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FT SPECIAL REPORT 
Doing Business in China 
www.ft.com/Tuesday November 4 2014 reports | @ftreports 
Inside 
Bribes just one malady 
in healthcare system 
Achieving affordability 
and quality of care is 
proving to be a struggle 
Page 2 
Driving the car craze 
Antitrust fines have a 
wider agenda: to lower 
prices of vehicles 
Page 3 
Hong Kong protests 
Beijing’s plans for 
electoral reform spark 
fears of long-term 
impact on business hub 
Page 4 
Financial system in for 
short-term shocks 
Liberalisation plans aim 
to foster longer-term 
growth 
Page 5 
T he Chinese flag was flying 
over the New York Stock 
Exchange in late September 
as a grinning, elflike former 
English teacher watched his 
ecommerce company smash the record 
for the world’s largest ever initial public 
offering. 
Alibaba’s $25bn share sale made Jack 
Ma the richest man in China, but it 
also provided the kind of moment that 
symbolises historic shifts in the global 
landscape. 
From outside, China’s rising economic 
and political power appears unstoppa-ble 
and relentless. 
Chinese are now the biggest purchas-ers 
of expensive properties in London, 
New York and Sydney, and Chinese 
investors are buying up everything from 
Italian utility companies to the Waldorf 
Astoria Hotel in New York City. 
China’s increasingly assertive Com-munist 
leaders seem to want their own 
version of the United States’ 19th cen-tury’s 
Monroe Doctrine for their own 
back yard of Asia. 
This policy stated that any interven-tion 
by external powers in the politics of 
the Americas was seen as a potential 
hostile act. 
At the same time, Beijing’s rising 
influence can be seen around the globe, 
from Sierra Leone to São Paulo. 
As he revelled in his company’s suc-cessful 
debut in New York, Mr Ma 
declared that Alibaba was a company 
that had already “shaped the world” 
and said he wanted it to be “bigger than 
Walmart” as it expands outside its home 
market. 
US capitalist investors lapped it up 
and appeared to have bought into the 
newest Chinese dream. Alibaba shares 
ended their first trading day up nearly 
40 per cent and the company was 
valued at more than Facebook, Ama-zon, 
JPMorgan or Procter & Gamble. 
Alibaba is not the only Chinese com-pany 
with dreams of world domination. 
As growth continues to slow at home, 
many Chinese companies are looking 
abroad to make investments, enter for-eign 
markets and acquire valuable tech-nology 
and brands. 
But this interest in overseas corporate 
expansion is increasing just as foreign 
Slowdown is 
part of new 
economic 
narrative 
Jamil Anderlini says shifts in investment patterns 
and internal problems signal end to strong growth 
direct investment (FDI) into China is 
slowing sharply. In recent months, it has 
fallen at the steepest rate since the 
height of the global financial crisis, with 
a drop of 14 per cent in August and a 17 
per cent fall in July from the same 
months a year earlier. 
Apart from a drop during the financial 
crisis, FDI inflows to China have grown 
steadily since the country joined the 
World Trade Organisation in 2001 and 
reached a record $118bn in 2013, com- 
Continued on page 2 
Internet giants train 
sights on killer apps 
Mobile gateway 
developers become top 
targets for acquisitions 
Page 6 
High stakes: Alibaba’s New York 
IPO made Jack Ma China’s 
richestman— Andrew Burton/Getty Images 
Even the most optimistic 
forecasters believe China 
will keep slowing 
Rising energy, transport and 
labour costs squeeze profits 
Order a child’s Halloween costume in 
China ($3.44 for pirate hat, eye patch 
and black cape) and it will arrive at your 
door the next day, with a mere $1.60 in 
shipping costs added. If the supplier is in 
your city, you get it the same day free. 
This consumer bonanza is increas-ingly 
a problem for local and foreign 
companies selling in China, where rising 
energy, transport and labour costs are 
squeezing profits, not just for manufac-turers 
but for the growing number of 
brands targeting Chinese consumers. 
For years, the price of labour has been 
rising, especially for managers, but 
overall costs were still so low compared 
with the prices foreign customers would 
pay that its export industry thrived. 
By contrast, brands that market to 
cost-conscious Chinese buyers not only 
have to manage their manufacturing 
costs but also contend with shipping and 
retail costs inside the country. And that 
in turn means high energy costs are tak-ing 
a double toll. 
“Energy costs are so high in China, it’s 
becoming a concern,” says Shaun Rein, 
author of The End of Cheap China and 
managing director of China Market 
Research Group. 
Those high costs can show up in unex-pected 
ways as China’s business land-scape 
changes. “Sales have moved so 
decidedly from bricks and mortar to 
online that transport is really a prob-lem,” 
Mr Rein says. 
For retailers still selling the old fash-ioned 
way, the shift from tiny store-fronts 
to malls or box stores has meant 
higher power costs for air conditioning 
and lighting, as well as rising rent. 
Much of the problem lies in China’s 
industrial structure. “There is not much 
transparency in how authorities set 
domestic oil prices and a good system of 
supervision is not in place,” says Dong 
Zhengwei, a lawyer and veteran cam-paigner 
against state-owned mono-polies. 
“The government wants to pro-tect 
the interests of large oil companies.” 
International oil prices dropped by 
nearly a quarter between late June and 
mid-October; but Chinese retail petrol 
and diesel prices fell by only half that 
amount, or 11-12 per cent. The govern-ment, 
which adjusts prices on an irregu-lar 
basis, is allowing oil companies to 
recoup some revenues denied them 
when oil prices were higher. That puts 
Chinese retail petrol prices about 20 per 
cent above US prices and diesel prices 
about 9 per cent higher. 
Relatively few manufacturers rely on 
natural gas in China, but those that do 
have also been facing rising prices. 
Increases in the state-set natural gas 
price were designed to offset import 
losses for state oil companies and 
encourage them to produce more gas, 
but the price rises have deterred indus-trial 
customers. “It’s one of the few mar-kets 
in the world where industrial gas 
prices are higher than residential 
prices,” says Kim Woodard, an invest-ment 
adviser in Beijing. 
Most of China’s industrial sector still 
relies directly on coal, the cheapest fuel 
around, but by 2010, 28 per cent of Chi-nese 
industry’s energy needs were met 
by electricity, surpassing the level of 
industrial electrification in the US. The 
switch has helped mitigate noxious coal 
pollution in wealthier cities but made 
managing energy costs more compli-cated 
for Chinese companies. 
This is important, because power can 
account for up to 90 per cent of a fac-tory’s 
cost, depending on the industry. 
First Financial Daily, a Shanghai-based 
newspaper, tried to analyse 
China’s electricity rates last year and 
concluded there were at least 1,000 tar-iffs 
across the country, with 314 in Bei-jing 
alone. 
The result is so confusing it creates a 
business opportunity. Taryn Sullivan, 
an American, founded EEx, a consul-tancy 
that is helping Chinese factories 
cut electricity costs by 10 -20 per cent. 
EEx’s entry-level service is helping cli-ents 
make sense of their electricity bills. 
Chinese labour costs are rising stead-ily 
as the workforce shrinks, but wages 
are still well below those in the US, 
Europe or Japan. The labour-intensive 
textile industry has already moved to 
lower-cost markets such as Vietnam or 
Bangladesh, but for many other indus-tries, 
especially electronics, China’s 
ports, roads and clusters of supplier fac-tories 
make it unattractive to move. 
Minimum wages are $2.50 an hour in 
the manufacturing hub of Guangdong 
(versus $7.25 in the US), although many 
workers earn more for overtime work 
during peak order season. 
The introduction of social security, 
medical insurance and other pro-grammes 
has raised costs, although 
many factories skimp on these legally 
required payments or deduct other, ran-dom 
fees, from salaries. They also hire 
“interns” through vocational schools 
who can legally be paid much less. 
There is one labour cost that factories 
are not able to dodge. 
“Management salaries in China have 
seen a large increase in the past decade,” 
says David Alexander, whose Florida-based 
company BaySource Global 
advises companies on offshoring. 
“Where a mid-level manager may have 
been paid $20,000 about 10 years ago, 
that position is double that now.” 
Additional reporting by Owen Guo 
Cheap China 
Local consumers are not 
prepared to pay the prices 
that foreign customers will, 
reports Lucy Hornby 
Going up: move from tiny storefronts to malls has increased overheads– Bloomberg 
‘It’s one of the few markets 
in the world where industrial 
gas prices are higher than 
residential prices’
2 FINANCIAL TIMES Tuesday 4 November 2014 
Doing Business in China 
Corruption a symptom of healthcare ills 
Number of licensed doctors for 
every 1,000 people 
2.5 
2.0 
1.5 
Continued from page 1 
merce ministry figures show. 
But inbound FDI is not expected to 
reach that level again this year and 
accelerating outbound investment, 
which hit $108bn in 2013, according to 
the commerce ministry, is likely to over-take 
inbound investment within the 
next year or two. 
This trend of rising outbound and fall-ing 
inbound investment suggests a dif-ferent 
narrative from the dominant 
international impression of a relent-lessly 
rising China. 
Charles Wolf, a China expert and dis-tinguished 
chair in international eco-nomics 
at the Rand Corporation think-tank, 
argues that shifts in investment 
patterns are important for judging eco-nomic 
prospects in a given market. 
“If we look at inbound and outbound 
FDI in China and we examine the rates 
of change, we can see that outbound 
Chinese investment to Europe and the 
US is extremely positive, while inbound 
FDI from those markets and elsewhere 
to China is now quite negative,” he says. 
“This shift is indicative of expecta-tions 
regarding market opportunities 
and GDP growth,” he adds. 
In fact, from Beijing’s viewpoint, glo-bal 
perceptions of indomitable Chinese 
strength seem somewhat far-fetched. 
The country’s borrowing-to-GDP 
ratio continues to rise rapidly, even as 
growth continues to slow. 
The world’s second-largest economy 
is almost certain this year to report its 
weakest annual expansion rate since 
1990, when the country still faced inter-national 
sanctions in the wake of the 
Tiananmen Square massacre. 
Owing to the stimulus measures Bei-jing 
introduced in the wake of the finan-cial 
crisis, debt relative to GDP has 
expanded from about 130 per cent in 
2008 to more than 250 per cent by the 
middle of this year. 
No economy in history has experi-enced 
credit growth of that speed and 
scale without suffering a financial crisis 
and a protracted period of low growth. 
China’s expansion is also being 
dragged down by a prolonged correc-tion 
in the property market, which has 
been the single most important driver of 
the economy for much of the past dec-ade. 
Even the most optimistic forecasters 
Number of outpatient visits 
(bn) 
8 
6 
GSK 
Case timeline 
Top of the world: Jack Ma’s Alibaba was the largest ever IPO — Andrew Burton/Getty Images 
believe China will keep slowing in the 
next few years, even if it is able fully to 
implement a range of reforms intended 
to rebalance growth away from an over-reliance 
on investment towards con-sumption, 
particularly of services. 
China faces double-digit wage 
increases and indeed rising costs across 
the board that are making the country 
less and less attractive as the world’s 
workshop. 
But it is also becoming less attractive 
as a market for global businesses and 
not just because of the falling growth 
rate. 
Over the past year, many multina-tional 
companies have been hit by a 
wave of state media attacks and opaque 
regulatory investigations that have 
sometimes resulted in hefty fines. 
Many of the world’s largest carmak-ers, 
household names from the world of 
technology, such as Microsoft and Qual-comm, 
and a host of others from sectors 
as varied as pharmaceuticals and baby 
milk formula makers, have been inves-tigated 
for alleged price fixing and 
monopolistic activities. 
The US and EU Chambers of 
Commerce in China have strongly 
criticised the heavy-handed “intimida-tion 
tactics” of the “discriminatory” 
government campaign against their 
members. They have warned that these 
actions could violate commitments that 
China made when it joined the World 
Trade Organisation. 
Jacob Lew, the US treasury secretary, 
sent a letter to China’s leaders saying 
such tactics could have serious implica-tions 
for broader Sino-US relations. 
Shaken by the criticism, Chinese pre-mier 
Li Keqiang responded by saying 
foreign companies have only been 
involved in 10 per cent of the anti-mo-nopoly 
cases brought under the current 
campaign. 
No other statistics are publicly availa-ble 
and the claim has been met by deep 
scepticism among multinational execu-tives, 
who point out that none of the 
country’s large state-owned monopo-lies, 
which dominate most big indus-tries, 
have been targeted. 
Experts on China’s investment poli-cies 
believe the investigations are part of 
a broader trend that has developed as 
the country has shifted from being a 
cash-starved importer of capital to an 
exporter of capital. 
