. Golden Dragon Copper Tube is the leading manufacturer of precision copper pipes in the world. It estab-Mexico is the largest producer of silver in the world and is ranked lished a factory in the state of Coahuila in 2007, investingamong the leading 12 countries for production of eighteen types around 100 USD million and creating hundreds of jobs.of minerals. A Behre Dolbear report published in 2010 placedMexico as the world’s fourth-best investment destination for Chinese companies have also established operations inmining in a 25-country list and in first place for fiscal regime. the mining and consumer products industries. In 2008, Jinchuan Group Ltd. acquired the Canadian company Tyler Resources Inc. for 214 million Canadian dollars,When it comes to global manufacturing, as a low cost including the rights to exploit the Bauerachi copper andsourcing country itself, is Mexico a competitor to China in molybdenum project in Chihuahua, around 130 km fromLatin America? Or is it a case of complementarity? the Pacific coast of Mexico in Sinaloa State.Mexico views itself not as low cost sourcing country but as astrategic platform for international companies from around Hubei Tobacco established a joint venture with a localthe world. It is true that due to the gap between the average partner in Quintana Roo state in 2008 to manufactureincome of workers in Mexico and the US, historically Mexico has cigarettes using Mexican tobacco leaves under Chinesebeen a low cost manufacturing base, but now the situation has brands, both for the local market and to export to Centralchanged dramatically. With the improvement in global logistics, America.communications and information technologies, a country likeChina can directly compete with Mexico despite it being on the How do you see China - Latin American relations going d h lopposite shore of the Pacific Rim. forward and how will Mexico play a role in China’s growing interest in the region?International companies will be greatly impressed by the oppor- Relations between Latin America and China are at their besttunities that Mexico offers. Its workforce is young and well level in history. I think the links between the region and Chinaeducated and trained. There is a strong supply of managers and will increase and diversify in the future, benefiting both sides inengineers with good command of English and knowledge of terms of trade, investment and tourism, but also in the realmsUS and European cultures. We are in the same time zone as the of culture, science and technology cooperation, among others.US and the main cities in North America are within a six-hourflight-time radius. Mexico is one of the largest economies in Latin America; it enjoys the most strategic geographical position and is the mostThe international division of work is a reality and Mexico offers a globalised country in the region. The bilateral relationship withdistinctive platform because of its geographic location, human China was upgraded to the Strategic Partnership level in 2003resources quality, solid economic and logistics foundations and and Mexico will continue to be one of the main regional partnersa sound legal and administrative framework friendly to foreign for China due to its intrinsic weight in terms of economy, culturetrade and investment. and politics and as a bridge to other geostrategic regions: North, Central and South America, and the Caribbean. The Beijing Axis 49

The China Analyst RegionsRegional Focus: CHINA-RUSSIAWhile bilateral trade between China and Russia maintained steady growth in the first quarter of 2011,the two countries are still locked in long-running negotiations on gas prices and oil supplies. With thehighly anticipated natural gas super deal put on hold, the major event of the year in the China-Russiaspace could be in the banking sector where China Investment Corporation is set to participate in theSPO of Russia’s largest bank.China-Russia Briefing: Hu Jintao state visit to Russia; Direct currency trading; Open door for invest-ment from Hong Kong in Eastern Siberia • On 15-18 June, Chinese President Hu Jintao undertook a state visit to Russia. Included in a package of other political and economic deals signed during the visit was a power generation deal and an investment cooperation deal between China Eximbank and Russia’s En+ Group. A main topic for discussion during the state visit was the terms of pending