The china analyst september 2013

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China’s Increased Presence in the Developed World

The Growing Global Influence of Chinese Consumers

China’s Transformation: Implications for Global Supply Chains

China in the Developed World

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Source: China National Bureau of Statistics; World Bank; IMF; The Beijing Axis Analysis

Note (1): The Engel coefficient is the proportion of family income that is spent on food. (2): The Gini coefficient measures the degree of inequality in the distribution of

family income in a country.

While the economic record of Hu Jintao, China’s former president, would be the envy of most leaders elsewhere in the world, how does it compare with that of his predecessors? As it turns out, economic growth was even faster under Mr Hu than it had been under his predeces-sors Jiang Zemin and Deng Xiaoping, but did this ensure a “harmonious society” and translate into a better quality of life for Chinese citizens?

Hu Jintao did outperform his predecessors in terms of increasing China’s GDP per capita and urbanisation level, while Jiang Zemin was responsible for the fastest increase in total health expenditure and oversaw greater improvements in the country’s Engel coefficient1. As for the widening income gap, the numbers show President Xi Jinping has his work cut out for him as the rise in China’s Gini coefficient2 has quickened with each successive leadership. However, time will tell whether solving this inherited problem will turn out to be one of Xi Jinping’s greatest achievements.

Comparing Hu Jintao and his Predecessors on China’s Social Development

The China Analyst

4 І The Beijing Axis

At the Highest LevelAs China’s top leaders prepare to discuss major policies on the country’s reform agenda during the upcoming plenary session of the 18th Central Committee in November, the rest of the world is keeping a close eye on Xi Jinping for any clues as to the policy direction of China’s new leadership.

The China Analyst

September 2013

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

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China’s top leaders are well aware of the problems facing the world’s second-l a r g e s t e c o n o m y and fol lowers are cautiously optimistic that President Xi Jinping and company will push through long anticipated reforms needed to ensure China continues on its long-term growth trajectory.

Some of the new (old) ideas China’s new leadership are floating around to manage imbalances throughout Chinese society include: privatising rural land to boost rural incomes and encourage migration to cities; refining the “One Child” policy to ensure the country has an adequate labour supply to offset a rapidly ageing population; and reforming the hukou household registration system to give migrant workers and their children equal access to urban facilities.

From an economic perspective, China’s new leaders must continue to stabilise the economy to keep employment high while avoiding a surge in housing prices and inflation that could undermine reforms needed to overhaul the country’s investment and export-oriented growth model. Environmental protection, food safety and public health are high on the young administration’s agenda as a richer, larger and healthier middle class in China would not only help to stimulate domestic consumption but also demand more from the future.

The changes taking place in China are worthy of their own story. One of the major issues to watch will be the success (or failure) of Chinese and other emerging-country firms in cracking into developed markets. The fruits of globalisation will no longer largely accrue to rich-world businesses as emerging-market products and services win consumers in the West. In the coming years, Chinese car manufacturers will continue their efforts to break into European markets, while Chinese real estate developers, construction and Internet firms look to diversify their asset portfolios into more stable but still revenue-generating economies.

Against this backdrop, manufacturing will be undergoing a revolution. Rising Chinese wages will prompt some domestic and foreign-owned factories to look for more cost-competitive

locations - in some instances back home, but more often to places such as Bangladesh or Mexico. Others will have to reinvent themselves.

The stakes are equally high for resource-endowed countries such as Australia as their economies remain heavily dependent on China, with most maintaining a relatively long-term bullish view about China’s future demand for commodities. China’s gradual shift from heavy infrastructure construction to a more domestic consumption-oriented growth model is understandably changing the strategic planning of global miners.

President Xi’s number two, Li Keqiang, advocates further urbanisation, which could put more money in the pockets of China’s migrants to spend on cars, televisions, appliances and real estate to fulfil their aspirations of joining China’s middle-class ranks.

Put these themes together, and it is clear that the rest of 2013 and 2014 is going to be a period of great change for companies in many sectors. But in that change lies opportunity, and the better the businesses’ knowledge of the environment in which they will be operating, the more likely they are to succeed.

In this edition of The China Analyst, we outline the implications of China’s growing footprint in the developed world as the country enters a new era in its on-going transformation.

I trust our readers will enjoy this edition of The China Analyst and, as always, we welcome your feedback.

Kobus van der WathFounder & Group Managing DirectorThe Beijing [email protected]

The China Analyst


REGIONSRegional Focus: CHINA-AFRICAChina-Africa trade and investment analysis, and a

focus on China’s relations with the Intergovernmental Authority on Development (IGAD)

REGIONSRegional Focus: CHINA-AUSTRALIA

China-Australia trade and investment analysis, and ‘Australia State Watch’, featuring the Northern Territory. We also feature an interview with Austrade’s Senior Trade Commissioner in Beijing on Australia’s evolving trade relationship with China

REGIONSRegional Focus: CHINA-LATIN AMERICA

China-Latin America trade and investment analysis, and a special focus on China’s relations with Chile

REGIONSRegional Focus: CHINA-RUSSIA

China-Russia trade and investment analysis, including ‘China-Russia Resources Watch’

The Beijing Axis NewsThe latest news from The Beijing Axis Group

FEATURESChina’s Increased Presence in the Developed World

As China plays an increasingly larger role in the global economy, Chinese companies are re-writing the rules of engagement in the global marketplace

FEATURESThe Growing Global Influence of Chinese Consumers

The growing global purchasing power of Chinese consumers is forcing multinationals and governments to re-think their China strategies to capture the attention (and wallets) of Chinese consumers

FEATURESChina’s Transformation: Implications for Global Supply Chains

We examine the megatrends reshaping the global procurement landscape, with China at the forefront of these trends

MACROECONOMYMacroeconomic Monitor: China’s On-going Transformation

An improved global outlook will help China’s new leadership to continue the country’s path towards more moderate and sustainable growth, but many challenges exist

INVESTMENTChina Capital: Inbound/Outbound FDI & Overseas Resource Investment

Analysis of the latest on FDI in China and OFDI by Chinese firms, with a focus on overseas resource investment

STRATEGYMapping China in the Global Commodities Trade

In this edition, we illustrate global trading patterns between China and its leading commodity suppliers

STRATEGYMCC: China’s Leading Metallurgical Engineering and Construction Contractor

We focus on the success and tribulations of MCC’s overseas operations

REGIONSRegional Overview: BRIICSA macro overview and comparison of the leading

developing economies: Brazil, Russia, India, Indonesia, China and South Africa

Table of Contents September 2013

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About the cover:Unveiled on The Bund in Shanghai in May 2010, Shanghai’s 2,300 kg Charging Bull is said to have the same height, length and weight as New York City’s Charging Bull, although it was purposely built redder, younger and stronger than its predecessor. A symbol of perseverance, diligence and wealth in Chinese culture, the bull’s confident stance is said to represent a bullish and prosperous future for China’s rising financial centre.