Lei Li, a Beijing-based partner with 
the law firm Sidley Austin and a former 
official in the legal department of 
China’s ministry of commerce, declares: 
“I can remember the good old days a 
decade ago, when the Chinese authori-ties, 
particularly local governments, 
welcomed almost any kind of foreign 
investment.” 
However, Mr Li says that since 2009 
the government has become much 
more selective about the kinds of invest-ment 
it wants: 
“It has imposed more and more con-ditions 
on foreign investment and has 
actively discouraged certain kinds, such 
as polluting, low-end manufacturing.” 
Decades from now, the Alibaba IPO 
will definitely be remembered as a his-toric 
symbol of changing fortunes and 
shifting economic realities. 
However, those shifts may not go 
entirely in the direction most people 
assume they are heading today. 
Slowdown is 
part of new 
economic 
narrative 
$108bn 
China’s outbound 
investment 
last year 
250% 
China’s debt 
relative to GDP, up 
from 130% in 2008 
D oing business in China 
became that bit more 
unpredictable when a court 
hit UK pharmaceutical 
company GlaxoSmithKline 
with the largest bribery fine ever 
imposed on a foreign company in China, 
while GSK’s British head in China, Mark 
Reilly, received a suspended three-year 
prison sentence. 
Four Chinese managers got sentences 
of two to three years in a verdict handed 
down in September. Their sentences 
were also suspended, but the message 
was clear, drug industry analysts and 
insiders say. Foreign drug companies in 
China can no longer turn a blind eye (or 
worse) to sales staff who offer bribes to 
doctors and hospitals that buy their 
products. 
Soon after Chinese police began inves-tigating 
GSK in 2013, the company 
stopped using individual sales targets as 
a basis for calculating staff bonuses, glo-bally 
as well as in China. Other multina-tional 
pharmaceutical companies in 
China have not been so categorical, but 
industry and legal sources say they have 
all re-examined their compliance pro-cedures 
to make sure they are not set-ting 
unrealistic sales targets that can 
only be achieved through what are 
euphemistically known locally as “com-missions”. 
But punishing one foreign drug com-pany 
will hardly solve corruption in the 
Chinese healthcare system, which has 
eroded public trust in doctors and the 
objectivity of their treatment choices. 
Drug industry analysts, doctors and 
hospital officials all say that local 
generic companies are more profligate 
with kickbacks than foreign companies, 
and that the underfunded hospital sys-tem 
cannot function without them. 
Local suppliers are still very depend-ent 
on such payments, despite the anti-corruption 
campaign’s efforts to pre-vent 
bribery of staff at hospitals. 
Many doctors say they cannot make 
ends meet – or live a lifestyle commen-surate 
with being a medical professional 
– without accepting “gifts” from drug 
companies, so their incentive to take 
“commissions” will remain strong, 
whatever the risk. 
But bribes to doctors are far from the 
only problem facing a medical system 
that must serve 1.4bn increasingly 
sophisticated, urbanised, demanding – 
and elderly – patients. China’s leaders 
have ambitious plans to improve both 
the quality and affordability of medical 
care, through complicated reforms of 
the healthcare system including drug 
price controls and a radical transforma-tion 
of health insurance. However, none 
of this will happen swiftly. 
Beijing is certainly willing to spend 
money on the problem, but in 2013 
healthcare still accounted for only 6 per 
cent of gross domestic product, accord-ing 
to national statistics, compared with 
10-12 per cent in western Europe and 
15-17 per cent in the US – and far less per 
capita, according to McKinsey. 
The government promised in 2009 to 
provide universal, low-cost healthcare 
within three years. Since then, 95 per 
cent of the population has been given 
basic health insurance. However, the 
coverage is so limited that many fami-lies 
face crippling costs. 
While public dissatisfaction is high, 
Beijing sees improving healthcare as 
critical to maintaining social harmony. 
However, many interactions between 
healthcare staff and patients are far 
from agreeable, with hundreds of 
attacks on healthcare workers every 
month. Many doctors say the last thing 
they want their children to do is study 
medicine. 
Beijing hopes to ease the pressures on 
the public system by doubling the share 
of private hospitals to 20 per cent by 
2015 and private investors are eager to 
jump on that bandwagon. Private 
investment in the mainland healthcare 
sector rose to an all-time high, with 
deals worth $10bn last year, nearly five 
times the 2006 figure, according to sta-tistics 
from Dealogic. So far this year, 
there have been another $7bn in deals. 
But public distrust of private hospi-tals 
is a hurdle, and they struggle to 
attract top-quality doctors, who prefer 
the prestigious state system. Investors 
may battle to identify potentially profit-able 
deals in a sector where corruption 
is rife and hospital finances are opaque. 
Additionally, privatisation will not 
solve the problems of corruption, over-work, 
low salaries and conflict in the 
state hospital system – where most of 
China will continue to receive its medi-cal 
treatment. 
Additional reporting by Zhang Yan 
Medical system Beijing 
plans to improve care 
for its 1.4bn citizens, but 
distrust of private 
hospitals is a hurdle, 
writes Patti Waldmeir 
Healthcare shortfall 
Source: China National Health and Family Planning Commission 
4 
2004 05 06 07 08 09 10 11 12 13 
2013: June 28 Police in Changsha 
announce that GSK company 
officials are under investigation for 
alleged “economic crimes”. 
July 2 The National Development 
and Reform Commission, China’s 
main economic planning agency, 
announces a probe into the costs of 
medicines at 60 domestic and 
international drugmakers. 
July 11 The Public Security Ministry 
issues a statement accusing GSK of 
bribing doctors to prescribe their 
drugs and concocting a “huge 
scheme” to raise drug prices. 
July 15 Police say GSKmade “illegal” 
transfers. Gao Feng, head of the 
economic crimes investigation unit, 
says four senior Chinese executives 
from GSK have been held. 
Aug 15 China’s State Administration 
for Industry and Commerce says it 
is investigating possible bribery, 
fraud and anti-competitive 
practices in a range of sectors, 
including the drugs industry. 
Dec 16 GSK says it is to scrap 
individual sales targets for 
commercial staff and will instead 
link pay to improved patient care 
and company-wide performance. 
2014: Feb 4 GSK says sales of 
medicines and vaccines in China fell 
18 per cent in the fourth quarter of 
2013, year on year, after falling 61 
per cent in the third quarter. 
May 14 Chinese police say their 
investigation shows that GSK as a 
company and individuals engaged 
in bribery on a “massive scale”. 
June 29 GSK says senior executives 
had been sent a secretly filmed sex 
tape of the company’s top manager 
in China shortly before Beijing 
opened its bribery investigation. 
Sep 19 GSK says its Chinese unit 
will pay a fine of about £300m after 
it is found guilty of bribery. 
New start: pharmaceutical multinationals have re-examined their compliance 
procedures after GlaxoSmithKline was found guilty of bribery — Alexander F Yuan/AP
Tuesday 4 November 2014 FINANCIAL TIMES 3 
Doing Business in China 
Antitrust fines 
for foreign car 
companies fail 
to stall growth 
F or multinational car compa-nies 
operating in China, the 
euphoria from the biggest ever 
automotive boom in industrial 
history is finally being tem-pered 
by some unexpected risks, most 
notably a controversial investigation by 
the National Development and Reform 
Commission (NDRC) into allegedly 
anti-competitive behaviour by Audi, 
Mercedes-Benz and other brands. 
The investigations have so far 
resulted in fines that are peanuts in 
comparison to the vast profits that for-eign 
automakers have enjoyed over 
recent years – and continue to enjoy. 
In July, a joint venture between 
Volkswagen unit Audi and state-owned 
First Auto Works was ordered to pay 
$41m for alleged violations of China’s 
2008 Anti-Monopoly Law. This com-pares 
with reported operating profits of 
$12.2bn for VW’s joint ventures in China 
(its other is with SAIC Motor) last year. 
Fiat unit Chrysler was also hit with a 
small fine this summer, while Daimler’s 
joint venture with BAIC Motor, which 
makes Mercedes-Benz saloons, is still 
awaiting the outcome of an NDRC inves-tigation 
after one of its Shanghai sales 
offices was raided in July. 
These fines are the byproduct of a 
wide-ranging investigation that appears 
to have a much larger aim – forcing car 
companies, regardless of whether they 
are in fact guilty of anti-competitive 
practices, to lower the prices of their 
vehicles, spare parts and services. 
According to one industry executive, 
the head of a multinational company’s 
China operations has told visiting board 
members that, in view of the NDRC’s 
offensive, his biggest fear is of a sudden 
shift in government policy. “It’s bad for 
business,” the executive says of the 
investigation. “It has made the invest-ment 
environment very uncertain. 
“If people can afford the cars, they can 
afford the spare parts and after-sales 
service,” he adds. “It’s not like the NDCR 
is lowering the price of medical care or 
making food cheaper.” 
Foreign automobile executives argue 
that the relatively high prices asked for 
cars – especially premium vehicles that 
can be almost twice as expensive in 
China as they are in the US – is a function 
of unprecedented demand, even for 
overseas models subject to expensive 
import taxes. 
China’s car craze began in earnest in 
2008-09, during the depths of the global 
financial crisis, when it overtook the US 
as the world’s largest car market. 
Demand from entire generations of 
first-time drivers soared in the world’s 
second-largest economy, just as pur-chasing 
power collapsed in the US and 
Europe – a nadir symbolically marked 
by Washington’s bailout of General 
Motors in December 2008. 
Over the ensuing half decade, foreign 
carmakers in China, especially long 
established ones such as Volkswagen 
and GM, had a licence to print money. 
Even last year, when double-digit 
annual growth was finally expected to 
taper, annual sales grew by about 15 per 
cent to 18m passenger cars – 10 times as 
many as were sold in India. 
This year began in similar fashion, 
especially for foreign brands and their 
Chinese joint venture companies. Sales 
of Chinese brands, however, began to 
fall sharply and their share of the pas-senger 
car market tumbled from 27 per 
cent to 23 per cent. 
The precipitous fall-off in sales of 
local brands and slower economic 
growth has forced the China Association 
of Automobile Manufacturers to lower 
its projection of an 8.3 per cent increase 
in year-on-year sales this year to 4.6 per 
cent – two-thirds down on last year. 
In the first quarter, Geely, the private 
sector carmaker most famous for its 
purchase of Volvo Cars from Ford, saw 
sales of its own-brand vehicles fall by as 
much as 40 per cent over the same 
period a year earlier. 
This was despite a gradual improve-ment 
in the quality of local-brand cars 
in China, according to Geoff Broderick 
at JD Power, which publishes an annual 
customer survey of 212 models across 
62 brands. “The domestic brands are 
doing exactly what they should be doing 
– focusing on quality,” Mr Broderick 
says. “But as we see the quality gap clos-ing, 
we’re not seeing a pick-up in [local 
brands’] market share.” 
One reason for the fall has been a 
counterintuitive NDRC requirement 
that foreign-invested joint ventures 
develop a local brand for the China mar-ket, 
such as the Baojun saloon manufac-tured 
by GM, SAIC and Wuling. Many of 
these new entrants are priced to com-pete 
against domestic rivals, especially 
in smaller cities where car ownership 
rates are relatively low. 
“I don’t understand what the Chinese 
government’s objective was in encour-aging 
foreign companies to create local 
brands,” says Bill Russo, a Shanghai-based 
industry consultant. 
“It only cannibalises already dis-tressed 
sales of local brands. I think the 
intent was for more technology to be 
shared by the foreign companies. But 
the unintended consequence is to take 
volume from local carmakers producing 
similar products,” he adds. 
At the other end of the spectrum, for-eign 
carmakers continue to thrive in sat-urated 
markets such as Beijing and 
Shanghai, where premium brands such 
as Audi, BMW and Mercedes-Benz 
account for a quarter of the market. 
Even now, limits on expensive new 
licence plates to combat congestion and 
pollution are spurring their sales, as 
existing plate holders trade up. 
“As cities implement plate restric-tions, 
people gravitate towards pre-mium 
foreign brands,” says Mr Russo. 
“They want to put their expensive 
plates on the best piece of automotive 
technology that they can.” 
Sales drive Price probe 
has not dented profits, 
reports Tom Mitchell 
Contributors 
Jamil Anderlini 
Beijing bureau chief 
Lucy Hornby 
China correspondent 
Patti Waldmeir 
Shanghai correspondent 
Gabriel Wildau 
Shanghai correspondent 
Charles Clover 
Beijing correspondent 
Tom Mitchell 
China correspondent 
Demetri Sevastopulo 
South China correspondent 
Jörg Wuttke 
President of the EU Chamber of 
Commerce in China 
Adam Jezard 
Commissioning editor 
Steven Bird 
Designer 
Andy Mears 
Picture Editor 
For advertising details, contact: 
Maralyn Ho +852 2905 5580; email: 
maralyn.ho@ft.com, 
or your usual FT representative. 