natural gas supplies from Russia to China, although agreement has still not been reached due to differing price expectations on the two sides • In June, the central Bank of Russia and the People’s Bank of China signed an agreement on foreign trade payments using their national currencies. In accordance with this agreement, Russian and Chinese companies will be able to settle accounts using both freely convertible and national currencies. Trade partners will have the right to choose the currency independently, by mutual consent • On 17 April, Russian President Medvedev paid his first visit to Hong Kong and met with Donald Tsang, Chief Executive and President of the Executive Council of the Government of Hong Kong. The main topic of the meeting was to high- light opportunities for investment from Hong Kong in Eastern Siberia and Russias Far East, following the cross-border cooperation programme for these regions and China’s North-East, which was announced two years agoChina-Russia TradeTotal Trade China-Russia Monthly Trade (USD bn, Jan 2010-Jun 2011)• Bilateral trade between China and Russia increased 2010 2011 substantially in H1 2011, reaching USD 35.8 bn, an 7 increase of 40% y-o-y (see chart to the right) 6China Imports from Russia 5• China’s imports from Russia in June 2011 amounted to USD 3.17 bn, up 39.6% y-o-y 4• China’s imports from Russia for H1 2011 amounted to 3 USD 18.6 bn, an increase of 33.7% y-o-y 2China Exports to Russia• Chinas exports to Russia in June 2011 amounted to USD 1 3.54 bn, an increase of 42.7% y-o-y• Chinas exports to Russia for H1 2011 amounted to USD 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 17.2 bn, an increase of 45.7% y-o-y Source: China National Bureau of StatisticsChina-Russia InvestmentMajor Recent Deals• In March, DST Global, a Russian investment group focusing Levaev had bought Katoka’s stock of shares from ALROSA, on internet projects, joined a group of investors (including Russias largest diamond producer, for USD 20 mn in the US retailer Walmart) putting ‘hundreds of millions’ of US late 1990s, when ALROSA was suffering financially due to dollars into China’s internet retailer 360buy.com. The exact the absence of export quotas amount of the investment was not disclosed • In June, Chinese car glass producer Fuyao Glass signed• In May, Israeli businessman Lev Levaev sold 18% of the an agreement with the local government of the Kaluga Russian-Angolan mining company Katoka to China region in Russia to build a plant with capacity to manufac- Sonangol, a joint venture between China International ture three million car glass sets annually. According to the Fund (CIF) and Sonangol, an Angolan oil and gas para- agreement, Fuyao Glass will invest USD 200 million in the statal. As a result, control of one of Africa’s largest diamond project, and the region will provide utility networks and fields was transferred to a China-Angolan alliance. Lev other infrastructure. The launch of the first phase of the50 The Beijing Axis

Regions The China Analyst plant is scheduled for 1 December 2012, and the plant is • In June, China Investment Corporation (CIC) received an expected to reach full capacity in February 2013 offer to participate in the second public offering (SPO) of• In June, during the St. Petersburg International Economic Russia’s largest bank, Sberbank. The offer came from one Forum, Russia’s largest private power generation company, of the investments banks that will organise Sberbank’s Eurosibenergo, and China’s largest public hydropower SPO, planned for the autumn of 2011. The Russian corporation, China Yangtze Power, signed an agreement government plans to sell 7.6% of Sberbank’s shares, and for the construction of three power stations in Eastern CIC may purchase 5%. Considering the market capitalisa- Siberia. These stations include Lenskaya a thermal power tion of Sberbank, 5% may amount to about USD 3.5 bn, plant in the Irkutsk region (capacity of 1200 MW), Nizhne- which will automatically make this deal the largest ever Angarskaya hydro power plant in the Krasnoyarsk region Chinese investment in the Russian finance sector. CIC’s (capacity of 600-1200 MW) and the Transsiberian hydro strong interest in Sberbank follows CIC’s participation in power plant in the Zabaikalsk region (capacity of 400-900 February’s SPO of Russia’s second-largest bank, VTB, when MW). A joint venture, YES Energo, will