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The China Analyst

China’s Increased Presence in the Developed WorldOver the past decade, China’s unprecedented surge of economic dynamism and development has radically altered the global landscape and affected a host of international relationships. Taking advantage of lower valuations, ambitious, cash-flush Chinese companies are looking for sound investments outside their traditional markets. The recent track record of Chinese overseas investors illustrates that they are increasingly capable of closing complex transactions and successfully operating in the tough regulatory environment of the developed world. By Daniel Galvez

In the not-so-distant past, foreign direct investment (FDI) flowed predominantly from the so-called developed world to the developing world. While these flows are continuing, China is now

taking a lead role, as the world’s largest saver, by investing in a wide array of ventures in developed economies – including in the United States and Europe – through mergers, acquisitions and greenfield investments. China is now the world’s third-largest source of FDI, with outflows from China reaching a record USD 84 billion in 2012.

The latest figures suggest Chinese companies are learning to navigate the delicate political and regulatory landscape for investments in countries with more sophisticated legal systems. For example, while major US companies will remain essentially unattainable to Chinese buyers due to national security concerns or their access to critical technologies, Chinese firms have nonetheless moved to tap the US market, which, in many industries, offers the opportunity for more operational know-how that Chinese companies can use in other markets. Annual OFDI from China to the US has grown by more than 300% since 2007, according to official statistics. Chinese leaders have also encouraged investment abroad and the development of global brands to enlarge China’s economic footprint.

Corporate real estate

According to industry estimates, Chinese companies and investors spent USD 3.9 billion on offshore commercial real estate in 2012, up 34% 2011, with these purchases heavily concentrated in a handful of developed markets, including Hong Kong, Singapore, London, New York, San Francisco and Sydney. In February 2013,

China’s largest property developer, China Vanke, announced it had formed a joint venture with Tishman Speyer Properties Inc. to develop two high-rise condominium towers in downtown San Francisco. The USD 620 million 655-unit development would be the largest condo project in the city and marks Vanke’s first foray into the prestigious US market. For Vanke specifically, venturing into the US makes sense given that China’s policymakers continue to clamp down on property speculation at home. The underlying trend is that Chinese companies are learning to recognise the value of diversifying some asset holdings in developed economies from potentially overheated markets in mainland China as a long-term growth strategy.

China’s foreign-exchange regulator has been actively but discreetly investing in UK property and infrastructure, marking a significant shift in how the manager of the world’s largest foreign-currency reserves uses its funds. Since 2012, UK-registered Gingko Tree Investment Ltd., a wholly owned unit of China’s State Administration of Foreign Exchange (SAFE), has invested more than USD 1.6 billion in at least four deals, including a 49% stake in Manchester office building One Angel Square for about USD 110 million and USD 438.2 million for Drapers Gardens, a 16-story office building in London.

SAFE, which is responsible for investing most of China’s more than USD 3 trillion worth of foreign-exchange reserves, has also quietly set up an operation in downtown Manhattan to invest in private equity, real estate and other US assets. The move by SAFE comes as it steps up diversification away from US government debt towards relatively safe yet higher yielding assets. While the new effort is unlikely to reduce China’s dependence on US Treasuries soon, the attempt represents part of China’s long-term strategy to reduce its hoard of dollar debt. According to estimates from the Heritage Foundation, SAFE’s non-bond investments in the US total USD 4.5 billion, mostly through stakes in private equity funds and similar investments.

In many ways, SAFE is following in the footsteps of China Investment Corp (CIC), the better-known investor of Beijing’s sovereign wealth. In November 2012, CIC, one of the world’s largest sovereign-wealth funds with about USD 410 billion under management, bought Winchester House, which is leased by Deutsche Bank for its London headquarters, for about USD 400.6 million. CIC has also invested in UK infrastructure, including small stakes in Heathrow Airport Holdings and water utility Thames Water. As of the end of 2011, 43.8% of CIC’s equity holdings were in companies based in North America, followed by 29.6% in the Asia-Pacific region, 20.6% in Europe, 4.7% in Latin America and 1.3% in Africa. Given SAFE’s recent moves, competition between SAFE and CIC has intensified somewhat in the US.

Source: World Investment Report 2013; The Beijing Axis Analysis

Top 20 World FDI Outflows (USD bn, 2012)

329

0 50 100 150 200

US Japan China

Hong Kong UK

Germany Canada

Russia Switzerland

Virgin Is. Canada France

Sweden S. Korea

Italy Mexico

Singapore Chile

Ireland Luxembourg

In 2012, China ranked third

Developed Economies Developing Economies Transition Economies

The China Analyst


In another deal, a group led by Soho China, one of China’s highest profile property developers, completed a purchase of a 40% stake in the iconic 50-story General Motors Building in Manhattan, one of the most valuable buildings in the US. Completed at the end of May 2013, the deal by the family of Zhang Xin, who is a principal of Soho China, and its partners values the tower at about USD 3.4 billion, making it one of the largest acquisitions of a single US property by a Chinese investor. With valuable retail space next to Central Park, the GM Building attracts some of the highest office rents in New York City, and has long been seen as a top prize by New York landlords.

Western real estate developers are also looking to China to back their projects. New York developer Gary Barnett is currently looking to China to back a larger and taller tower than one of the most expensive condominium towers in history, One57, located a block away. Founder of Extell Development Co., Mr Barnett is in early talks with the state-owned Export-Import Bank of China (China Exim Bank) for a loan of about USD 1 billion to build the soaring condo and hotel skyscraper just south of Manhattan’s Central Park. If completed, such a deal would likely be the largest loan for a US real-estate construction project since the property downturn and would give the Chinese bank its first foothold in a US real estate project. With a building-permit application calling for a 1,550-foot-high structure, the high-profile building is poised to be the tallest residential tower in the US, surpassing the Empire State Building.

Real estate professionals in China expect Chinese state-owned lenders such as China Exim Bank, which have been on the hunt for North American investments in the past few years, to continue increasing their amount of US loans. Chinese banks’ US branches held USD 5.3 billion in loans in the first quarter of 2013, up from just USD 1.5 billion in the first quarter of 2010. In developing economies, China Exim Bank and China Development Bank, among others, have traditionally offered relatively low-cost financing for projects that involve Chinese contractors or investors, thereby furthering Chinese investment overseas. The US subsidiary of China State Construction Engineering Corp (CSCEC), China’s largest construction company by revenue, is in talks to be the co-general contractor on Mr Barnett's New York tower, should the bank loan go forward. CSCEC is known for building many prominent public works in China, such as the Water Cube in Beijing. In the past few years, it has tried to expand its US business, working on local infrastructure projects and, now, on real estate.

The new Chinatown

Chinese companies are not simply interested in owning assets but also building them, with investment in infrastructure becoming a more visible trend. In the past, Chinese OFDI in infrastructure was concentrated in developing countries but efforts are now being stepped up in the developed world.