All FT Reports are available on FT.com at 
ft.com/reports. 
Follow us on Twitter @ftreports. 
Chinese antitrust fines 
Largest fines, Rmb million 
Sumitomo Electric and nine other parts suppliers (Japan) 
Audi JV and dealerships (Germany) 
Maotai (China) 
Mead Johnson (US) 
Wuliangye (China) 
Danone Dumex (France) 
Biostime (China) 
LG (Korea) 
Samsung (Korea) 
Source: China Central Television, NDRC 
1,240 
278 
247 
304 
202 
172 
163 
118 
101 
648.6m 
Paid by Chinese 
companies 
2,394.9m 
Paid by foreign 
companies 
Total: Rmb 3,043.6m 
Fines paid 
Rmb 
Investigations have so 
far resulted in fines that 
are peanuts in comparison 
to the vast profits that 
foreign automakers 
continue to enjoy 
Trading up: premium vehicles cost 
almost twice as much as in the US
4 FINANCIAL TIMES Tuesday 4 November 2014 
Doing Business in China 
Beijing 
is not 
prepared 
to give the 
public a role 
in choosing 
the 
candidates 
Hermès takes long view to feed 
appetite for understated style 
Luxury goods were the currency of 
Chinese corruption for decades, until 
Beijing stepped in two years ago to block 
the flow of fine baubles into the hands of 
government officials – and stem the 
flood of profits into the coffers of luxury 
goods companies. 
Hermès, the luxury dynasty best 
known for its sought-after Birkin and 
Kelly handbags, is one of the few luxury 
brands that has prospered despite Bei-jing’s 
abstemiousness campaign. 
“So far we haven’t seen any impact on 
our figures,” says Axel Dumas, chief exec-utive 
of Hermès and scion of the found-ing 
family. 
The French company does not break 
out mainland sales, but sales in Asia 
(excluding Japan) rose 17 per cent in the 
first half of 2014, while first-half sales for 
its rival LVMH in Asia (excluding Japan) 
were up only 3 per cent. 
And despite the generally gloomy 
atmosphere around luxury in China 
these days, in September Hermès 
opened its first mainland maison, in 
Shanghai, to complement those in Paris, 
New York, Tokyo and Seoul. 
It might seem like the worst time to do 
such a thing, but Mr Dumas is not in the 
least bit worried. That could just be the 
self-confidence that comes with repre-senting 
the sixth generation of the com-pany’s 
founding family. But it is more 
likely that his optimism reflects a more 
important underlying fact about why 
the French luxury group continues to do 
well in the middle kingdom, despite the 
most challenging luxury market condi-tions 
in a decade. 
Hermès represents what China 
aspires to be: not just another nouveau 
riche nation with more money than 
taste, but a country of sophisticated 
affluence and understated extrava-gance. 
Mr Dumas thinks time is on the com-pany’s 
side, as Chinese consumers out-grow 
their tendency to show off with 
luxury brands and develop an appetite 
for savouring them. 
Most retail analysts agree: Chinese 
consumers are growing keener on niche 
top-level brands such as Hermès and 
less fond of logo-laden, mass luxury 
rivals such as LVMH and Gucci. 
Torsten Stocker, retail partner at 
consultancy AT Kearney in Hong Kong, 
says: “Hermès’ more classic style fits 
well with the high-end Chinese 
consumer’s shift to less ostentatious 
items.” Cao Weiming, Hermès head in 
China, agrees: “Two to three years ago, 
we started to see some changes, even 
before the anti-corruption campaign 
began, as the market moved naturally 
toward greater sophistication, where 
consumers are more brand-knowledge-able 
than show-off.” 
That transformation will take time; 
but that is one thing the French house 
prides itself on having. 
It takes many years to train its crafts-men. 
It takes forever to get through the 
waiting list to buy a Birkin bag. It even 
took seven years to build the Shanghai 
maison. 
Mr Dumas points out that his family’s 
connection with China stretches a long 
way back: his grandmother, who was 
born in the early 20th century, when 
many French writers and artists 
indulged a passion for the “far east”, was 
a fan of mah-jong. 
Gestures toward that Chinese herit-age 
pepper the Beijing store, including 
horse-themed dinnerware for the cur-rent 
lunar year of the horse. 
Indeed, Hermès is so keen on winning 
over this market that four years ago it 
launched its own Chinese luxury brand, 
Shang Xia– one of the few mainland 
brands that celebrates its Chineseness, 
rather than apologising for it. 
Everything in the Shang Xia collec-tion 
of clothing, jewellery, furniture and 
objets d’art has a story: a cashmere felt 
coat is inspired by the wool felt saddle 
blankets used by Mongolian horsemen; 
a jade “ladder to heaven” necklace ech-oes 
the bamboo undergarments worn in 
imperial China to keep heavy ceremo-nial 
fabrics away from sweaty skin. 
It is the first Chinese lifestyle brand 
built from the ground by a leading Euro-pean 
luxury house. Making it a success 
will take time, even decades. 
Additional reporting by Zhang Yan 
Luxury case study 
Even as Beijing cracks down 
on extravagance, brand holds 
its appeal for sophisticates, 
writes Patti Waldmeir 
Lap of luxury: Hermès’ Shanghai maison took seven years to build 
Hermès represents what 
China aspires to be: not just 
another nouveau riche 
nation with more money 
than taste, but a country of 
understated affluence 
Hong Kong Fears grow over impact on business of 
electoral reform plans, reports Demetri Sevastopulo 
H ong Kong has witnessed 
the most heated debate 
about its political future 
since Britain handed the 
territory back to China in 
1997. 
From the end of September, tens of 
thousands of students and other pro-de-mocracy 
demonstrators took to the 
streets to oppose a controversial Chi-nese 
plan for electoral reform in the 
former British colony. 
The protesters were so successful in 
blocking traffic in a crucial commercial 
district that they sparked concerns 
about the impact on the economy and 
the city’s reputation as a leading finan-cial 
centre. 
The Occupy movement even 
prompted a rare intervention from Li 
Ka-shing, Asia’s richest man, who urged 
the students to return home. 
“We understand student passion, but 
your pursuit needs to be guided by wis-dom,” 
the Hong Kong tycoon said 
recently. “It would be Hong Kong’s great-est 
sorrow if the rule of law breaks down.” 
So far, few protesters appear to have 
listened, partly because one of their 
main concerns is that the Chinese plan 
allows the elites who wield power in 
Hong Kong to retain far too much influ-ence 
at the expense of the public. 
In August, China followed through on 
a promise to introduce universal suf-frage 
– one person, one vote – for the 
election of Hong Kong chief executive, 
the top political job, in 2017. It has urged 
people in Hong Kong to support the plan 
– which requires approval from Hong 
Kong’s legislature – on the grounds that 
it provides them with a greater political 
voice than was available during the Brit-ish 
colonial period. 
But critics say tough conditions that 
Beijing included in the plan mean it 
amounts to nothing more than “sham 
democracy”. Those concerns morphed 
into the physical protests that forced the 
closure of traffic arteries in the Admi-ralty 
district and other shopping and 
entertainment areas in what has been 
dubbed the “umbrella revolution” after 
demonstrators huddled under umbrel-las 
during downpours. 
While many business people say pri-vately 
the protests could do lasting dam-age 
to the city’s reputation, few have 
been willing to speak out. Some are con-cerned 
about generating anger among 
the protesters that might be directed at 
their businesses. 
Following a visit to Hong Kong, 
Stephen Roach, a senior fellow at Yale 
University’s Jackson Institute for Global 
Affairs and a former Morgan Stanley 
Asia economist, said that while the pro-tests 
were still causing a little inconven-ience, 
they were “not a big deal” in 
terms of economic impact. 
Mr Roach said the bigger question was 
whether there would be any long-term 
impact on Hong Kong’s reputation as a 
business hub. At the height of the pro-tests 
when masses of people were dem-onstrating 
on the streets, he said there 
were signs multinationals might start to 
look at places such as Singapore as an 
alternative, but “now that the intensity 
has diminished, I don’t think it is going 
to be a significant factor”. He added that 
as long as the confrontation did not lead 
to “extreme” police action, “the reputa-tional 
impact will be minimal”. 
Some people who are sympathetic to 
the protesters fear that speaking pub-licly 
would earn them the wrath of 
China, on which they increasingly rely 
for business deals. For example, Jimmy 
Lai, the Hong Kong media tycoon who 
owns the anti-Beijing Apple Daily news-paper, 
has accused the Hong Kong gov-ernment 
of persecuting him in the wake 
of a move by the anti-graft agency to 
investigate payments he made to demo-cratic 
lawmakers who are critical of Bei-jing. 
Apple Daily has also accused Stand-ard 
Chartered and HSBC of pulling 
advertising because of pressure from 
Beijing, claims both banks have denied. 
Even before China unveiled its con-troversial 
plan, a Chinese official speak-ing 
in Hong Kong gave an unusual warn-ing 
– for a senior Communist party 
member – that the territory’s famed 
capitalist system could come under 
threat if protesters followed through on 
their threat to occupy the city. 
Under the current electoral system, 
an elite committee of 1,200 people who 
are mostly loyal to Beijing, elect the 
chief executive. Beijing is prepared to let 
5m people in Hong Kong vote for their 
leader, but is not prepared to give the 
public a role in choosing the candidates. 
The leaders of the democracy move- 
Power of Beijing 
looms large in 
territory’s future 
Tide of opinion: 
while many 
Hong Kong 
people are 
sympathetic 
towards the 
protesters, few 
have been 
willing to speak 
out publicly – AFP 
ment in Hong Kong argue that, as a 
result, the plan on offer does not 
amount to “genuine” universal suffrage. 
China has also ruled that potential 
candidates must secure support of a 
majority of a nominating committee 
that is expected to resemble closely the 
current 1,200-member election com-mittee. 
At present, candidates need sup-port 
of only one-eighth of committee 
members – a formula that has allowed 
opponents of the Communist party 
twice to get on the ballot. Critics say the 
new proposal would be more restrictive, 
giving Beijing even more scope to ensure 
its critics could not run for election. 
At a rally on the day that China 
unveiled its electoral reform plan, Mar-tin 
Lee, the founder of Hong Kong’s 
Democratic party, summed up the con-cerns 
of critics when he said the people 
of Hong Kong wanted “genuine univer-sal 
suffrage and not democracy with 
Chinese characteristics”. “Hong Kong 
people will have one person, one vote, 
but Beijing will select all the candidates 
– puppets,” he said. “What is the differ-ence 
between a rotten apple, a rotten 
orange and a rotten banana?”
Tuesday 4 November 2014 FINANCIAL TIMES 5 
Liberalisation threatens stability in the short term 
Total social financing stock by type, as a % of GDP 
Entrusted loans, corporate bonds, nonfinancial equities, and others 
Bank and trust loans to local governments 
Bank and trust loans to corporates, households 
Authorities are taking a cautious 
approach to Shanghai test ground 
A year after the launch of the Shanghai 
“free trade zone”, hailed as a laboratory 
for ambitious economic and financial 
reforms, many investors are disap-pointed 
at the slow pace of change. 
However, while critics rightly note 
that precious few business and invest-ment 
activities are currently permitted 
in the zone (known as the FTZ) that are 
not also allowed in the rest of China, it is 
too early to dismiss it as a failure. 
The government has used its first year 
to establish a regulatory framework for 
further liberalisation of rules on foreign 
direct investment and cross-border cap-ital 
flows. 
Meaningful deregulation under this 
framework has been slow, but with the 
basic infrastructure now in place, the 
government could proceed quickly to 
loosen capital controls or open to for-eign 
investment industries that were 
previously off-limits. 
“We still hold the view that the Shang-hai 
FTZ and other [similar zones] will 
be an important test ground for China’s 
capital account convertibility,” says Ju 
Wang, senior foreign exchange strate-gist 
at HSBC. 
“Over time, we can expect companies 
and individuals within the zone to be 
able to conduct free borrowing and 
lending activities as well as portfolio 
investments.” 
Full convertibility would enable 
investors to exchange renminbi 
freely for foreign currency for the 
purpose of either portfolio or direct 
investment, without being subject to 
quotas and onerous administrative 
approvals. 
Last December, the central bank’s 
Shanghai branch issued rules establish-ing 
a system of special FTZ bank 
accounts. Moving funds between these 
and offshore accounts is already possi-ble 
with few restrictions, but 
transfers between FTZ 
accounts and the rest of China remain 
tightly controlled. 