be set up to imple- it purchased 1% of VTB’s shares for USD 100 mn ment these projectsChina-Russia Resources WatchMore Russian iron ore exports to China; Protracted gas price negotiations; CNPC’s debt repayments; Biogas constructionjoint venture in Russia• 2011 saw a sharp y-o-y increase in Russia’s iron ore Russian Iron Ore Exports to China (Mn tons, 2004-10) supplies to China through one of the main routes, the 10 railway crossing point Zabaikalsk-Manzhouli. During the first six months of 2011, China imported 8,789 wagons of 8 iron ore (with total weight exceeding 500,000 tons). For the same period last year, China’s imports through this route totalled only 4,497 wagons (with a total weight of 6 200,000)• In April, Russias Biogas EnergoStroy and China National Bioenergy Company (the largest bioenergy enterprise 4 in China, affiliated with State Grid) signed a memo- randum of understanding (MOU) on the establishment of a network of biogas facilities in Russia based on waste 2 products of the local crop, livestock and utility sectors. Russian and Chinese collaborative technologies will be used for complex processing of raw materials. A joint 0 2004 2005 2006 2007 2008 2009 2010 venture (JV) will be set up to handle the construction Source: UN Comtrade of these facilities in different regions of Russia by the autumn of 2011. The facilities will produce heat, elec- commenced with payment reductions tricity and biogas. At some point in the future these • The price of natural gas supplies from Russia to China companies plan to build Russias first large biotech plant was the main topic of discussion between President Hu producing wood fuel pellets from the waste of wood Jintao and his Russian counterpart Dmitry Medvedev harvesting and wood processing in the Samara region during the St. Petersburg International Economic Forum in the southeastern part of European Russia (SPIEF) on 16 June. Gas will be supplied via the Altai pipe-• By the end of May, Chinas oil giant China National line from Western Siberia through the western section of Petroleum Corporation (CNPC) paid debts to the Russian the Russian-Chinese border. It is planned that gas deliv- companies Transneft and Rosneft for oil supplies. CNPC eries of about 30 billion cubic metres a year will begin transferred USD 78 million to Transneft and USD 118 in 2015. However, China and Russia have yet to reach million to Rosneft. According to Transneft representative agreement on pricing, and there was little progress at Igor Demin, taking into account the amount received the SPIEF on this issue. The Chinese side wants to pay from China, CNPC’s debt to Transneft declined to about USD 235 per 1,000 cubic meters, although the average USD 20 million. The amount of outstanding CNPC debt forecast for export prices of Gazprom to Europe in to Rosneft has not been disclosed. Disputes between the 2011 is USD 352 per 1,000 cubic meters. As for Russia’s companies arose from the fact that the parties could not initial plans to export 38 billion cubic meters of gas to agree on the tariff for pumping oil through Russia via the China along the eastern route (driving gas supplies to Eastern Siberia-Pacific Ocean (ESPO) pipeline. According 68 billion cubic metres a year and making China the to a contract signed between the parties in February largest importer of Russian gas by far), negotiations for 2009, the pumping tariff covered the whole length of this route are currently inactive. According to Gazprom’s the ESPO. However, the Chinese side concluded that the CEO, Alexey Miller, Russia’s gas monopoly currently only tariff for pumping to Skovorodino in the Amur region pursues the western route project (the starting point of the branch to China) would be 7% less. From the beginning of 2011, CNPC had unilaterally The Beijing Axis 51