In May, ABP (China) Holdings Group announced plans to develop a USD 1.6 billion London business centre, one of the first direct investments by a Chinese developer in London’s property market. The plan aims to transform the 14-hectare site at Royal Albert Dock near London City Airport into the capital’s third business district after the City of London and Canary Wharf. The project will target Asian businesses, particularly financial-services companies, seeking to establish headquarters in Europe, as well as other businesses wanting to set up in the capital. According to ABP, most Chinese companies with operations in Britain rent space and cannot find desirable offices to buy. When completed, the project is expected to add 20,000 jobs to the local economy and be worth more than USD 9 billion to the UK’s economy.

It was also revealed in May 2013 that China won regulatory approval to build an entire city in the forests near the Belarusian capital Minsk

to create a manufacturing springboard between the European Union and Russia. Belarus has allotted an area 40% larger than Manhattan around Minsk’s international airport for the USD 5 billion development, which will put Chinese exporters within 170 miles of EU members Poland and Lithuania and give them tax-free entry into Russia and Kazakhstan, which share a customs union, with Belarus. It will also let them draw from a workforce that’s 99.6% literate and makes USD 560 a month on average, half the Polish wage.

As the “modern city on the Eurasian continent,” the first stage of the park is scheduled to be completed by 2020, with the second stage taking another 10 years. China, which signed a USD 3 billion currency swap deal with Belarus in 2009 to boost trade, agreed to finance the venture with low-interest loans as long as half the money is spent on Chinese materials, technology or labour. The project is being managed by Industrial Park Development Co., which is 60% owned by a unit of China National Machinery Industry Corp. and 40% owned by Belarus’ government. China Exim Bank and China Development Bank are among the Chinese lenders that have already agreed to fund the project, with Chinese drug maker Sinopharm Group among the more than 10 companies which have already shown interest.

In March, Shanghai-based Greenland Group struck a deal to buy and develop a residential and hotel building in downtown Sydney from Canadian firm Brookfield Asset Management Inc. for USD 111.4 million, adding to an international portfolio that includes a project on Jeju Island in South Korea and partnerships with hotels in Spain and Germany. The USD 600 million development is the group’s first foray into the Australian market and will become Sydney’s tallest residential tower at a height of 240 metres. Greenland is no stranger to big developments. The company is one of the largest state-owned enterprises in China with developments in about 65 cities and three of its 17 landmark buildings ranked among the top ten tallest buildings in the world. Greenland plans to invest more than USD 23.6 billion in real estate developments in 2013 and has plans to explore the Melbourne and Brisbane CBD markets for future project opportunities.

Energy infrastructure

China’s energy companies have been aggressive in their dealings abroad to secure access to cleaner-burning natural gas to generate electricity, with the country aiming to raise the contribution of natural gas to the fuel mix to 10% by 2020 from less than 5% today. Raising LNG imports will be one part in meeting that goal, particularly as development of large-scale production of domestic shale gas resources remains years away. For PetroChina, China’s largest listed oil company by capacity, investing in overseas LNG projects has been an important part of its expansion. In December 2012, it agreed to

Source: Rhodium Group; The Beijing Axis Analysis

Annual Chinese FDI Flows to the United States and the European Union (USD bn, 2000-2012)

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Chinese FDI in the United States Chinese FDI in the EU-27


The China Analyst

buy a 49.9% stake in Canadian firm Encana’s natural gas project in Alberta for USD 2.2 billion. In April, it was reported that Industrial & Commercial Bank of China (ICBC), China’s largest bank by market value, agreed to help finance plans for the USD 25 billion LNG export terminal in British Columbia, set to be among the 10 largest refineries in the world. The project envisions refining oil from Alberta’s oil sands and exporting it from the Pacific port of Kitimat to markets in Asia.

With a population of less than 300, the town of Medicine Bow, Wyoming in western US has become an unlikely location for the next phase of China’s advance into the US energy market. Sinopec Engineering Group, a subsidiary of state-controlled Sinopec Group, is planning to build an advanced facility there that will convert coal into gasoline, which will capture and reuse carbon dioxide otherwise emitted into the atmosphere. With one of the most competitive procurement arms in the world, Sinopec brings competitively-priced Chinese components and materials to the potentially expensive and complicated project. Some materials, such as steel, could potentially be sourced from China as a way to keep costs down. While Sinopec’s role may also open up the doors to attractive Chinese capital, the most critical success factor will be Sinopec’s ability to source components internationally for the USD 2 billion project.

According to Sinopec, high investment levels in the refining and petrochemicals sector will present strong overseas business opportunities in the coming years as it seeks to build up a unique Chinese engineering brand. Sinopec expects to offer the US energy market high technology value and high-quality engineering services. Already involved in developing energy refining, transport and storage assets from Indonesia to Saudi Arabia, Sinopec has clearly set its eyes on the US market. US-based DKRW, Sinopec’s local partner in the Medicine Bow project, believes it is at the forefront of a bigger US engineering push by Chinese companies. The project is expected to benefit the local economy by creating up to 2,300 construction jobs and 400 full-time jobs when the facility goes into operation.

In the coming years, Chinese oil and gas companies will also have greater opportunities to participate in downstream plays – refining, processing and distribution of fuels – in developed economies. Sinopec and other Chinese state-owned behemoths could potentially have a cost advantage when it comes to downstream. The work by Sinopec Engineering Group helps to satisfy a key requirement of the Chinese government – developing new overseas markets to prop up domestic materials and component producers. While a booming Chinese economy and high public-spending levels have supported industrial production for decades, the Chinese government worries industrial companies could suffer as economic growth moderates. Sinopec winning engineering work in the US marks an important step in establishing itself as a global brand.

Sinopec has previously pursued similar work in the US power industry. In September 2012, Seattle-based Summit Power Group LLC announced that Sinopec Engineering will manage the construction of a critical portion of the Texas Clean Energy Project, a planned power-generating facility near Odessa, Texas. The facility will be funded by China Exim Bank, and is in line to receive USD 450 million in US federal funding. While opponents of the US-China cooperation on energy and power projects argue that some components will be sourced internationally instead of from US factories, lower upfront costs to construct facilities could accelerate projects and ultimately translate into cheaper electricity and other benefits for consumers.

Chinese investments in energy project are not limited to traditional sources of energy. According to the World Resources Institute,

Chinese companies have made at least 124 investments in solar and wind industries worth nearly USD 40 billion in 33 countries over the past decade (2002 – 2011). Most of these investments are in developed countries, with a significant amount going to the US, as well as Germany, Italy, and Australia.

China’s investments in the wind and solar industries are driven by many factors, including an oversupplied domestic market and subsequent need to boost international sales. Chinese wind companies are relatively new entrants to the international markets, while declining subsidies in the European solar market have decreased demand for Chinese solar products. As a result, direct investments overseas are seen as a way of retaining and expanding market share, typically through creating demand for the export of products. Other factors that motivate investment include the quest for new technologies; opportunities to acquire undervalued assets in the wake of the financial crisis; the financing support provided by China’s state banks for overseas investments and engineering, procurement, and construction; and, renewable energy targets and tax benefits in host countries.