Yet, with the FTZ account system now 
in place, the ground is prepared for fur-ther 
opening up of the system. Officials 
have said they are preparing stress tests 
to gauge the impact of freer capital-ac-count 
flows. 
Nonetheless, investors should be 
under no illusion that the authorities 
will allow unfettered flows for financial 
investment any time soon. 
Han Zheng, Shanghai Communist 
Party secretary, said recently: “Convert-ibility 
under the capital account does 
not equate to full convertibility under 
the capital account. These are different 
concepts.” 
He added: “We are opening up capital 
account operations directly serving the 
real economic growth, instead of 
finance for the finance’s sake.” 
Another example of the government’s 
cautious approach to reforms in the 
zone is the much-touted “negative list”. 
For years, China has regulated foreign 
direct investment by publishing a cata-logue 
that categorises each sector of the 
economy as either “encouraged”, 
“restricted” or “prohibited”. 
The FTZ has established a mirror-image 
system for regulation of foreign 
investment. All industries not included 
in the negative list are permitted for for-eign 
investment. 
Like the FTZ bank account system, 
the negative list has delivered few prac-tical 
results so far. 
The initial version of the list con-tained 
190 items, making foreign invest-ment 
in the zone barely less restrictive 
than in the rest of China. 
In late June, the government trimmed 
51 items from the list, opening sectors 
including real estate, oil exploration 
technology, and chemicals. Officials say 
that the negative list is likely to be short-ened 
further in the coming years. 
Yang Xiong, Shanghai’s mayor, has 
said: “It is not a matter of two or 
three years. Many things 
need to be done. But 
from a long-term per-spective, 
it is the right 
path.” 
Trade zone 
Critics are disappointed, 
one year on, at the slow pace 
of change in this important 
test area for reforms, 
writes Gabriel Wildau 
Han Zheng: 
no finance for 
finance’s sake 
Doing Business in China 
G lobal financial institutions 
are hoping that China’s 
pledge to liberalise its 
financial system will bring 
opportunities in a market 
that has long stymied their efforts to 
gain a foothold. 
Their hopes for swift progress may be 
dashed, however, as risks from within 
the system are likely to encourage pol-icy 
makers to apply the brakes on 
reform. Last November, Communist 
party leaders approved a landmark 
agenda that included pledges to deregu-late 
interest rates and liberalise the flow 
of investment funds in and out of the 
country. 
Their goal was to improve the alloca-tion 
of financial resources and correct 
distortions in the economy, putting the 
country on a secure footing for several 
more decades of rapid growth. For 
instance, a cap on bank deposit rates has 
encouraged excessive investment in 
infrastructure and manufacturing by 
keeping borrowing costs artificially low. 
Meanwhile, overinvestment has led to 
rampant overcapacity in sectors such as 
steel, cement and non-ferrous metals, 
creating a host of unprofitable firms and 
imperilling the financial sector, as loss-making 
companies fail to repay debt. 
At the same time, restrictive capital 
controls preventing Chinese citizens 
from moving funds abroad have 
trapped savings inside the nation’s bor-ders, 
further contributing to wasteful 
domestic investment. This liquidity has 
also helped inflate a housing bubble, as 
savers – prevented from buying foreign 
assets and wary of the casino-like 
domestic stock market – have embraced 
bricks and mortar as an investment 
rather than just a place to live. 
Deregulation of rates, when it finally 
occurs, should play to the advantage of 
foreign banks and joint-venture broker-ages 
operating in China, which are expe-rienced 
at managing interest-rate and 
foreign-exchange risk. They should also 
be able to earn profits dealing in deriva-tives 
to help clients manage such risks. 
Freer capital flows would also create 
opportunities for foreigners, especially 
overseas asset managers that will enjoy 
increased access to mainland capital 
markets. But such freedom may still be 
years away. 
Currently, foreign investors are 
allowed to buy only into China’s domes-tic 
stock and bond markets under a strict 
quota system that severely limits access. 
By comparison, direct investment, 
which involves buying an overseas com-pany 
outright or starting an enterprise 
from scratch, is relatively more open, 
but still subject to government 
approval. 
John Greenwood, chief economist at 
Invesco, a UK-based fund manager, 
says: “The gradual relaxation of capital 
controls should bring multiple opportu-nities 
to asset managers, but we must 
accept that these changes will be slow in 
coming. Nevertheless, since the Chinese 
market has huge potential, it is worth-while 
being patient.” 
The problem is that such reforms, 
while they will aid long-term growth, 
are likely to be destabilising in the short 
term. That is a problem for China’s 
200 
150 
100 
50 
stability-obsessed leadership, which is 
therefore likely to implement them 
more slowly than the most zealous 
advocates of reform would prefer. 
Once banks are forced to compete for 
depositors’ funds, interest rates will 
rise. That will be painful, given the large 
increase in corporate and local govern-ment 
debt since the global financial cri-sis. 
Rising rates will also increase the 
cost of servicing debt, potentially spark-ing 
a wave of defaults. 
Freer capital flows will open the door 
to capital flight if investors lose confi-dence 
in the economy. Such a scenario is 
all the more likely if rising interest rates 
spark a wave of defaults among highly-indebted 
corporate borrowers. 
To be sure, China has already taken 
cautious steps to open its financial sys-tem. 
A new programme will allow Hong 
Kong and Chinese investors to buy into 
each others’ stock markets. 
However, this scheme is subject to a 
strict quota, and authorities have made 
it clear that “capital-account converti-bility” 
– the technical term for freeing 
cross-border investment flows – does 
not mean it is open season for specula-tive 
capital to slosh in and out of the 
territories. “A rapid opening up could be 
highly destabilising for the economy, so 
we understand the caution of the 
authorities,” says Mr Greenwood. 
Finance Policy makers 
set sights on long-term 
growth and patient 
investors will find 
plenty of opportunities, 
writes Gabriel Wildau 
Patience pays: 
investors 
monitor stock 
prices in 
Shanghai 
– Qilai Shen/Bloomberg 
Freer capital 
flows will 
open the 
door to 
capital flight 
if investors 
lose 
confidence 
in the 
economy 
China’s rising debt load 
Source: CEIC 
0 
2002 03 04 05 06 07 08 09 10 11 12 13 
Preferential policies 
in the zone 
• Simplified company registration: 
a “one-stop shop” for all steps in 
the process. 
• Approach to foreign investment. 
All industries not on the “negative 
list” are open to foreigners. 
• Investment in sectors not on the 
list via a simple registration system; 
no advance approvals necessary. 
• Simplified procedures and less 
red tape for customs, shipping and 
logistics to make merchandise 
trade more convenient. 
• Unrestricted transfer of funds 
between FTZ bank accounts and 
offshore accounts. 
• Suspension of 14-year ban on 
games consoles, which can be 
produced in the zone and sold 
throughout China. 
‘It is not a matter of two or 
three years: many things 
need to be done’
6 ★ FINANCIAL TIMES Tuesday 4 November 2014 
China needs to be placed at the top of 
the European Commission’s ‘to do’ list 
Ukraine will undoubtedly be the main 
foreign policy focus for the European 
Commission’s newly appointed leaders. 
The importance of this immediate 
neighbour to the east is obvious. But 
Jean-Claude Juncker and his 
administration should place equal – if 
not greater – emphasis on a country 
this lies even further east. 
With the EU exclusively responsible 
for foreign trade and investment 
matters since the entry into force of the 
Lisbon Treaty in late 2009, the bloc’s 
relations with China should be 
prioritised to reflect the country’s size 
and its restrictive investment 
environment. 
China has contributed substantially 
more to the world’s economic growth 
than any other country since the global 
economic crisis and it has become its 
largest economy in purchasing power 
parity terms. Yet China has long 
adopted an idiosyncratic approach to 
foreign investment. 
Unlike the EU, which does not even 
have a term for classifying investment 
within its borders as “foreign”, China 
retains a distinction between external 
and domestic investment. In doing so, 
it places conditionality on the opening 
of its marketplace by prescriptively 
laying out conditions that accept 
foreign investment only where it is 
perceived to serve specific domestic 
industrial policies. 
The vast reform agenda outlined a 
year ago in the so-called Decision of the 
Communist Party Central Committee’s 
third plenary session was therefore 
welcomed by European industry in 
China for its breadth and boldness. If 
implemented resolutely, its emphasis 
on further opening up of its markets 
could rebalance China’s increasingly 
precarious economy and level the 
playing field for European and other 
foreign companies. While this 
demonstrates the political will of 
China’s leaders to push reforms, 
these will not come into 
force overnight. 
The recent spate of investigations 
into antitrust violations indicates that 
problems will continue to arise. One is 
how China investigates tax collection, 
particularly among foreign companies. 
The EU’s leaders should be mindful of 
these difficulties when working out 
how to engage with China. 
Foreign businesses have developed a 
justified wariness of speaking out on 
controversial topics. 
So, when the European chamber 
became the first association to express 
concern openly about the opacity and 
lack of due process in China’s 
enforcement of its competition law 
over the past year and a half, it was 
praised for being courageous. 
Foreign industry needed to voice its 
concern, for reasons that go well 
beyond today’s investigations. But this 
should not be done to disparage China’s 
efforts to improve how it applies its 
laws. China’s antimonopoly law is one 
of the cornerstones for strengthening 
exactly those conditions that are 
required to rebalance and upgrade the 
economy. 
However, non-adherence to legal due 
processes in antimonopoly 
investigations risks a situation whereby 
administrative power not only 
perversely distorts competition but, in 
a wider context, endangers the 
credibility of China’s attempts to be 
more open and its ability to let the 
wider market place have a bigger role 
in the economy. 
China improved the positive 
sentiment among foreign companies to 
an all-time high following the third 
plenary session last year. It would be a 
shame if the praise it has earned for 
this important policy direction is 
undermined by poor execution. 
The antimonopoly investigations 
show that the EU’s political leadership 
must be ready to engage head on with 
China on politically prickly trade and 
investment issues. Such a strategy 
must be built on a deep and studied 
understanding of the country’s 
business environment. The European 
parliament ought to look closely (and 
regularly) at Beijing’s trade policies 
and actions – as happens in the US – in 
order to make the informed decisions 
needed to engage with China. 
At stake are millions of European 
jobs, a substantial contribution to 
economic growth, our ability to 
innovate and the multiple benefits our 
relationship with China has brought. 
As China is now an economic 
superpower that increasingly shapes 
global practices and invests overseas, it 
is high time that engagement with the 
country commands the priority it 
merits across all the EU’s institutions 
and member states. 
This means that the European 
parliament, the 28 member states and 
the European Commission speak with 
one voice and avoid temptations to 
bow down to China’s economic might 
in return for short-term gains at the 
expense of a unified and results-orientated 
strategy. 
Europe’s change in leadership 
provides an opportunity for this 
readjustment of its strategy with China. 
The opportunity within that 
opportunity is the EU’s continuing 
negotiation of an ambitious bilateral 
investment agreement (BIA) with 
China. The negotiations represent the 
most important engagement with 
China on trade and investment policy 
since China’s accession to the World 
Trade Organisation in 2001. 
They also present the EU with a 
prime opportunity to set the tone for a 
constructive engagement with China. 
As explained in the EU-China 2020 
Strategic Agenda for Cooperation, 
the successful conclusion of a 
comprehensive BIA would convey 
China’s willingness to engage in a 
deep and comprehensive trade 
agreement with the EU. 
The writer is president of the EU 
Chamber of Commerce in China 
Jean-Claude Juncker: 
setting tone for future 
engagement 
Doing Business in China 
T he listing of Alibaba in New 
York in September created 
the world’s second-largest 
internet company by mar-ket 
capitalisation, behind 
Google. This did not happen by acci-dent. 
Of the top10 internet companies 
in the world, ranked by market cap, 
three are Chinese, and the rest are from 
the US. 
Together, Baidu, Alibaba and Tencent 
form what is know in China as “BAT”. 
These economic juggernauts that have 
come to dominate the internet in China 
are operating almost along the lines of 
Japan’s keiretsu, which are alliances of 
businesses with similar interests or that 
have shareholdings in one another. 
They are also rapidly branching out into 
offline sectors, such as transport, travel, 
retail and banking. 
Whether the rapid growth of the Chi-nese 
internet is just a bubble or a stable 
trend is open to question. However, for 
the time being at least, BAT has become 
the nucleus of an internet industry that 
is starting to rival the US, creating what 
is essentially a US-China duopoly. The 
three Chinese companies also benefit 
from what has become known as the 
“Great Firewall”, as most of the top US 
companies, such as Google, Facebook 
and Twitter, are excluded from operat-ing 
in China. 