The China Analyst The Beijing AxisThe Beijing Axis News: March–September 2011Greater China and Asia ered a presentation entitled The Influence of Asia on the World12th Asian Ferro-alloys Conference - Hong Kong, China Economy.On 28-30 March 2011, the 12th Asian Ferro-alloys Confer-ence was held at Kowloon Shangri-La, Hong Kong. Matt Pi- FutureChina Global Forum - Singaporeeterse attended the event and delivered a presentation en- On 11-12 July 2011, the FutureChina Global Forum 2011 wastitled The move westward and elsewhere for Asian M&A on 30 held at the Ritz-Carlton in Singapore. Kobus was invited asMarch. the panelist of a session entitled Chinese Outbound M&As: From steady growth to a tidal wave?7th Annual Asia Mining Congress 2011 - SingaporeOn 4-8 April 2011, The 7th Annual Asia Mining Congress Annual Precious Metals Meeting - Guiyang, China2011 was held at Marina Bay Sands, Singapore. Kobus van On 26-27 July 2011, the Annual Precious Metals Meeting wasder Wath (Founder and Group Managing Director) attended held in Guiyang, China. Haiwei Huang attended the eventthe event and chaired the Africa Mining Investment Forum and delivered a presentation entitled The Development andon 4 April. impact of Chinese Mining Investment in Africa.AFBG on Africa: Penetrating the South African Market - 3rd Mining Investment Summit 2011 - SingaporeSingapore On 27-28 July 2011, the 3rd Mining Investment Summit 2011On 6 April 2011, AFBG on Africa: Penetrating the South Af- was held in Singapore. Kobus van der Wath delivered a pres-rican Market, a dialogue session by the Singapore Business entation entitled The outlook for the Asian and global com-Federation’s Africa Business Group (AFBG), was held at Kep- modities market.pel Towers in Singapore. Kobus van der Wath was a panelistof the session entitled Perspectives from a Southern African Other events recently attended by The Beijing Axis incompany/businessmen. Greater China and Asia: 13-14 April BRICS Business Forum Sanya, ChinaBrazil-China Seminar Attended by Brazilian President 25-29 April ACBC Trade and Investment Beijing, ChinaDilma Rousseff - Beijing, China Delegation to BeijingOn 12 April 2011, Javier Cuñat (General Manager, Beijing Axis 27 April South Africa Freedom Day Beijing, China CelebrationStrategy) and Barry van Wyk (Senior Consultant) attended a 29 May - 1 June 17th Coaltrans Asia Bali,bilateral trade and investment seminar at the China World IndonesiaTrade Centre in Beijing. The event was attended by the Presi- 2-3 June 5th Annual Asia Mining Beijing, Chinadent of Brazil, Dilma Rousseff, as well as Chinese Vice Premier Partnering ForumWang Qishan. 14-16 June Mines and Money Beijing 2011 Beijing, China 25-26 June Investment Policies and Foreign Beijing, China5th CCPIT Chinese Enterprises Outbound Investment Economic Market OpportunitiesConference - Beijing, China and Risks in Asia, Africa, Latin AmericaOn 28 April 2011, the China Council for the Promotion ofInternational Trade (CCPIT) hosted the fifth installment of Africaits annual conference on Chinese outbound investment. Africa Project Access Business Briefing - Johannesburg,Dirk Kotze (General Manager: Strategic Projects) and Haiwei South AfricaHuang attended the seminar. Dirk was also invited to deliver On 18 May 2011, the Africa Project Access Business Briefinga presentation at the event on the major trends and dynam- was held at Werksmans Attorneys in Johannesburg, Southics of China’s drive to invest abroad, particularly focusing on Africa. Nitesh Dullabh of the South African office attendedimplications from a Chinese perspective. and delivered a presentation entitled Strategic Market Entry by Chinese Companies in Africa.Investment in Energy and Natural Resources – CurrentThemes and Issues - Beijing, China Zambian Mining and Energy Conference - Lusaka, ZambiaOn 24 May 2011, Javier Cuñat attended and delivered a On 15-17 June 2011, the 1st Zambian International Min-presentation entitled An Examination of China’s Strategy for ing and Energy Conference (ZIMEC) was held in Lusaka,Outbound Investment in Mining and Infrastructure Sectors in Zambia. Nitesh Dullabh attended the event and deliveredAfrica. a presentation entitled China’s Importance to the African Re- sources Sector on June 15.International Chromium Development AssociationMembers Meeting 2011 - Hong Kong, China 10th Coaltrans South Africa - Johannesburg, South AfricaOn 1-3 June 2011, the International Chromium Develop- On 21-22 June 2011, Coaltrans South Africa was held at thement Association (ICDA) Members Meeting 2011 was held in Hilton Hotel Sandton in Johannesburg, South Africa. KobusHong Kong. Matt Pieterse attended the meeting and deliv- van der Wath attended the event and delivered a presen-52 The Beijing Axis