Final word

China’s global direct investment stock is projected to grow from its current USD 400 billion to more than USD 1 trillion by 2020, with an increasing share of investment flowing to developed economies. How the developed world responds to the new reality of China’s increased presence in their countries will have enormous consequences both for their economic futures and relationships with China. While there are critical national security concerns that must be factored into any nation’s embrace of FDI, countries must refrain from politicising the issue or risk missing out on the potential benefits of these investments.

The barriers that prevent individuals and companies in China from investing more freely outside its borders will continue to gradually diminish. Continued reform in China, coupled with its vast domestic savings and central role in world trade, could make the country one of the world’s most influential suppliers of capital in the years ahead. Chinese investments can create jobs and stimulate infrastructure renewal, while at the same time lay the foundation for a more cooperative relationship with China; however, some will also view this as China entering a new sphere of competition.

Daniel Galvez, [email protected]

Source: World Resources Institute; The Beijing Axis Analysis

Number of Chinese Overseas Investments in Wind and Solar Industries (2002-2011)

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Spain

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The China Analyst


Outbound tourism

Thanks to rapid urbanisation, rising disposable incomes and relaxation of restrictions on foreign travel, the volume of international trips by Chinese travellers grew from 10 million in 2000 to 83 million in 2012. According to the United Nations World Tourism Organisation, China’s spending on outbound travel jumped 40% to USD 102 billion in 2012, leapfrogging Germany and the US to become the top source of tourism spend in the world.

The number of mainland Chinese tourists visiting the US exploded from a mere trickle to more than 1.5 million in 2012, making the US the leading destination for Chinese tourists outside Asia. Chinese travellers have one of the highest per capita spending ratios of all foreign visitors, creating new sources of revenue and taxes for foreign companies and countries. In Europe, the flood of Chinese tourists to high-end stores in Paris and elsewhere reshaped how luxury brands operate, helping to offset the impact of the recession in the euro zone. However, a subtle shift is starting to appear among Chinese tourists who are choosing to spend more on other activities such as sightseeing and dining. This presents a growing challenge for Europe’s luxury-goods brands (and an opportunity for local tourist operators and restaurants).

Furthermore, by 2020, purchases by individual Chinese tourists abroad – on travel, food, accommodation, entertainment and shopping – is expected to overtake that of tour groups, which currently dominate spending. Many Chinese tourists are no longer on their first trips abroad and are looking for fresh experiences beyond shopping. While Chinese nationals are set to remain an explosive force in global tourism, attracting independent travellers is different from working with tour groups and will require more than hiring a Mandarin speaker.

At the same time, China’s leading companies are looking to cash in on the Chinese outbound tourism opportunity by expanding their presence abroad. Chinese property conglomerate Dalian Wanda Group plans to expand its luxury real-estate and hotel business overseas, as it seeks to build the world’s first Chinese luxury hotel outside of China’s mainland to cater to the country’s booming outbound travel market. In June, Wanda announced plans to invest USD 1.09 billion in a luxury hotel and development complex in London, in addition to a luxury hotel project in New York. Overall, the company plans to build luxury hotels with the Wanda brand in eight to 10 major cities around the world over the next decade. Within China, Wanda already runs a chain of five-star hotels and has partnerships with hotel groups such as France’s Accor SA, Hilton Worldwide Inc. and Starwood Hotels & Resorts Worldwide Inc. of the US, giving it priceless exposure to global best practices in the hotel chain industry.

The Growing Global Influence of Chinese ConsumersGrowing at a much faster rate than any other major economy over the past three decades, China has become a key locomotive for global growth, in many ways taking over the role traditionally played by the US and other developed economies. As China moves to a consumption-driven growth model, new consumption-oriented opportunities are emerging both inside and outside China, forcing multinationals and governments to re-think their China strategies to capture the attention (and wallets) of Chinese consumers. By Daniel Galvez

China’s overseas real estate boom

Armed with a long-term perspective and newfound wealth, Chinese citizens are searching for better living and investment opportunities outside China. Chinese overseas real estate investors buy real estate to use as rental properties, vacation homes or simply leave them empty in the hope of a rise in housing prices, particularly in North America and Europe. For example, Chinese buyers flush with cash are flooding into the US housing market, accounting for 18% of the USD 68.2 billion that foreigners spent on homes during the 12 months ended March 31, according to the National Association of Realtors. At a median price of USD 425,000, Chinese buyers are also buying more expensive homes than other foreign buyers, who spent a median of nearly USD 276,000 on US homes. What’s even more impressive – nearly 70% of Chinese deals were made in cash.

Nowhere is the influx of Chinese homebuyers felt more strongly than in California, where more than half of the homes sold to foreign buyers went to Chinese nationals. Local real estate agents in Los Angeles say most of their Chinese clients are wealthy industrialists or real estate tycoons, many of whom spend less than half the year in the US. Some have children going to school in Los Angeles and use the homes as residences for them and as a place to stay at when they visit their kids. It’s no secret that China’s top business people have long viewed US real estate as a safe and stable investment. This phenomenon is not limited to the US. Wealthy Chinese are now among the largest buyers of real estate in Australia, picking

Source: World Tourism Organization; The Beijing Axis Analysis

Number of Chinese Overseas Travellers and Expenditures (USD bn, 2003-2012)

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No. of Chinese Travellers (rhs)


The China Analyst

up properties ranging from modest suburban homes to waterfront mansions with views across Sydney Harbour. There are signs that the influx of Chinese money is starting to skew Australia’s real-estate data. Data analysis of Chinese immigration and Australia’s real estate sector reveals the following correlation: changes in property prices trail rising levels of Chinese migration by about three years. The reason: Australia has long courted China’s affluent. In the fiscal year ending June 2011, more immigrants arrived in Australia from China than from any other country.

Australia’s schools and universities are also a drawing card for upwardly mobile Chinese citizens. With an estimated 50,000 Chinese students studying in Australia, international education is big business for the country, generating about USD 13.3 billion in export revenue last year to rank behind only iron ore, coal and gold. The falling Australian dollar – down more than 10% against the US dollar since the beginning of 2013 – is also making property more affordable for overseas investors.

Rolling the dice

A casino building boom throughout the Asia-Pacific region is currently underway to cater to China’s growing elite. A property tycoon recently announced plans to build a USD 3.7 billion resort and casino complex near the Great Barrier Reef equipped with nine luxury hotels and its very own soccer stadium. The Aquis Resort is slated to be built close to Cairns in Queensland’s far-north by 2018 and has the backing of the state government, which assigned it a “coordinated project” status so that it can receive a more streamlined approvals process.

Local officials welcomed the proposal as the state has not had a new major tourism project in decades. With the local tourism-oriented economy battered by the global financial crisis, the proposed resort is expected to create more than 16,000 direct and indirect jobs during peak construction and more than 26,000 when fully operational. Australia’s tourism sector has also been under pressure in recent years from a strong local currency that has pushed up the cost of local goods and services for visitors.