However, no Chinese internet com-pany 
has yet made the leap from China 
to become a global brand. For now, it is 
enough for them be dominant in China, 
which had 632m internet users as of 
June, 527m of whom go online using 
mobile devices. The potential of the 
forecast consumption boom, as China 
moves from an investment-driven econ-omy 
to a consumption-driven one, is 
enough to attract investments such as 
the $25bn sunk into Alibaba in its initial 
public offering, the largest ever. 
The internet is the most dynamic part 
of China’s budding private sector, 
though it remains solidly under the con-trol 
of the state. Foreigners hold large 
shareholdings in Alibaba, Tencent and 
Baidu and dozens of other internet com-panies. 
But these stakes are largely theo-retical 
at best and owned via “variable 
interest entities”, or VIEs, which guar-antee 
a payment stream from, but not 
ownership of, the licence-holding vehi-cles 
in China. These VIE’s are techni-cally 
illegal, though Chinese courts turn 
a blind eye to the practice, and owners 
know their large holding only exists 
thanks to the tacit consent of the state. 
Nimble private internet companies, 
able to dance circles around the ineffi-cient 
state-owned enterprises, have 
begun impromptu liberalising of whole 
sectors such as financial services. Ali-baba’s 
fund company Yu’e Bao is China’s 
biggest online money market fund, with 
Rmb574bn ($93.8bn) worth of assets 
The internet is a phenomenal wealth 
generator. Five of the 10 richest men in 
China are tech moguls, up from none 
three years ago, according to the Hurun 
China Rich List, which tracks wealthy 
individuals. In September, Alibaba 
founder Jack Ma joined the list in first 
place and became one of the wealthiest 
men in the world, with a 7.8 per cent 
stake in a $230bn company. 
Competition between internet com-panies 
is fierce, however. With the 
entire industry switching from desktop 
devices to mobile ones, many compa-nies 
risk being left behind if they don’t 
have a “killer app” that will act as a gate-way 
for mobile users. 
Alibaba has been searching for just 
such a feature to challenge the currently 
undisputed leadership of Tencent, 
whose WeChat instant messenger has 
350m monthly users. WeChat and Ten-cent’s 
other messenger, QQ, are the two 
most popular mobile apps in China, 
according to iResearch, a Beijing-based 
internet research firm. 
In June, Alibaba bought UCWeb, a 
popular mobile browser company, and 
the two have developed Shenme, a 
mobile search engine. They are also 
working with Quixey, a US-based com-pany 
in which Alibaba has invested, to 
design a mobile gateway using Quixey’s 
app search engine. Francis Bea of Papa-yaMobile, 
a Chinese mobile technology 
company, says Alibaba is attempting to 
mirror Tencent’s success with WeChat. 
He says: “In as highly competitive a 
market as China, there is potential for 
the mobile internet to disrupt estab-lished 
internet players if they don’t 
manage the transition from desktop to 
mobile.” 
Alibaba has spent an estimated 
$6bn-$8bn in the space of a year on full 
acquisitions of, or investments in, com-panies 
including mobile providers, 
chain stores, an internet TV company, a 
maker of electrical appliances, a movie 
producer, a digital broadcaster and a 
professional Chinese football team. 
While attention has focused on Ali-baba’s 
acquisitions, Tencent and Baidu 
have been on similar spending sprees. 
Baidu is betting that its stake in Qunar, 
China’s top travel website by users, and 
mobile app store 91Wireless.com, will 
complement its popular search engine 
to carry it into the mobile age. Tencent 
has taken a stake in JD.com, China’s sec-ond- 
largest ecommerce platform, and 
mobile-friendly companies such as res-taurant 
review site Dianping and South 
Korea’s CJ Games. 
Internet titans 
focus on staying 
ahead of mobile 
revolution 
Technology Charles Clover says search for gateway 
apps is driving acquisitions in a dynamic industry 
Changing times: 
of the 632m 
internet users in 
China, 527m go 
online using 
mobile devices 
Ed Jones/AFP/Getty Images 
‘There is 
potential for 
the mobile 
internet to 
disrupt the 
established 
internet 
players’ 
OPINION 
Jörg 
Wuttke 
China is now an economic 
superpower that helps 
shape global practices 
and invests overseas

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Business in China

  • 1. FT SPECIAL REPORT Doing Business in China www.ft.com/Tuesday November 4 2014 reports | @ftreports Inside Bribes just one malady in healthcare system Achieving affordability and quality of care is proving to be a struggle Page 2 Driving the car craze Antitrust fines have a wider agenda: to lower prices of vehicles Page 3 Hong Kong protests Beijing’s plans for electoral reform spark fears of long-term impact on business hub Page 4 Financial system in for short-term shocks Liberalisation plans aim to foster longer-term growth Page 5 T he Chinese flag was flying over the New York Stock Exchange in late September as a grinning, elflike former English teacher watched his ecommerce company smash the record for the world’s largest ever initial public offering. Alibaba’s $25bn share sale made Jack Ma the richest man in China, but it also provided the kind of moment that symbolises historic shifts in the global landscape. From outside, China’s rising economic and political power appears unstoppa-ble and relentless. Chinese are now the biggest purchas-ers of expensive properties in London, New York and Sydney, and Chinese investors are buying up everything from Italian utility companies to the Waldorf Astoria Hotel in New York City. China’s increasingly assertive Com-munist leaders seem to want their own version of the United States’ 19th cen-tury’s Monroe Doctrine for their own back yard of Asia. This policy stated that any interven-tion by external powers in the politics of the Americas was seen as a potential hostile act. At the same time, Beijing’s rising influence can be seen around the globe, from Sierra Leone to São Paulo. As he revelled in his company’s suc-cessful debut in New York, Mr Ma declared that Alibaba was a company that had already “shaped the world” and said he wanted it to be “bigger than Walmart” as it expands outside its home market. US capitalist investors lapped it up and appeared to have bought into the newest Chinese dream. Alibaba shares ended their first trading day up nearly 40 per cent and the company was valued at more than Facebook, Ama-zon, JPMorgan or Procter & Gamble. Alibaba is not the only Chinese com-pany with dreams of world domination. As growth continues to slow at home, many Chinese companies are looking abroad to make investments, enter for-eign markets and acquire valuable tech-nology and brands. But this interest in overseas corporate expansion is increasing just as foreign Slowdown is part of new economic narrative Jamil Anderlini says shifts in investment patterns and internal problems signal end to strong growth direct investment (FDI) into China is slowing sharply. In recent months, it has fallen at the steepest rate since the height of the global financial crisis, with a drop of 14 per cent in August and a 17 per cent fall in July from the same months a year earlier. Apart from a drop during the financial crisis, FDI inflows to China have grown steadily since the country joined the World Trade Organisation in 2001 and reached a record $118bn in 2013, com- Continued on page 2 Internet giants train sights on killer apps Mobile gateway developers become top targets for acquisitions Page 6 High stakes: Alibaba’s New York IPO made Jack Ma China’s richestman— Andrew Burton/Getty Images Even the most optimistic forecasters believe China will keep slowing Rising energy, transport and labour costs squeeze profits Order a child’s Halloween costume in China ($3.44 for pirate hat, eye patch and black cape) and it will arrive at your door the next day, with a mere $1.60 in shipping costs added. If the supplier is in your city, you get it the same day free. This consumer bonanza is increas-ingly a problem for local and foreign companies selling in China, where rising energy, transport and labour costs are squeezing profits, not just for manufac-turers but for the growing number of brands targeting Chinese consumers. For years, the price of labour has been rising, especially for managers, but overall costs were still so low compared with the prices foreign customers would pay that its export industry thrived. By contrast, brands that market to cost-conscious Chinese buyers not only have to manage their manufacturing costs but also contend with shipping and retail costs inside the country. And that in turn means high energy costs are tak-ing a double toll. “Energy costs are so high in China, it’s becoming a concern,” says Shaun Rein, author of The End of Cheap China and managing director of China Market Research Group. Those high costs can show up in unex-pected ways as China’s business land-scape changes. “Sales have moved so decidedly from bricks and mortar to online that transport is really a prob-lem,” Mr Rein says. For retailers still selling the old fash-ioned way, the shift from tiny store-fronts to malls or box stores has meant higher power costs for air conditioning and lighting, as well as rising rent. Much of the problem lies in China’s industrial structure. “There is not much transparency in how authorities set domestic oil prices and a good system of supervision is not in place,” says Dong Zhengwei, a lawyer and veteran cam-paigner against state-owned mono-polies. “The government wants to pro-tect the interests of large oil companies.” International oil prices dropped by nearly a quarter between late June and mid-October; but Chinese retail petrol and diesel prices fell by only half that amount, or 11-12 per cent. The govern-ment, which adjusts prices on an irregu-lar basis, is allowing oil companies to recoup some revenues denied them when oil prices were higher. That puts Chinese retail petrol prices about 20 per cent above US prices and diesel prices about 9 per cent higher. Relatively few manufacturers rely on natural gas in China, but those that do have also been facing rising prices. Increases in the state-set natural gas price were designed to offset import losses for state oil companies and encourage them to produce more gas, but the price rises have deterred indus-trial customers. “It’s one of the few mar-kets in the world where industrial gas prices are higher than residential prices,” says Kim Woodard, an invest-ment adviser in Beijing. Most of China’s industrial sector still relies directly on coal, the cheapest fuel around, but by 2010, 28 per cent of Chi-nese industry’s energy needs were met by electricity, surpassing the level of industrial electrification in the US. The switch has helped mitigate noxious coal pollution in wealthier cities but made managing energy costs more compli-cated for Chinese companies. This is important, because power can account for up to 90 per cent of a fac-tory’s cost, depending on the industry. First Financial Daily, a Shanghai-based newspaper, tried to analyse China’s electricity rates last year and concluded there were at least 1,000 tar-iffs across the country, with 314 in Bei-jing alone. The result is so confusing it creates a business opportunity. Taryn Sullivan, an American, founded EEx, a consul-tancy that is helping Chinese factories cut electricity costs by 10 -20 per cent. EEx’s entry-level service is helping cli-ents make sense of their electricity bills. Chinese labour costs are rising stead-ily as the workforce shrinks, but wages are still well below those in the US, Europe or Japan. The labour-intensive textile industry has already moved to lower-cost markets such as Vietnam or Bangladesh, but for many other indus-tries, especially electronics, China’s ports, roads and clusters of supplier fac-tories make it unattractive to move. Minimum wages are $2.50 an hour in the manufacturing hub of Guangdong (versus $7.25 in the US), although many workers earn more for overtime work during peak order season. The introduction of social security, medical insurance and other pro-grammes has raised costs, although many factories skimp on these legally required payments or deduct other, ran-dom fees, from salaries. They also hire “interns” through vocational schools who can legally be paid much less. There is one labour cost that factories are not able to dodge. “Management salaries in China have seen a large increase in the past decade,” says David Alexander, whose Florida-based company BaySource Global advises companies on offshoring. “Where a mid-level manager may have been paid $20,000 about 10 years ago, that position is double that now.” Additional reporting by Owen Guo Cheap China Local consumers are not prepared to pay the prices that foreign customers will, reports Lucy Hornby Going up: move from tiny storefronts to malls has increased overheads– Bloomberg ‘It’s one of the few markets in the world where industrial gas prices are higher than residential prices’