The Beijing Axis The China Analysttation entitled The Role and Importance of Asia for African Xstract Lunch Time Technical Series - BrisbaneCoal. On 16 August 2011, Xstract held one of its Lunch Time Tech- nical Seminars in Brisbane, Australia. Kobus van der Wath de-Africa Mining Congress 2011 - Johannesburg, South Africa livered a presentation entitled The Why, What & How of ChinaOn 19-22 July 2011, the Africa Mining Congress 2011 was Procurement.held at the Sandton Convention Centre in Johannesburg,South Africa. Kobus van der Wath attended the event and Other events recently attended by The Beijing Axis indelivered a presentation entitled China as a Driver of the Afri- Australia:can Resources Sector on 20 July. 5 July Australia China Business Council Sydney 1-3 August Diggers & Dealers KalgoorlieOther events recently attended by The Beijing Axis inAfrica: 16 August CIPSA Strategic Procurement Forum Perth 22 August 7th Annual Coaltrans Australia Brisbane1-3 March Energy Indaba 2011 Johannesburg, 31 August - 2 Africa Down Under Conference Perth South Africa September25 March CIPS Gauteng Regional Johannesburg, 22-23 Coaltrans Australia Brisbane Conference South Africa August18-20 May IMEXPO SADC China Trade Johannesburg, 30 August China Procurement Roundtable Perth Fair & Investment Forum South Africa (Organised by The Beijing Axis)7-8 June Africa Iron Ore Cape Town, South Africa26-28 June 33rd Annual SAPICS Confer- Johannesburg, Europe and Americas ence & Exhibition for Supply South Africa Structured Commodity Finance Conference 2011 - Lon- Chain, Logistics and Opera- don, UK tions Management Profes- On 13-14 April 2011, the Structured Commodity Finance sionals Conference 2011 was held at the Crowne Plaza Hotel in28 June Impala Platinum Holdings Johannesburg, Limited CEO - David Brown South Africa London, UK. Matt Pieterse attended the event and deliv- (GIBS Forum) ered a presentation entitled China’s Impact on Global Com-5-6 July Mozambique Coal Maputo, modity Markets and Increasing International Investment on Mozambique April 13.18 July The India Africa Business Johannesburg, Network Launch South Africa Texel Breakfast Briefing - London, UK1 August American Chamber of Johannesburg, On 16 May 2011, Matt Pieterse attended and delivered a pres- Commerce Breakfast South Africa entation entitled China Moving Westwards and How Europe22 August SA-Angola: Trade and Invest- Johannesburg, ment Forum South Africa Stands to Benefit. World Mining Investment Congress - London, UKAustralia On 17-19 May 2011, the World Mining Investment CongressSA Boardroom Lunch - Perth was held at the Royal Garden Hotel in London, UK. Matt Pi-On 27 May 2011, Kobus van der Wath attended the event eterse attended the event and delivered a presentation onand delivered a presentation entitled China and its role in the 18 May.Australian Mining industry. HARBOR Annual Aluminium Outlook Conference - Chi-Financial Review Mining Investment Conference 2011 - cago, USSydney On 20-22 June 2011, the HARBOR Aluminium ConferenceOn 23-24 June 2011, this conference was held at the Amora was held at the Swissotel in Chicago, US. Lilian Luca deliv-Hotel Jamison in Sydney, Australia. Javier Cuñat attended ered a presentation at the event entitled China’s Economicthe event and delivered a presentation entitled China’s Ris- Growth and its Expected Effects on Aluminium Supply anding Outward Investment and How the West Can Benefit. Demand on June 21, and another presentation entitled CHINA SOURCING: Perspectives on Why, What and How onAMEC (Association of Mining and Exploration Compa- June 22.nies) Convention 2011 - PerthOn 28-30 June 2011, the AMEC Convention 2011 was held atBurswood Convention Centre in Perth, Australia. Kobus vander Wath delivered a presentation entitled China and its Rolein the Australian Mining Industry on June 28.Global Mining Investors ‘n Explorers Show - SydneyOn 4-6 July 2011, the Global Mining Investment ‘n’ Explor-ers Show was held at the Hilton Hotel in Sydney, Australia.Kobus van der Wath delivered a presentation entitled ChinaOutbound Investment Strategy on 5 July. The Beijing Axis 53