Australia currently accounts for just 3% (USD 3.7 billion) of global high-roller gambling revenue annually (compared with USD 38 billion in Macau and USD 5.8 billion in Singapore), a figure which the country seems eager to raise after Australian lawmakers backed a plan to spend USD 1.38 billion building Sydney’s second casino. The 60-story hotel aims to attract middle-class Chinese, as well as Chinese high-rollers, and marks the first major hotel development in the city since the Sydney Olympics more than a decade ago.

Changing Chinese palette

Battered European economies looking for new export markets are taking aim at the Chinese consumer. For example, one of Greece’s largest industries, the food business, has found that China’s growing middle class is rapidly becoming an important market for olive oil and other Mediterranean products, including honey, fig bars and goat’s milk. Between 2010 and 2012, Greek virgin-olive-oil exports to China surged around 160%, rising six times faster than total overseas sales. The broader food market also shows new momentum in China.

Olives are not traditionally part of the Chinese diet and olive oil can burn in high-temperature wok cooking, infusing flavour not meant for Chinese recipes designed around soy, peanut and sesame. However, in a reaction to domestic food-quality problems, Chinese middle-class households are experimenting and embracing Greek,

Spanish and Italian ingredients to replicate the Mediterranean diet, with olive oil, wine and fresh feta among the most popular items.

American food producers are also taking aim at the Chinese market. For example, while Tyson Foods currently only rears half of its own chickens for the Chinese market, the succession of scandals that hit Chinese producers over the winter is helping the company in its talks with the Chinese government over building more plants and bringing all of its poultry supplies in-house.

Made in China, for China

While China is the world’s fifth-largest wine consumer, a recent study forecasts annual consumption in China and Hong Kong will grow by a billion more bottles every year through 2015. To capture a portion of this opportunity, makers of globally renowned French brands such as Chateau Lafite-Rothschild and Dom Perignon champagne are investing millions of dollars to partner with Chinese investors to produce super-premium wines for wealthy Chinese drinkers who, they hope, will be proud to serve local vintages that are of equal superiority to their imported collections.

Investing USD 16.3 million with partner CITIC, a state investment firm, Domaines Barons de Rothschild (DBR) aims to develop 25 hectares of vineyards in eastern Shandong province to produce super-premium red wine for the Chinese market. Moet-Hennessy is also looking to make a top-end Chinese red and is planting 30 hectares of Cabernet sauvignon, Cabernet franc and Merlot grapes in the famous Shangri-La region of southern Yunnan province. Moet-Hennessy is also developing vineyards in Ningxia Hui autonomous region in north-central China with a view to producing China’s first ultra-premium sparkling wine.

Now the world’s largest beer market, China remains atop foreign breweries’ list of strategic growth markets. China’s population consumes a fourth of all beer and is expected to deliver more than 40% of the industry’s growth this decade. Understandingly so, over the past two years, Anheuser-Busch (AB) InBev has spent USD 1.4 billion refurbishing breweries and on other capital expenditures in China. AB InBev’s push in China is arguably the company’s best hope for bolstering a brand, Budweiser, which has seen consumption fall for a remarkable 24 straight years in the US. To succeed in China, AB InBev is aware that it must navigate a series of hurdles somewhat unique to the Chinese market, including logistical problems due to bad pollution and traffic in urban areas; advertising restrictions which prohibit marketing claims of being the “best” or “No. 1,”; and lower alcoholic content, to cater to the Chinese tradition of making many toasts (ganbei) over dinner to mark special occasions.

AB InBev is also making strides to accommodate the unique Chinese palette, rolling out a variant of Harbin Beer, its biggest local brand, with chrysanthemum and honeysuckle, to cool spicy foods. Budweiser does have some natural advantages in the country; similar to many Chinese beers, Budweiser is made with rice, giving it a mild taste that – while a turnoff to many beer aficionados – is widely favoured by Chinese consumers. Furthermore, the brand’s chief colour is red – same as the Chinese flag and a colour that represents good fortune and happiness to the Chinese.

Chinawood

In China, where pirated movies can be bought for less than USD 1, people are flocking to theatres, a sign of how Chinese consumers are willing to spend more on entertainment. China is already a critical market for Hollywood blockbusters, with box-office sales in China surging 30% to USD 2.74 billion in 2012. The increase in

The China Analyst


ticket sales has coincided with an increase in movie screens, which have quadrupled from 2009 to 2012. This expansion in supply has helped make movies more affordable, with ticket prices remaining largely flat for the past decade, even though urban incomes have almost tripled.

Now the world’s second-largest film market after the US, China is expected to add 5,000 screens a year for the next few years, giving it roughly 30,000 screens by 2015, which will still be 10,000 fewer than in the US. IMAX Corp recently announced a partnership with Dalian Wanda, China’s largest cinema chain, to build as many as 120 new theatres in the country, targeting Chinese moviegoers with an affinity for watching Hollywood blockbusters on bigger, more immersive screens. By 2020, it is possible that IMAX will be able to generate as much revenue from China as the US. For Dalian Wanda, its partnership with IMAX marks yet another move to position itself well in the global movie industry after shelling out USD 2.6 billion to purchase US cinema chain AMC Entertainment in 2012. Currently in talks to acquire at least two of Europe’s largest theatre chains, Dalian Wanda aims to become the world’s first major global chain of theatres.

Hollywood movie studios have been eager to incorporate Chinese elements into their scripts, cast Chinese actors in top roles and partner with domestic producers on co-productions to better resonate with Chinese audiences. China Media Capital is teaming up with DreamWorks to produce “Kung Fu Panda 3” in China. In May, US film finance and production company Legendary Pictures announced plans to launch a movie venture with China Film Co., China’s largest producer and distributor, to produce films for global audiences. Following China’s DMG Entertainment and Walt Disney Co.’s successful co-productions of “Looper” and “Iron Man 3”, US film company Alcon Entertainment decided to team up with DMG to produce big-budget (more than USD 100 million) action films.

While American studios are eager for increased exposure to Chinese moviegoers, Hollywood has been hindered by policies designed to protect movies produced in China from competition. Those tactics include a quota on imports, blackout periods during which no foreign movies are allowed to play and release-date decisions that pit similar Hollywood films against each other at the box office. Under an agreement reached last year by American and Chinese officials, foreign movie producers can collect as much as 25% of ticket sales in China.

The visible hand

While foreign brands are eager to clothe, entertain, feed and quench the thirst of Chinese consumers, foreign companies operating in China have to deal with complex (sometimes ambiguous) regulations. With the rising popularity of foreign brands and foreign-made goods in China, China’s regulators are increasing their scrutiny of foreign companies in industries from drugs to cars to baby formula as part of a drive to push down prices for consumers. For China’s new leadership, the intensifying effort has the possibility of helping it win favour at home and give Beijing a greater say in global commerce.

One of the latest moves includes China’s State Administration for Industry and Commerce opening a three-month probe into possible bribery in the pharmaceutical and medical-device industries, citing public dissatisfaction with high prices. The announcement followed a criminal probe into whether GlaxoSmithKline executives in China used bribes to get doctors and hospitals to sell its drugs, driving up prices.