  • 2. 2 FINANCIAL TIMES Tuesday 4 November 2014 Doing Business in China Corruption a symptom of healthcare ills Number of licensed doctors for every 1,000 people 2.5 2.0 1.5 Continued from page 1 merce ministry figures show. But inbound FDI is not expected to reach that level again this year and accelerating outbound investment, which hit $108bn in 2013, according to the commerce ministry, is likely to over-take inbound investment within the next year or two. This trend of rising outbound and fall-ing inbound investment suggests a dif-ferent narrative from the dominant international impression of a relent-lessly rising China. Charles Wolf, a China expert and dis-tinguished chair in international eco-nomics at the Rand Corporation think-tank, argues that shifts in investment patterns are important for judging eco-nomic prospects in a given market. “If we look at inbound and outbound FDI in China and we examine the rates of change, we can see that outbound Chinese investment to Europe and the US is extremely positive, while inbound FDI from those markets and elsewhere to China is now quite negative,” he says. “This shift is indicative of expecta-tions regarding market opportunities and GDP growth,” he adds. In fact, from Beijing’s viewpoint, glo-bal perceptions of indomitable Chinese strength seem somewhat far-fetched. The country’s borrowing-to-GDP ratio continues to rise rapidly, even as growth continues to slow. The world’s second-largest economy is almost certain this year to report its weakest annual expansion rate since 1990, when the country still faced inter-national sanctions in the wake of the Tiananmen Square massacre. Owing to the stimulus measures Bei-jing introduced in the wake of the finan-cial crisis, debt relative to GDP has expanded from about 130 per cent in 2008 to more than 250 per cent by the middle of this year. No economy in history has experi-enced credit growth of that speed and scale without suffering a financial crisis and a protracted period of low growth. China’s expansion is also being dragged down by a prolonged correc-tion in the property market, which has been the single most important driver of the economy for much of the past dec-ade. Even the most optimistic forecasters Number of outpatient visits (bn) 8 6 GSK Case timeline Top of the world: Jack Ma’s Alibaba was the largest ever IPO — Andrew Burton/Getty Images believe China will keep slowing in the next few years, even if it is able fully to implement a range of reforms intended to rebalance growth away from an over-reliance on investment towards con-sumption, particularly of services. China faces double-digit wage increases and indeed rising costs across the board that are making the country less and less attractive as the world’s workshop. But it is also becoming less attractive as a market for global businesses and not just because of the falling growth rate. Over the past year, many multina-tional companies have been hit by a wave of state media attacks and opaque regulatory investigations that have sometimes resulted in hefty fines. Many of the world’s largest carmak-ers, household names from the world of technology, such as Microsoft and Qual-comm, and a host of others from sectors as varied as pharmaceuticals and baby milk formula makers, have been inves-tigated for alleged price fixing and monopolistic activities. The US and EU Chambers of Commerce in China have strongly criticised the heavy-handed “intimida-tion tactics” of the “discriminatory” government campaign against their members. They have warned that these actions could violate commitments that China made when it joined the World Trade Organisation. Jacob Lew, the US treasury secretary, sent a letter to China’s leaders saying such tactics could have serious implica-tions for broader Sino-US relations. Shaken by the criticism, Chinese pre-mier Li Keqiang responded by saying foreign companies have only been involved in 10 per cent of the anti-mo-nopoly cases brought under the current campaign. No other statistics are publicly availa-ble and the claim has been met by deep scepticism among multinational execu-tives, who point out that none of the country’s large state-owned monopo-lies, which dominate most big indus-tries, have been targeted. Experts on China’s investment poli-cies believe the investigations are part of a broader trend that has developed as the country has shifted from being a cash-starved importer of capital to an exporter of capital. Lei Li, a Beijing-based partner with the law firm Sidley Austin and a former official in the legal department of China’s ministry of commerce, declares: “I can remember the good old days a decade ago, when the Chinese authori-ties, particularly local governments, welcomed almost any kind of foreign investment.” However, Mr Li says that since 2009 the government has become much more selective about the kinds of invest-ment it wants: “It has imposed more and more con-ditions on foreign investment and has actively discouraged certain kinds, such as polluting, low-end manufacturing.” Decades from now, the Alibaba IPO will definitely be remembered as a his-toric symbol of changing fortunes and shifting economic realities. However, those shifts may not go entirely in the direction most people assume they are heading today. Slowdown is part of new economic narrative $108bn China’s outbound investment last year 250% China’s debt relative to GDP, up from 130% in 2008 D oing business in China became that bit more unpredictable when a court hit UK pharmaceutical company GlaxoSmithKline with the largest bribery fine ever imposed on a foreign company in China, while GSK’s British head in China, Mark Reilly, received a suspended three-year prison sentence. Four Chinese managers got sentences of two to three years in a verdict handed down in September. Their sentences were also suspended, but the message was clear, drug industry analysts and insiders say. Foreign drug companies in China can no longer turn a blind eye (or worse) to sales staff who offer bribes to doctors and hospitals that buy their products. Soon after Chinese police began inves-tigating GSK in 2013, the company stopped using individual sales targets as a basis for calculating staff bonuses, glo-bally as well as in China. Other multina-tional pharmaceutical companies in China have not been so categorical, but industry and legal sources say they have all re-examined their compliance pro-cedures to make sure they are not set-ting unrealistic sales targets that can only be achieved through what are euphemistically known locally as “com-missions”. But punishing one foreign drug com-pany will hardly solve corruption in the Chinese healthcare system, which has eroded public trust in doctors and the objectivity of their treatment choices. Drug industry analysts, doctors and hospital officials all say that local generic companies are more profligate with kickbacks than foreign companies, and that the underfunded hospital sys-tem cannot function without them. Local suppliers are still very depend-ent on such payments, despite the anti-corruption campaign’s efforts to pre-vent bribery of staff at hospitals. Many doctors say they cannot make ends meet – or live a lifestyle commen-surate with being a medical professional – without accepting “gifts” from drug companies, so their incentive to take “commissions” will remain strong, whatever the risk. But bribes to doctors are far from the only problem facing a medical system that must serve 1.4bn increasingly sophisticated, urbanised, demanding – and elderly – patients. China’s leaders have ambitious plans to improve both the quality and affordability of medical care, through complicated reforms of the healthcare system including drug price controls and a radical transforma-tion of health insurance. However, none of this will happen swiftly. Beijing is certainly willing to spend money on the problem, but in 2013 healthcare still accounted for only 6 per cent of gross domestic product, accord-ing to national statistics, compared with 10-12 per cent in western Europe and 15-17 per cent in the US – and far less per capita, according to McKinsey. The government promised in 2009 to provide universal, low-cost healthcare within three years. Since then, 95 per cent of the population has been given basic health insurance. However, the coverage is so limited that many fami-lies face crippling costs. While public dissatisfaction is high, Beijing sees improving healthcare as critical to maintaining social harmony. However, many interactions between healthcare staff and patients are far from agreeable, with hundreds of attacks on healthcare workers every month. Many doctors say the last thing they want their children to do is study medicine. Beijing hopes to ease the pressures on the public system by doubling the share of private hospitals to 20 per cent by 2015 and private investors are eager to jump on that bandwagon. Private investment in the mainland healthcare sector rose to an all-time high, with deals worth $10bn last year, nearly five times the 2006 figure, according to sta-tistics from Dealogic. So far this year, there have been another $7bn in deals. But public distrust of private hospi-tals is a hurdle, and they struggle to attract top-quality doctors, who prefer the prestigious state system. Investors may battle to identify potentially profit-able deals in a sector where corruption is rife and hospital finances are opaque. Additionally, privatisation will not solve the problems of corruption, over-work, low salaries and conflict in the state hospital system – where most of China will continue to receive its medi-cal treatment. Additional reporting by Zhang Yan Medical system Beijing plans to improve care for its 1.4bn citizens, but distrust of private hospitals is a hurdle, writes Patti Waldmeir Healthcare shortfall Source: China National Health and Family Planning Commission 4 2004 05 06 07 08 09 10 11 12 13 2013: June 28 Police in Changsha announce that GSK company officials are under investigation for alleged “economic crimes”. July 2 The National Development and Reform Commission, China’s main economic planning agency, announces a probe into the costs of medicines at 60 domestic and international drugmakers. July 11 The Public Security Ministry issues a statement accusing GSK of bribing doctors to prescribe their drugs and concocting a “huge scheme” to raise drug prices. July 15 Police say GSKmade “illegal” transfers. Gao Feng, head of the economic crimes investigation unit, says four senior Chinese executives from GSK have been held. Aug 15 China’s State Administration for Industry and Commerce says it is investigating possible bribery, fraud and anti-competitive practices in a range of sectors, including the drugs industry. Dec 16 GSK says it is to scrap individual sales targets for commercial staff and will instead link pay to improved patient care and company-wide performance. 2014: Feb 4 GSK says sales of medicines and vaccines in China fell 18 per cent in the fourth quarter of 2013, year on year, after falling 61 per cent in the third quarter. May 14 Chinese police say their investigation shows that GSK as a company and individuals engaged in bribery on a “massive scale”. June 29 GSK says senior executives had been sent a secretly filmed sex tape of the company’s top manager in China shortly before Beijing opened its bribery investigation. Sep 19 GSK says its Chinese unit will pay a fine of about £300m after it is found guilty of bribery. New start: pharmaceutical multinationals have re-examined their compliance procedures after GlaxoSmithKline was found guilty of bribery — Alexander F Yuan/AP
  • 3. Tuesday 4 November 2014 FINANCIAL TIMES 3 Doing Business in China Antitrust fines for foreign car companies fail to stall growth F or multinational car compa-nies operating in China, the euphoria from the biggest ever automotive boom in industrial history is finally being tem-pered by some unexpected risks, most notably a controversial investigation by the National Development and Reform Commission (NDRC) into allegedly anti-competitive behaviour by Audi, Mercedes-Benz and other brands. The investigations have so far resulted in fines that are peanuts in comparison to the vast profits that for-eign automakers have enjoyed over recent years – and continue to enjoy. In July, a joint venture between Volkswagen unit Audi and state-owned First Auto Works was ordered to pay $41m for alleged violations of China’s 2008 Anti-Monopoly Law. This com-pares with reported operating profits of $12.2bn for VW’s joint ventures in China (its other is with SAIC Motor) last year. Fiat unit Chrysler was also hit with a small fine this summer, while Daimler’s joint venture with BAIC Motor, which makes Mercedes-Benz saloons, is still awaiting the outcome of an NDRC inves-tigation after one of its Shanghai sales offices was raided in July. These fines are the byproduct of a wide-ranging investigation that appears to have a much larger aim – forcing car companies, regardless of whether they are in fact guilty of anti-competitive practices, to lower the prices of their vehicles, spare parts and services. According to one industry executive, the head of a multinational company’s China operations has told visiting board members that, in view of the NDRC’s offensive, his biggest fear is of a sudden shift in government policy. “It’s bad for business,” the executive says of the investigation. “It has made the invest-ment environment very uncertain. “If people can afford the cars, they can afford the spare parts and after-sales service,” he adds. “It’s not like the NDCR is lowering the price of medical care or making food cheaper.” Foreign automobile executives argue that the relatively high prices asked for cars – especially premium vehicles that can be almost twice as expensive in China as they are in the US – is a function of unprecedented demand, even for overseas models subject to expensive import taxes. China’s car craze began in earnest in 2008-09, during the depths of the global financial crisis, when it overtook the US as the world’s largest car market. Demand from entire generations of first-time drivers soared in the world’s second-largest economy, just as pur-chasing power collapsed in the US and Europe – a nadir symbolically marked by Washington’s bailout of General Motors in December 2008. Over the ensuing half decade, foreign carmakers in China, especially long established ones such as Volkswagen and GM, had a licence to print money. Even last year, when double-digit annual growth was finally expected to taper, annual