The China Analyst EventsUpcoming EventsThe Beijing Axis can assist delegates who wish to attend events in China as well as globally. The BeijingAxis’ service set includes research, interpretation, negotiation and travel logistics. For more information,please send an email to info@thebeijingaxis.com, or for contact details see The Beijing Axis corporateprofile on the back page.Date Event Location15-16 September 2011 4th South African Ferro-alloys Conference JohannesburgLocal and international delegates will be in attendance at this important industry forum for a country which is vital tothe ferro-alloys market. Understand how your demand can be met and build lasting relationships with these key sup-pliers.10-12 October 2011 Mines and Money Australia 2011 SydneyMines and Money Australia 2011 Conference and Exhibition will draw on the global investor database of its sister showsto match Australian mines with both domestic and international capital.12-13 October 2011 The 7th CIPSA Annual Conference MelbourneWith 10 plenary sessions, 25 seminars and 6 pre-conference half-day workshops, the CIPSA Annual Conference is theleading procurement event in the region.20 October 2011 CHINAAFRICA Business Forum 2011 JohannesburgThis one day forum will bring together key business leaders, industry specialists, project managers and others to explorethe current dynamic of the China-Africa relationship.25-28 October 2011 2011 China Investment Summit LondonThis is the only conference of its kind bringing together European and institutional investors, sovereign wealth funds,banks, fund managers, regulators and all key stakeholders to access China’s investment opportunities.6-8 November 2011 13th Annual CHINA MINING Congress & Expo TianjinThe theme of this year’s Congress & Expo is The World and China in Mining Consolidation: Co-operation, Responsibilityand Development. Over the years CHINA MINING has evolved into one of the most influential mineral exploration/ex-traction trade events in the world, and has come to play a critical role in bringing together top policy makers and leadingindustry figures.8-9 November 2011 3rd China Overseas Investment Fair BeijingThis fair is the first authoritative and professional exhibition on Chinas overseas investment.22-23 November 2011 Coaltrans Mozambique MozambiqueCoaltrans Mozambique provides a forum to discuss key developments and opportunities in both Mozambique andSouthern Africa as a whole.6-7 December 2011 Mines and Money London LondonMines and Money provides a channel for the global mining industry to cultivate long term partnerships with London’smining stakeholders and investors, and brings together some of the most influential decision makers within mining com-panies, the investment community, governments and professional services.54 The Beijing Axis

The Beijing Axis The China AnalystPrevious Editions of The China AnalystMarch 2011 August 2010 Regulars Regulars Macroeconomic Monitor Macroeconomic Monitor China Facts & Figures China Facts & Figures China Trade Roundup China Trade Roundup China Sourcing Strategy China Sourcing Strategy China Capital China Capital Mapping China Mapping China Regional Focus: China-Africa, China-Australia, Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia China-Latin America and China-RussiaFeatures FeaturesChina in 2030: Outlines of a Chinese Future The China Factor: Supplying China’s Phenomenal Demand for ResourcesChina appears to have an awe-inspiring future ahead of it, and its economy its How did the China Factor become a singular driving force of globalset to attain unparalleled dimensions, if the future turns out like we expect. demand for natural resources in the 2000s?Chinas Construction Industry: Strategic Options for Foreign Players Road to 2020: Nuclear’s Rising Contribution to China’s Energy NeedsEntering the Chinese construction industry is a challenging prospect for Nuclear power has entered a new era in China as China targets 2020 forforeign firms, yet opportunities still exist. radically ramping up nuclear production.May 2010 January 2010 Regulars Regulars Macroeconomic Monitor Macroeconomic Monitor China Facts & Figures China Facts & Figures China Trade Roundup China Sourcing Strategy China Sourcing Strategy China Sourcing Blog Highlights China Capital China Trade Roundup Mapping China China Capital Regional Focus: China-Africa, China-Australia, Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia China-Latin America and China-RussiaFeatures FeaturesUpstart: China’s Emergence in Science and Technology Fighting for Trade: China and the Threat of ProtectionismAfter coming of age in China’s domestic markets, Chinese are now replicating China’s leaders are worried about protectionism, yet what is the real extenttheir domestic success in global markets. of the threat to China?Building by Design: How China Develops the Developing World Rare Earths: China’s Contribution to Modern TechnologyChinese contractors and