Officials are also looking at prices of foreign-branded cars, which have enjoyed enormous success in the world’s largest auto market. According to the China Automobile Dealers Association, officials at the National Development and Reform Commission (NDRC) have asked the association to collect data on the prices of foreign cars. Volkswagen AG, General Motors Co. and Nissan Motor Co., which are among the more popular foreign auto makers in China, will most likely be among those to be investigated.

These investigations come after the NDRC levied USD 109 million in fines on foreign infant-formula makers, concluding that they had violated competition laws in the country. Price cuts by companies such as Mead Johnson Nutrition Co and Abbott Laboratories ABT of US will save Chinese consumers an estimated USD 390 million a year, according to Chinese state media. The regulators’ moves, which have received heavy coverage in state-controlled news outlets, are winning support from people who complain about the high prices of some goods, such as infant formula and medication.

To be clear, the drives are not just targeting foreign companies. Regulators in Shanghai fined five local jewellery retailers a combined USD 1.73 million for price manipulation. Legal experts say domestic companies in other industries also face regulatory pressure regarding prices in a country where inflation has a tendency to surge. Foreign companies do make high-profile targets and have less political protection than China’s well-connected state-controlled companies, with many of the important consumer industries dominated by foreign players.

Final word

‘Selling to China’ will become a critical success factor and key growth strategy for many multinational companies in the years to come. Chinese consumers will continue to breathe new life into otherwise failing brands and occasionally become unlikely new sources of revenue for struggling markets and products. While the Chinese government is keen on expanding domestic consumption, this will not necessarily make it any easier for foreign companies to sell their goods and services in China. On the contrary, each industry has its own set of constantly changing rules and regulations which warrant careful examination. Multinationals hoping for a slice of the pie would be wise to adopt a unique strategy for each of China’s many markets as well as well as anticipate change and adapt quickly to the constantly shifting habits of Chinese consumers.

Daniel Galvez, [email protected]

Source: Entgroup; The Beijing Axis Analysis

China’s Box Office Breakdown by Film Source (2005-2012)

USD bn %

45.0% 45.0% 45.9% 39.2% 43.4% 43.7%

46.4%

51.5%

0%

10%

20%

30%

40%

50%

60%

0

30

60

90

120

2005 2006 2007 2008 2009 2010 2011 2012

Domestic Film Box O�ce Imported Film Box O�ce

Proportion of Box O�ce Held by Imported Films (rhs)


The China Analyst

China’s Transformation: Implications for Global Supply ChainsWhile costs have become a focal point for companies seeking to grow their margins, China’s competitive position as a low-cost sourcing destination is being questioned. This article takes a closer look at the new competitive forces shaping China and other low cost countries’ competitiveness and the implications for global supply chain executives. By Javier Cuñat

The world that witnessed a decade of impressive growth is now a distant memory. The global financial crisis intervened and put a halt to it. Demand in developed markets plummeted before

levelling out and the knock-on effects have been felt around the world. China, along with a few other countries, temporarily bucked the trend but most are seeing relatively slower growth and it seems as if this pace is set to remain in place for the foreseeable future.

Unfortunately, not only are growth prospects bleak, but for numerous countries and sectors, costs are rising faster than revenues. This is not only the case for some developed economies, such as Australia, where labour costs have grown at twice the pace of other OECD countries over the past decade, but also that of a number of so-called low cost countries (LCCs).

Of the numerous ways to counter the effects of slowing revenues and rising costs, companies are attempting to increase their productivity and efficiency as well as run cost-cutting initiatives. By targeting one’s cost base, companies are searching for innovative ways to deliver the same products and services as before from a more cost-effective position.

A changing competitive landscape

Globalisation has created opportunities for companies to exploit cost arbitrage between geographies, with the so-called LCC phenomenon enabling constant shifts of foreign direct investment flows in manufacturing and export activities from developed to developing countries that possess a more favourable manufacturing cost profile. None is this more evident than in China,

the world’s largest exporter and a preferred sourcing destination for procurement managers across the globe.

However, China’s rising factors of production is leading companies to identify alternative sources of supply, especially in the case of some apparel and other low-value products, where the location of factories has partially moved from China to Thailand, Indonesia, Vietnam, Bangladesh and Myanmar. There has been literature published that deals exclusively with which countries will be able to, and are challenging, China’s dominance as the world’s factory. In George Friedman’s work “The CP16: Identifying China’s Successors”, he explains how several countries are already manufacturing certain categories (typically low-value and labour-intensive) more competitively than China.

This has raised some pertinent questions: Will China’s higher cost profile threaten its competitive position as a low-cost sourcing destination? Is it time for global manufacturing to go somewhere else?

Assessing China’s competitiveness

As reflected in the chart on the next page, China is moving away from its position as simply a LCC into a sourcing destination which enjoys the same world-class infrastructure facilities, access to highly skilled labour force and technological innovation capabilities as the most advanced economies in the world. While labour costs are definitely lower in many other destinations, a wider set of factors must be considered when choosing an alternative location. Ease of doing business, availability of raw materials, reliability of supply, good quality products and scale are some of the competitive advantages

Source: The Beijing Axis Analysis

Factors Expected to Affect China’s Competitiveness in the Short, Medium and Long Term

Ageing Population

Product Integration Capability and Established Industrial Clusters

Large and Skilled Labour Pool

Integrated Supply Chain and Diversi�ed Supply Bases

Increasing Focus on High-end Value Products and R&D/Technology/Innovation

Improving Quality

Increasing Environmental Costs and Stringent HSE Regulations

Increasing Wage In�ation

Increasing Competition from Other Low Cost Countries

‘Made in China’ Brand/Quality Risk

Reduced National and Local Government Subsidies

Strengthening Currency (RMB)

Positive Factors (for competitiveness) Negative Factors (against competitiveness) 1

2

3

4

5

Factors that will persist in the short-term Factors that will persist in the medium-term Factors that will persist in the long-term

China’sManufacturing

Competitiveness

Robust Infrastructure to Support Manufacturing

National and Local Government Incentives and Policies

6

7 7

1

2

3

4

5

6

Features 专题 The China Analyst


China still enjoys that ‘cheaper’ alternatives do not. Companies considering alternative sources of supply may face infrastructure challenges, shortages of skills or political instability. China will continue to hold certain key advantages – robust infrastructure, advanced technology/R&D and a skilled labour force – compared to its manufacturing competitors. While China is becoming a more expensive sourcing destination, it is also more comprehensive, flexible, and more reliable than many of its counterparts. The quality/cost ratio is also rising for many manufacturers. In the meantime, smaller supply bases in LCCs may eat a part of the cake (e.g. countries specialising in one single product).