sales grew by about 15 per cent to 18m passenger cars – 10 times as many as were sold in India. This year began in similar fashion, especially for foreign brands and their Chinese joint venture companies. Sales of Chinese brands, however, began to fall sharply and their share of the pas-senger car market tumbled from 27 per cent to 23 per cent. The precipitous fall-off in sales of local brands and slower economic growth has forced the China Association of Automobile Manufacturers to lower its projection of an 8.3 per cent increase in year-on-year sales this year to 4.6 per cent – two-thirds down on last year. In the first quarter, Geely, the private sector carmaker most famous for its purchase of Volvo Cars from Ford, saw sales of its own-brand vehicles fall by as much as 40 per cent over the same period a year earlier. This was despite a gradual improve-ment in the quality of local-brand cars in China, according to Geoff Broderick at JD Power, which publishes an annual customer survey of 212 models across 62 brands. “The domestic brands are doing exactly what they should be doing – focusing on quality,” Mr Broderick says. “But as we see the quality gap clos-ing, we’re not seeing a pick-up in [local brands’] market share.” One reason for the fall has been a counterintuitive NDRC requirement that foreign-invested joint ventures develop a local brand for the China mar-ket, such as the Baojun saloon manufac-tured by GM, SAIC and Wuling. Many of these new entrants are priced to com-pete against domestic rivals, especially in smaller cities where car ownership rates are relatively low. “I don’t understand what the Chinese government’s objective was in encour-aging foreign companies to create local brands,” says Bill Russo, a Shanghai-based industry consultant. “It only cannibalises already dis-tressed sales of local brands. I think the intent was for more technology to be shared by the foreign companies. But the unintended consequence is to take volume from local carmakers producing similar products,” he adds. At the other end of the spectrum, for-eign carmakers continue to thrive in sat-urated markets such as Beijing and Shanghai, where premium brands such as Audi, BMW and Mercedes-Benz account for a quarter of the market. Even now, limits on expensive new licence plates to combat congestion and pollution are spurring their sales, as existing plate holders trade up. “As cities implement plate restric-tions, people gravitate towards pre-mium foreign brands,” says Mr Russo. “They want to put their expensive plates on the best piece of automotive technology that they can.” Sales drive Price probe has not dented profits, reports Tom Mitchell Contributors Jamil Anderlini Beijing bureau chief Lucy Hornby China correspondent Patti Waldmeir Shanghai correspondent Gabriel Wildau Shanghai correspondent Charles Clover Beijing correspondent Tom Mitchell China correspondent Demetri Sevastopulo South China correspondent Jörg Wuttke President of the EU Chamber of Commerce in China Adam Jezard Commissioning editor Steven Bird Designer Andy Mears Picture Editor For advertising details, contact: Maralyn Ho +852 2905 5580; email: maralyn.ho@ft.com, or your usual FT representative. All FT Reports are available on FT.com at ft.com/reports. Follow us on Twitter @ftreports. Chinese antitrust fines Largest fines, Rmb million Sumitomo Electric and nine other parts suppliers (Japan) Audi JV and dealerships (Germany) Maotai (China) Mead Johnson (US) Wuliangye (China) Danone Dumex (France) Biostime (China) LG (Korea) Samsung (Korea) Source: China Central Television, NDRC 1,240 278 247 304 202 172 163 118 101 648.6m Paid by Chinese companies 2,394.9m Paid by foreign companies Total: Rmb 3,043.6m Fines paid Rmb Investigations have so far resulted in fines that are peanuts in comparison to the vast profits that foreign automakers continue to enjoy Trading up: premium vehicles cost almost twice as much as in the US
  • 4. 4 FINANCIAL TIMES Tuesday 4 November 2014 Doing Business in China Beijing is not prepared to give the public a role in choosing the candidates Hermès takes long view to feed appetite for understated style Luxury goods were the currency of Chinese corruption for decades, until Beijing stepped in two years ago to block the flow of fine baubles into the hands of government officials – and stem the flood of profits into the coffers of luxury goods companies. Hermès, the luxury dynasty best known for its sought-after Birkin and Kelly handbags, is one of the few luxury brands that has prospered despite Bei-jing’s abstemiousness campaign. “So far we haven’t seen any impact on our figures,” says Axel Dumas, chief exec-utive of Hermès and scion of the found-ing family. The French company does not break out mainland sales, but sales in Asia (excluding Japan) rose 17 per cent in the first half of 2014, while first-half sales for its rival LVMH in Asia (excluding Japan) were up only 3 per cent. And despite the generally gloomy atmosphere around luxury in China these days, in September Hermès opened its first mainland maison, in Shanghai, to complement those in Paris, New York, Tokyo and Seoul. It might seem like the worst time to do such a thing, but Mr Dumas is not in the least bit worried. That could just be the self-confidence that comes with repre-senting the sixth generation of the com-pany’s founding family. But it is more likely that his optimism reflects a more important underlying fact about why the French luxury group continues to do well in the middle kingdom, despite the most challenging luxury market condi-tions in a decade. Hermès represents what China aspires to be: not just another nouveau riche nation with more money than taste, but a country of sophisticated affluence and understated extrava-gance. Mr Dumas thinks time is on the com-pany’s side, as Chinese consumers out-grow their tendency to show off with luxury brands and develop an appetite for savouring them. Most retail analysts agree: Chinese consumers are growing keener on niche top-level brands such as Hermès and less fond of logo-laden, mass luxury rivals such as LVMH and Gucci. Torsten Stocker, retail partner at consultancy AT Kearney in Hong Kong, says: “Hermès’ more classic style fits well with the high-end Chinese consumer’s shift to less ostentatious items.” Cao Weiming, Hermès head in China, agrees: “Two to three years ago, we started to see some changes, even before the anti-corruption campaign began, as the market moved naturally toward greater sophistication, where consumers are more brand-knowledge-able than show-off.” That transformation will take time; but that is one thing the French house prides itself on having. It takes many years to train its crafts-men. It takes forever to get through the waiting list to buy a Birkin bag. It even took seven years to build the Shanghai maison. Mr Dumas points out that his family’s connection with China stretches a long way back: his grandmother, who was born in the early 20th century, when many French writers and artists indulged a passion for the “far east”, was a fan of mah-jong. Gestures toward that Chinese herit-age pepper the Beijing store, including horse-themed dinnerware for the cur-rent lunar year of the horse. Indeed, Hermès is so keen on winning over this market that four years ago it launched its own Chinese luxury brand, Shang Xia– one of the few mainland brands that celebrates its Chineseness, rather than apologising for it. Everything in the Shang Xia collec-tion of clothing, jewellery, furniture and objets d’art has a story: a cashmere felt coat is inspired by the wool felt saddle blankets used by Mongolian horsemen; a jade “ladder to heaven” necklace ech-oes the bamboo undergarments worn in imperial China to keep heavy ceremo-nial fabrics away from sweaty skin. It is the first Chinese lifestyle brand built from the ground by a leading Euro-pean luxury house. Making it a success will take time, even decades. Additional reporting by Zhang Yan Luxury case study Even as Beijing cracks down on extravagance, brand holds its appeal for sophisticates, writes Patti Waldmeir Lap of luxury: Hermès’ Shanghai maison took seven years to build Hermès represents what China aspires to be: not just another nouveau riche nation with more money than taste, but a country of understated affluence Hong Kong Fears grow over impact on business of electoral reform plans, reports Demetri Sevastopulo H ong Kong has witnessed the most heated debate about its political future since Britain handed the territory back to China in 1997. From the end of September, tens of thousands of students and other pro-de-mocracy demonstrators took to the streets to oppose a controversial Chi-nese plan for electoral reform in the former British colony. The protesters were so successful in blocking traffic in a crucial commercial district that they sparked concerns about the impact on the economy and the city’s reputation as a leading finan-cial centre. The Occupy movement even prompted a rare intervention from Li Ka-shing, Asia’s richest man, who urged the students to return home. “We understand student passion, but your pursuit needs to be guided by wis-dom,” the Hong Kong tycoon said recently. “It would be Hong Kong’s great-est sorrow if the rule of law breaks down.” So far, few protesters appear to have listened, partly because one of their main concerns is that the Chinese plan allows the elites who wield power in Hong Kong to retain far too much influ-ence at the expense of the public. In August, China followed through on a promise to introduce universal suf-frage – one person, one vote – for the election of Hong Kong chief executive, the top political job, in 2017. It has urged people in Hong Kong to support the plan – which requires approval from Hong Kong’s legislature – on the grounds that it provides them with a greater political voice than was available during the Brit-ish colonial period. But critics say tough conditions that Beijing included in the plan mean it amounts to nothing more than “sham democracy”. Those concerns morphed into the physical protests that forced the closure of traffic arteries in the Admi-ralty district and other shopping and entertainment areas in what has been dubbed the “umbrella revolution” after demonstrators huddled under umbrel-las during downpours. While many business people say pri-vately the protests could do lasting dam-age to the city’s reputation, few have been willing to speak out. Some are con-cerned about generating anger among the protesters that might be directed at their businesses. Following a visit to Hong Kong, Stephen Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs and a former Morgan Stanley Asia economist, said that while the pro-tests were still causing a little inconven-ience, they were “not a big deal” in terms of economic impact. Mr Roach said the bigger question was whether there would be any long-term impact on Hong Kong’s reputation as a business hub. At the height of the pro-tests when masses of people were dem-onstrating on the streets, he said there were signs multinationals might start to look at places such as Singapore as an alternative, but “now that the intensity has diminished, I don’t think it is going to be a significant factor”. He added that as long as the confrontation did not lead to “extreme” police action, “the reputa-tional impact will be minimal”. Some people who are sympathetic to the protesters fear that speaking pub-licly would earn them the wrath of China, on which they increasingly rely for business deals. For example, Jimmy Lai, the Hong Kong media tycoon who owns the anti-Beijing Apple Daily news-paper, has accused the Hong Kong gov-ernment of persecuting him in the wake of a move by the anti-graft agency to investigate payments he made to demo-cratic lawmakers who are critical of Bei-jing. Apple Daily has also accused Stand-ard Chartered and HSBC of pulling advertising because of pressure from Beijing, claims both banks have denied. Even before China unveiled its con-troversial plan, a Chinese official speak-ing in Hong Kong gave an unusual warn-ing – for a senior Communist party member – that the territory’s famed capitalist system could come under threat if protesters followed through on their threat to occupy the city. Under the current electoral system, an elite committee of 1,200 people who are mostly loyal to Beijing, elect the chief executive. Beijing is prepared to let 5m people in Hong Kong vote for their leader, but is not prepared to give the public a role in choosing the candidates. The leaders of the democracy move- Power of Beijing looms large in territory’s future Tide of opinion: while many Hong Kong people are sympathetic towards the protesters, few have been willing to speak out publicly – AFP ment in Hong Kong argue that, as a result, the plan on offer does not amount to “genuine” universal suffrage. China has also ruled that potential candidates must secure support of a majority of a nominating committee that is expected to resemble closely the current 1,200-member election com-mittee. At present, candidates need sup-port of only one-eighth of committee members – a formula that has allowed opponents of the Communist party twice to get on the ballot. Critics say the new proposal would be more restrictive, giving Beijing even more scope to ensure its critics could not run for election. At a rally on the day that China unveiled its electoral reform plan, Mar-tin Lee, the founder of Hong Kong’s Democratic party, summed up the con-cerns of critics when he said the people of Hong Kong wanted “genuine univer-sal suffrage and not democracy with Chinese characteristics”. “Hong Kong people will have one person, one vote, but Beijing will select all the candidates – puppets,” he said. “What is the differ-ence between a rotten apple, a rotten orange and a rotten banana?”