design firms have gone international and are A closer look at the history of the rare earths industry in China, theshaping landscapes where its needed most: the developing world. controversies surrounding it, and some upcoming trends to watch.Other Recent Publications by The Beijing AxisAn Examination of China’s China Sourcing: Perspec- China as a Driver of theStrategy for Outbound tives on Why, What and African Resources SectorInvestment in Mining and How Africa Mining CongressInfrastructure Sectors in HARBOR Annual Alumini- July 2011Africa um Outlook ConferenceInvestment in Energy and June 2011Natural ResourcesMay 2011The Role and Importance China and its Role in the The outlook for the Asianof Asia for African Coal Australian Mining Industryry and global commodities10th Coaltrans South Africa a Association of Mining and marketJune 2011 Exploration Companies 3rd Mining Investment Convention Summit 2011 June 2011 July 2011To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com.DISCLAIMERThis 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 opinionsexpressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information presented herehas 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 responsiblefor any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investmentstrategy, 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 necessarilyindicative 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 mentionedin this document. All readers are advised to make their own independent judgement with respect to any matter contained in this document.Copyright notice: Copyright of all materials, text, articles and information contained herein resides in and may only be reproduced with permission of an authorised signatory of The Beijing Axis. Copyrightin 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 asa 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 writtenconsent of an authorised signatory of The Beijing Axis. All rights reserved. © The Beijing Axis 2011. The Beijing Axis 55

The Beijing Axis Group is a China-focused international advisory firm operating in four principal areas: Commodities, Capital,Procurement and Strategy. We work across various industries, but our core focus is on the mining, resources, industrial andengineering sectors. With offices in Beijing, Singapore, Perth, Moscow, Johannesburg and London, we support internationalfirms as they act in unfamiliar territory in China and Chinese firms as they venture out and ‘go global’. We are committed tosafety and sustainability, and emphasise ‘actions and transactions’.The Group is organised along four synergistic cross-border business units:Beijing Axis CommoditiesBeijing Axis Commodities supports commodity producers with their international marketing efforts and the structuring ofoff-take agreements, and assists commodity consumers with their procurement efforts in securing supply.Beijing Axis CapitalBeijing Axis Capital provides independent corporate finance advisory and transaction origination services. We have a specialistChina-specific approach with extensive international and Africa-specific knowledge and experience.Beijing Axis ProcurementBeijing Axis Procurement is a China-focused global procurement house and provides a comprehensive range of servicesacross the supply chain.Beijing Axis StrategyBeijing Axis Strategy provides management consulting services to CEOs and senior executives in the areas of strategyformulation and strategy implementation.Contact InformationBeijing, China +86 10 6440 2106, +86 10 6440 2672 (fax)Beijing Axis Commodities Beijing Axis Capital Beijing Axis Procurement Beijing Axis StrategyCheryl Tang Matt Pieterse Lilian Luca Javier CuñatMD, Beijing Axis Commodities MD, Beijing Axis Capital MD, Beijing Axis Procurement GM, Beijing Axis Strategycheryl@thebeijingaxis.com matt@thebeijingaxis.com luca@thebeijingaxis.com javiercunat@thebeijingaxis.comJohannesburg, South Africa Moscow, Russia Perth, Australia Latin America DeskDirk Kotze Lilian Luca Doug Horak Javier Cuñat (in Beijing)Director; GM, Africa MD, Beijing Axis Procurement Business Development Manager GM, Beijing Axis Strategydirk@thebeijingaxis.com luca@thebeijingaxis.com doughorak@thebeijingaxis.com javiercunat@thebeijingaxis.com+27 (0)11 201 2453+27 (0)11 201 2508 (fax) www.thebeijingaxis.com

The China Analyst September 2011

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