A second factor to consider when assessing China’s overall competitiveness is the attractiveness of inland China. While average wages have almost doubled in China since 2007, those in central and western China are still comparable to other LCCs. Land costs show a similar picture. Hewlett-Packard for instance, recently set up factories in central and western China due to its costs advantages for exporting to Europe on express freight trains via the ancient Silk Road. They can now deliver goods to Western Europe in around three weeks (slower but cheaper than ship and air) which will also lower inventory costs and lead times. Many other companies have followed. The Chinese government is currently upgrading existing infrastructure networks to counterbalance increased inbound logistics costs. It has also announced the creation of a fourth economic hub (as it did in coastal China in the 1980s) in central China to foster further investment in manufacturing. If this initiative proves successful, China will simply become its own alternative to low cost manufacturing, or at least part of it. This advantage will not last forever but provide a solid enough case for many to make the move inland and compete.

Thirdly, as China’s labour costs have increased over the last decade, so has its investment in R&D. Today, more than half of the world’s Fortune 500 companies are operating factories and R&D centres in China and many aspire their China operations to become new global centres of excellence. High-tech zones with IP-designated courts in cities such as Chengdu are creating an investment environment suitable for more technologically-advanced manufacturing.

Therefore, while China might be losing a competitive edge in labour-intensive products, it is gaining new competitive advantages in high value-added products. This has huge implications for companies looking to outsource not only the manufacturing process, but also the engineering and design elements of a product or project.

Therefore, China’s competitive edge is not coming to an end, it is just transforming. China’s higher cost profile is accelerating the pace of a transformation characterised by greater levels of value added and innovation. China has taken a new direction towards quality rather than quantity at the cheap, margins rather than volumes, and productivity rather than low labour costs.

Implications for global supply chains

How companies react to this changing competitive environment is of critical importance. While this is not an easy task, there are some aspects supply chain executives must consider when facing these challenges, such as:

ӹ Fine-tune China procurement. For most procurement managers, China will remain central to their strategies for reasons such as scale, variety and reliability among others. However, its transformation requires a re-thinking of current category strategies. What capacity is moving out and what capabilities are being built? How are our existing suppliers adapting? In China, there are increasingly sophisticated production capabilities across mature product categories; a move towards the manufacturing of very complex components with solid in-house product design; and an emerging set of engineering capabilities serving international markets among other trends. Partnering or establishing strategic long-term relationships with large-scale, service-oriented and design-capable Chinese suppliers are some of the initiatives foreign companies are taking in order to take advantage of the increase in Chinese companies’ capabilities. However, Chinese companies still have certain gaps in skills and capabilities, but what is important is how to bridge those gaps, manage the risks and play the game well.

2.0

2.5

3.0

3.5

4.0

4.5

5.0

20 25 30 35 40 45 50 55 60

Infrastructure Index* A bubble of this size represents 50% of the population aged 25 and older with a college degree

US

Germany

Japan

Czech Republic

Technology Index*

Malaysia

China

Brazil

India

Vietnam

Mexico

Indonesia

Developed markets - high technology capability, robust infrastructure and highly skilled labour force

Emerging LCCs still have a long way to go before catching up with China in terms of technology, infrastructure and skilled labour pool

Poland

Note*: Technology Index based on WIPO’s Global Innovation Index (out of 100) and Infrastructure Index based on World Bank’s Logistics Performance Index (out of 5)Source: World Intellectual Property Organisation; World Bank; UN; The Beijing Axis Analysis

Comparison of Sourcing Capabilities of Selected Economies (2012)


The China Analyst

ӹ Follow a portfolio approach. Most strategic and prudent sourcing executives are adopting a portfolio approach. This does not imply moving away from China but rather building capabilities in emerging sourcing destinations that can complement an existing Chinese supplier base. China dominates in most but not all categories. Understanding the manufacturing competitiveness and associated risks of low cost countries on a relative basis becomes essential. Specific factors such as poor infrastructure, social non-compliance or political risks may negate an otherwise appropriate portfolio. Sourcing executives are strategically matching countries with the categories and even sub categories that they are competitive in. While the right mix can increase a supply chain’s complexity, it can also lower its overall cost structure and diversify its potential risks. However, with the world constantly changing, executives should try to anticipate the future direction of their chosen portfolio and be prepared for numerous possibilities.

ӹ Revisit risk management. As companies become more dependent on cost-cutting initiatives to maintain or increase their margins, managing supply chain risks becomes critical. This is especially important when those initiatives involve new (and usually riskier) sources of supply. Extended supply chains add complexity to the work of procurement managers. Enlarging one’s pool of pre-qualified vendors requires more visibility. Depending on volumes and associated risks, some sort of local risk management thinking and presence is required. More frequent travelling, strategically partnering with service providers who are on the ground, making better use of technology and establishing a local presence (or a combination of the above) are some of the available options. Cutting costs while compromising quality is not an option. Finding alternatives to China is possible, but you will have to manage the risks better and probably work harder.

ӹ Develop innovative strategies. Supply chain managers are realising that exploiting cost arbitrage opportunities between geographies is becoming increasingly difficult. The fast shifting landscape of LCCs means that finding a one-stop sourcing solution is unlikely. Although China is as close as one can achieve to a one-stop sourcing location, more and more supply chains are involving a larger number of geographies. It is within this context that other costs such as inbound logistics, outbound logistics and storage are playing a greater role in the cost cutting strategies of procurement managers. This reality

requires innovative supply chain organisational structures, strategies, skills and technologies in order to facilitate cost reductions and improve efficiencies across the entire supply chain.

Final word

We are entering an era where the ability of managing complexity and volatility across different stages of the supply chain and sourcing destinations will become a differentiator. New competitive forces are appearing and supply chains are being adapted to capture the advantages on offer. While companies with an existing LCC agenda are revisiting and optimising their strategies with a portfolio approach, companies with minimal exposure to LCCs will feel the pressure of rising costs more than ever and have little alternative but to begin incorporating low cost sourcing strategies.

Although China is not necessarily the right answer for all companies or product categories, it is still a focal point for most global supply chain strategies. China has preserved and is continuously creating a set of competitive sourcing factors that attract companies seeking to compete on scale, quality, technological innovation and even service delivery. Facing tight cost pressures, Chinese companies are learning the value of optimising management and processes to boost productivity, further boosting China’s gradual move up the value chain.

The speed and manner in which China transforms itself will directly affect the sourcing potential of numerous countries around the world. China will not only prove to be more attractive than other countries for certain products higher up the value chain, but it will also continue to lose competitiveness to countries in lower value products. Supply chain managers able to anticipate such shifts will cope with the complexities that emerge and adapt quickly enough to create unique competitive advantages.

Javier Cuñat, Associate [email protected]

This article is an abbrieviated version of a forthcoming white paper by The Beijing Axis. For a copy of the white paper, please contact Barbie Co at [email protected].