  • 5. Tuesday 4 November 2014 FINANCIAL TIMES 5 Liberalisation threatens stability in the short term Total social financing stock by type, as a % of GDP Entrusted loans, corporate bonds, nonfinancial equities, and others Bank and trust loans to local governments Bank and trust loans to corporates, households Authorities are taking a cautious approach to Shanghai test ground A year after the launch of the Shanghai “free trade zone”, hailed as a laboratory for ambitious economic and financial reforms, many investors are disap-pointed at the slow pace of change. However, while critics rightly note that precious few business and invest-ment activities are currently permitted in the zone (known as the FTZ) that are not also allowed in the rest of China, it is too early to dismiss it as a failure. The government has used its first year to establish a regulatory framework for further liberalisation of rules on foreign direct investment and cross-border cap-ital flows. Meaningful deregulation under this framework has been slow, but with the basic infrastructure now in place, the government could proceed quickly to loosen capital controls or open to for-eign investment industries that were previously off-limits. “We still hold the view that the Shang-hai FTZ and other [similar zones] will be an important test ground for China’s capital account convertibility,” says Ju Wang, senior foreign exchange strate-gist at HSBC. “Over time, we can expect companies and individuals within the zone to be able to conduct free borrowing and lending activities as well as portfolio investments.” Full convertibility would enable investors to exchange renminbi freely for foreign currency for the purpose of either portfolio or direct investment, without being subject to quotas and onerous administrative approvals. Last December, the central bank’s Shanghai branch issued rules establish-ing a system of special FTZ bank accounts. Moving funds between these and offshore accounts is already possi-ble with few restrictions, but transfers between FTZ accounts and the rest of China remain tightly controlled. Yet, with the FTZ account system now in place, the ground is prepared for fur-ther opening up of the system. Officials have said they are preparing stress tests to gauge the impact of freer capital-ac-count flows. Nonetheless, investors should be under no illusion that the authorities will allow unfettered flows for financial investment any time soon. Han Zheng, Shanghai Communist Party secretary, said recently: “Convert-ibility under the capital account does not equate to full convertibility under the capital account. These are different concepts.” He added: “We are opening up capital account operations directly serving the real economic growth, instead of finance for the finance’s sake.” Another example of the government’s cautious approach to reforms in the zone is the much-touted “negative list”. For years, China has regulated foreign direct investment by publishing a cata-logue that categorises each sector of the economy as either “encouraged”, “restricted” or “prohibited”. The FTZ has established a mirror-image system for regulation of foreign investment. All industries not included in the negative list are permitted for for-eign investment. Like the FTZ bank account system, the negative list has delivered few prac-tical results so far. The initial version of the list con-tained 190 items, making foreign invest-ment in the zone barely less restrictive than in the rest of China. In late June, the government trimmed 51 items from the list, opening sectors including real estate, oil exploration technology, and chemicals. Officials say that the negative list is likely to be short-ened further in the coming years. Yang Xiong, Shanghai’s mayor, has said: “It is not a matter of two or three years. Many things need to be done. But from a long-term per-spective, it is the right path.” Trade zone Critics are disappointed, one year on, at the slow pace of change in this important test area for reforms, writes Gabriel Wildau Han Zheng: no finance for finance’s sake Doing Business in China G lobal financial institutions are hoping that China’s pledge to liberalise its financial system will bring opportunities in a market that has long stymied their efforts to gain a foothold. Their hopes for swift progress may be dashed, however, as risks from within the system are likely to encourage pol-icy makers to apply the brakes on reform. Last November, Communist party leaders approved a landmark agenda that included pledges to deregu-late interest rates and liberalise the flow of investment funds in and out of the country. Their goal was to improve the alloca-tion of financial resources and correct distortions in the economy, putting the country on a secure footing for several more decades of rapid growth. For instance, a cap on bank deposit rates has encouraged excessive investment in infrastructure and manufacturing by keeping borrowing costs artificially low. Meanwhile, overinvestment has led to rampant overcapacity in sectors such as steel, cement and non-ferrous metals, creating a host of unprofitable firms and imperilling the financial sector, as loss-making companies fail to repay debt. At the same time, restrictive capital controls preventing Chinese citizens from moving funds abroad have trapped savings inside the nation’s bor-ders, further contributing to wasteful domestic investment. This liquidity has also helped inflate a housing bubble, as savers – prevented from buying foreign assets and wary of the casino-like domestic stock market – have embraced bricks and mortar as an investment rather than just a place to live. Deregulation of rates, when it finally occurs, should play to the advantage of foreign banks and joint-venture broker-ages operating in China, which are expe-rienced at managing interest-rate and foreign-exchange risk. They should also be able to earn profits dealing in deriva-tives to help clients manage such risks. Freer capital flows would also create opportunities for foreigners, especially overseas asset managers that will enjoy increased access to mainland capital markets. But such freedom may still be years away. Currently, foreign investors are allowed to buy only into China’s domes-tic stock and bond markets under a strict quota system that severely limits access. By comparison, direct investment, which involves buying an overseas com-pany outright or starting an enterprise from scratch, is relatively more open, but still subject to government approval. John Greenwood, chief economist at Invesco, a UK-based fund manager, says: “The gradual relaxation of capital controls should bring multiple opportu-nities to asset managers, but we must accept that these changes will be slow in coming. Nevertheless, since the Chinese market has huge potential, it is worth-while being patient.” The problem is that such reforms, while they will aid long-term growth, are likely to be destabilising in the short term. That is a problem for China’s 200 150 100 50 stability-obsessed leadership, which is therefore likely to implement them more slowly than the most zealous advocates of reform would prefer. Once banks are forced to compete for depositors’ funds, interest rates will rise. That will be painful, given the large increase in corporate and local govern-ment debt since the global financial cri-sis. Rising rates will also increase the cost of servicing debt, potentially spark-ing a wave of defaults. Freer capital flows will open the door to capital flight if investors lose confi-dence in the economy. Such a scenario is all the more likely if rising interest rates spark a wave of defaults among highly-indebted corporate borrowers. To be sure, China has already taken cautious steps to open its financial sys-tem. A new programme will allow Hong Kong and Chinese investors to buy into each others’ stock markets. However, this scheme is subject to a strict quota, and authorities have made it clear that “capital-account converti-bility” – the technical term for freeing cross-border investment flows – does not mean it is open season for specula-tive capital to slosh in and out of the territories. “A rapid opening up could be highly destabilising for the economy, so we understand the caution of the authorities,” says Mr Greenwood. Finance Policy makers set sights on long-term growth and patient investors will find plenty of opportunities, writes Gabriel Wildau Patience pays: investors monitor stock prices in Shanghai – Qilai Shen/Bloomberg Freer capital flows will open the door to capital flight if investors lose confidence in the economy China’s rising debt load Source: CEIC 0 2002 03 04 05 06 07 08 09 10 11 12 13 Preferential policies in the zone • Simplified company registration: a “one-stop shop” for all steps in the process. • Approach to foreign investment. All industries not on the “negative list” are open to foreigners. • Investment in sectors not on the list via a simple registration system; no advance approvals necessary. • Simplified procedures and less red tape for customs, shipping and logistics to make merchandise trade more convenient. • Unrestricted transfer of funds between FTZ bank accounts and offshore accounts. • Suspension of 14-year ban on games consoles, which can be produced in the zone and sold throughout China. ‘It is not a matter of two or three years: many things need to be done’
  • 6. 6 ★ FINANCIAL TIMES Tuesday 4 November 2014 China needs to be placed at the top of the European Commission’s ‘to do’ list Ukraine will undoubtedly be the main foreign policy focus for the European Commission’s newly appointed leaders. The importance of this immediate neighbour to the east is obvious. But Jean-Claude Juncker and his administration should place equal – if not greater – emphasis on a country this lies even further east. With the EU exclusively responsible for foreign trade and investment matters since the entry into force of the Lisbon Treaty in late 2009, the bloc’s relations with China should be prioritised to reflect the country’s size and its restrictive investment environment. China has contributed substantially more to the world’s economic growth than any other country since the global economic crisis and it has become its largest economy in purchasing power parity terms. Yet China has long adopted an idiosyncratic approach to foreign investment. Unlike the EU, which does not even have a term for classifying investment within its borders as “foreign”, China retains a distinction between external and domestic investment. In doing so, it places conditionality on the opening of its marketplace by prescriptively laying out conditions that accept foreign investment only where it is perceived to serve specific domestic industrial policies. The vast reform agenda outlined a year ago in the so-called Decision of the Communist Party Central Committee’s third plenary session was therefore welcomed by European industry in China for its breadth and boldness. If implemented resolutely, its emphasis on further opening up of its markets could rebalance China’s increasingly precarious economy and level the playing field for European and other foreign companies. While this demonstrates the political will of China’s leaders to push reforms, these will not come into force overnight. The recent spate of investigations into antitrust violations indicates that problems will continue to arise. One is how China investigates tax collection, particularly among foreign companies. The EU’s leaders should be mindful of these difficulties when working out how to engage with China. Foreign businesses have developed a justified wariness of speaking out on controversial topics. So, when the European chamber became the first association to express concern openly about the opacity and lack of due process in China’s enforcement of its competition law over the past year and a half, it was praised for being courageous. Foreign industry needed to voice its concern, for reasons that go well beyond today’s investigations. But this should not be done to disparage China’s efforts to improve how it applies its laws. China’s antimonopoly law is one of the cornerstones for strengthening exactly those conditions that are required to rebalance and upgrade the economy. However, non-adherence to legal due processes in antimonopoly investigations risks a situation whereby administrative power not only perversely distorts competition but, in a wider context, endangers the credibility of China’s attempts to be more open and its ability to let the wider market place have a bigger role in the economy. China improved the positive sentiment among foreign companies to an all-time high following the third plenary session last year. It would be a shame if the praise it has earned for this important policy direction is undermined by poor execution. The antimonopoly investigations show that the EU’s political leadership must be ready to engage head on with China on politically prickly trade and investment issues. Such a strategy must be built on a deep and studied understanding of the country’s business environment. The European parliament ought to look closely (and regularly) at Beijing’s trade policies and actions – as happens in the US – in order to make the informed decisions needed to engage with China. At stake are millions of European jobs, a substantial contribution to economic growth, our ability to innovate and the multiple benefits our relationship with China has brought. As China is now an economic superpower that increasingly shapes global practices and invests overseas, it is high time that engagement with the country commands the priority it merits across all the EU’s institutions and member states. This means that the European parliament, the 28 member states and the European Commission speak with one voice and avoid temptations to bow down to China’s economic might in return for short-term gains at the expense of a unified and results-orientated strategy. Europe’s change in leadership provides an opportunity for this readjustment of its strategy with China. The opportunity within that opportunity is the EU’s continuing negotiation of an ambitious bilateral investment agreement (BIA) with China. The negotiations represent the most important engagement with China on trade and investment policy since China’s accession to the World Trade Organisation in 2001. They also present the EU with a prime opportunity to set the tone for a constructive engagement with China. As explained in the EU-China 2020 Strategic Agenda for Cooperation, the successful conclusion of a comprehensive BIA would convey China’s willingness to engage in a deep and comprehensive trade agreement with the EU. The writer is president of the EU Chamber of Commerce in China Jean-Claude Juncker: setting tone for future engagement Doing Business in China T he listing of Alibaba in New York in September created the world’s second-largest internet company by mar-ket capitalisation, behind Google. This did not happen by acci-dent. Of the top10 internet companies in the world, ranked by market cap, three are Chinese, and the rest are from the US. Together, Baidu, Alibaba and Tencent form what is know in China as “BAT”. These economic juggernauts that have come to dominate the internet in China are operating almost along the lines of Japan’s keiretsu, which are alliances of businesses with similar interests or that have shareholdings in one another. They are also rapidly branching out into offline sectors, such as transport, travel, retail and banking. Whether the rapid growth of the Chi-nese internet is just a bubble or a stable trend is open to question. However, for the time being at least, BAT has become the nucleus of an internet industry that is starting to rival the US, creating what is essentially a US-China duopoly. The three Chinese companies also benefit from what has become known as the “Great Firewall”, as most of the top US companies, such as Google, Facebook and Twitter, are excluded from operat-ing in China. However, no Chinese internet com-pany has yet made the leap from China to become a global brand. For now, it is enough for them be dominant in China, which had 632m internet users as of June, 527m of whom go online using mobile devices. The potential of the forecast consumption boom, as China moves from an investment-driven econ-omy to a consumption-driven one, is enough to attract investments such as the $25bn sunk into Alibaba in its initial public offering, the largest ever. The internet is the most dynamic part of China’s budding private sector, though it remains solidly under the con-trol of the state. Foreigners hold large shareholdings in Alibaba, Tencent and Baidu and dozens of other internet com-panies. But these stakes are largely theo-retical at best and owned via “variable interest entities”, or VIEs, which guar-antee a payment stream from, but not ownership of, the licence-holding vehi-cles in China. These VIE’s are techni-cally illegal, though Chinese courts turn a blind eye to the practice, and owners know their large holding only exists thanks to the tacit consent of the state. Nimble private internet companies, able to dance circles around the ineffi-cient state-owned enterprises, have begun impromptu liberalising of whole sectors such as financial services. Ali-baba’s fund company Yu’e Bao is China’s biggest online money market fund, with Rmb574bn ($93.8bn) worth of assets The internet is a phenomenal wealth generator. Five of the 10 richest men in China are tech moguls, up from none three years ago, according to the Hurun China Rich List, which tracks wealthy individuals. In September, Alibaba founder Jack Ma joined the list in first place and became one of the wealthiest men in the world, with a 7.8 per cent stake in a $230bn company. Competition between internet com-panies is fierce, however. With the entire industry switching from desktop devices to mobile ones, many compa-nies risk being left behind if they don’t have a “killer app” that will act as a gate-way for mobile users. Alibaba has been searching for just such a feature to challenge the currently undisputed leadership of Tencent, whose WeChat instant messenger has 350m monthly users. WeChat and Ten-cent’s other messenger, QQ, are the two most popular mobile apps in China, according to iResearch, a Beijing-based internet research firm. In June, Alibaba bought UCWeb, a popular mobile browser company, and the two have developed Shenme, a mobile search engine. They are also working with Quixey, a US-based com-pany in which Alibaba has invested, to design a mobile gateway using Quixey’s app search engine. Francis Bea of Papa-yaMobile, a Chinese mobile technology company, says Alibaba is attempting to mirror Tencent’s success with WeChat. He says: “In as highly competitive a market as China, there is potential for the mobile internet to disrupt estab-lished internet players if they don’t manage the transition from desktop to mobile.” Alibaba has spent an estimated $6bn-$8bn in the space of a year on full acquisitions of, or investments in, com-panies including mobile providers, chain stores, an internet TV company, a maker of electrical appliances, a movie producer, a digital broadcaster and a professional Chinese football team. While attention has focused on Ali-baba’s acquisitions, Tencent and Baidu have been on similar spending sprees. Baidu is betting that its stake in Qunar, China’s top travel website by users, and mobile app store 91Wireless.com, will complement its popular search engine to carry it into the mobile age. Tencent has taken a stake in JD.com, China’s sec-ond- largest ecommerce platform, and mobile-friendly companies such as res-taurant review site Dianping and South Korea’s CJ Games. Internet titans focus on staying ahead of mobile revolution Technology Charles Clover says search for gateway apps is driving acquisitions in a dynamic industry Changing times: of the 632m internet users in China, 527m go online using mobile devices Ed Jones/AFP/Getty Images ‘There is potential for the mobile internet to disrupt the established internet players’ OPINION Jörg Wuttke China is now an economic superpower that helps shape global practices and invests overseas