Source: The Beijing Axis Analysis

High-level Overview of Selected Countries’ Short, Medium and Long Term Manufacturing Capabilities

China

India

US/Germany/Japan

Africa

Low High

Long-Term

Emerging leader in high-value add

Phasing out low value add

Global leader in low-value manufacturing

Retain low-medium end manufacturing

Established as a low end destination

Others (Mexico, Turkey, Poland)

Indonesia/Vietnam/Bangladesh

Re�ects a country’s manufacturing value add focus during the time period

Product Manufacturing Complexity Spectrum

Medium-Term

Low High

Short-Term

Low High

Phasing out low-value add

Global leader in high value manufacturing

Established low-value add destination

Emerging as a low end destination

Emerging as a low end destination

Established low-medium end manufacturing

?

Comprehensive Global Procurement and Supply Chain Managed Services

The Beijing Axis has established a leading, China-focused global procurement house that offers a comprehensive range of intelligent sourcing solutions across the supply chain in a way that balances total cost, delivery time and quality, while minimising risk. With more than 11 years of delivering procurement solutions for international companies, we have significant experience in sourcing more than 80 product categories from China, India, Southeast Asia and other emerging countries. These include capital and capital replenishment products, strategic raw materials, production consumables and MRO supply.

• Recognisedasaleading,independentChina procurement service provider with a strong focus on the mining and resources, industrial and engineering sectors

• Achievedanaveragesavingsofapproximately 25% for customers (within a range of 5-45% savings)

• Analysedmore than USD 2 bn in China/Asia spend for clients

• ManagedsourcingtransactionsofmorethanUSD 500 mn for clients in the last five years

• Experienceintransactingmorethan80 product categories across production consumables, MRO and CAPEX

• Databaseofmorethan 4,500 identified suppliers, with close to 1,000 pre-qualified



The China Analyst Macroeconomy 宏观经济

Macroeconomic Monitor: China’s On-going TransformationAfter two consecutive quarters of slower economic growth, China’s economy in Q3 2013 is showing clear signs of stabilisation, helped by policy support and some improvement in global demand. China’s gross domestic product (GDP) growth in the first half of 2013 averaged 7.6% (lower than the 7.8% rate for 2012), a figure staggering for almost any country – let alone one with a USD 8.2 trillion economy. While Beijing is often held to a higher standard based on China’s phenomenal three decade-long growth pattern, Beijing continues to display its tolerance for slower growth as it pushes much-needed reforms aimed at restructuring the economy for the long run. By Kobus van der Wath

While the economy has taken a downward turn in the first two quarters of 2013, with growth slowing to 7 7% and 7.5% in Q1 2013 and Q2 2013, respectively,

China is on track to meet the government’s 2013 growth target of 7.5%. Continuous double-digit growth in monthly retail sales and fixed asset investment, in additon to ten straight months of expansion in China’s manufacturing activity, ensure that there is little risk China will experience a hard landing.

China is undergoing a transformation on many levels. In addition to the government creating a domestic economic environment that is conducive to adequate levels of growth, there are other important areas in Chinese society that must change for the story to end well. Indeed, for China the challenge over the next few years is not just to grow, but to transform. The key is to change in the right areas, in the right direction and at the appropriate pace.

But old habits die hard and China is a complex country. This brings resistance and injects risk into the equation. Still, most agree that the new leadership will, in 10 years, leave behind a very different China from the one they inherited late last year.

Accordingly, they must determine the priority areas and manner in which the country must adapt and reposition itself. Above all, they must carefully gauge the capacity for change and set the appropriate speed — not too fast, not too slow.

This will not be easy, but not to change and not to transform would render future economic gains harder and eventually result in too many hot issues to manage simultaneously. Ultimately, China’s new leaders will write their own legacy by how they manage this process. There is no template or recipe for success, but strategic choices and judgment over time will yield outcomes that will be testimony to their work.

While there are daunting transformation challenges on the horizon, Beijing has demonstrated an enormous capacity to manage the agenda of the day. Several burning issues rank high on the current agenda:

ӹ Environmental management and sustainability considerations must become a central element of all planning. In the first few months of 2013, pollution in Beijing was as bad as I have seen it during my time in Asia (now almost two decades). Importantly, one could sense from people that growth at any cost is no longer an option if it means breathing such air.

ӹ Widespread corruption must be systematically dealt with. Middle and lower income citizens have, over the past two years, become more vocal in expressing their dissatisfaction with deeply-rooted corruption. Related to this, the formation of a super wealthy elite, often with top party connections, has become a sensitive

Source: China National Bureau of Statistics; The Beijing Axis Analysis

Contribution to GDP Growth (%, 1998-2012)

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-20

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20

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60

80

100

120

140Net Exports of Goods and ServicesGross Capital FormationFinal Consumption Expenditure (household + gov)

10 11 12090807060504030201009998

E�ect from stimulus package

Consumption overtakes gross capital formation as largest contributor

Falling net exports contribution


China’s Quarterly Y-o-Y GDP Growth Rate (%, 2008-2013F)

0%

5%

10%

15%

Q1 Q1 Q1 Q1 Q1 Q1 2008 2009 2010 2011 2012 2013

5-year (2008-2012) average: 9.1%

Government stimulus package (USD 586 bn)

2012 y-o-y GDP: 7.8%

2011 y-o-y GDP: 9.2%

Q4 2012 rebound

Further softening in line with Q1 and Q2 2013


issue. The widening gap in income and wealth has now become critical for Beijing’s planners to address. The government has already launched a crackdown on official banqueting and excess to stem the masses in addition to introducing a five-year ban on building government offices.

ӹ Another complicated transformation is to orientate the economy more towards domestic consumption. This is already under way as domestic consumption contributed 4.3 percentage points to China’s growth in Q1, but more progress must be made.

ӹ At the same time, the manufacturing sector must increase its innovation, productivity and competitiveness if it is to compete effectively with developed countries such as the US and Germany, and developing countries such as Mexico, India, Indonesia and Vietnam.

ӹ China, as a rising superpower, must also manage international relations and perceptions carefully as it pursues integration with the world. For example, its approach towards its neighbours, in dealing with rising tensions in the South China Sea, will have to be carefully calibrated. Also, its stance towards the US – given that nation’s tilt to Asia – will inevitably reveal how the new Chinese leadership would like to position China internationally.

The action list goes on, and while some of these are prickly issues, China has demonstrated its strategic acumen and pragmatism in managing its own transformation.

Even though China’s National People’s Congress (NPC) may have set an official GDP growth target of 7.5% for 2013, markets were still surprised at the low 7.7% Q1 growth rate. Q2’s 7 5% was taken more in stride, with oil and gold markets even being buoyed slightly by the news. Traditionally, NPC targets have been easily surpassed; however, in mid-July, China’s finance minister stated that even 6.5% growth would not be a “big problem.” Overall, we remain confident it can maintain 7.5% growth for 2013. Further out though, we expect growth to slow to a rate of 6.5%-7.5%. This makes it urgent that China pushes through on as many aspects

of its wider transformation as possible. If it succeeds in doing so, we concur that 6.5% would not be a ‘big problem.’

China’s latest data, coupled with the recent lowering of global expansion forecasts by the IMF, means Chinese authorities will be pressured to gently stimulate domestic demand in the background in order to somewhat shore up GDP growth – the most tenable option for China’s new leaders – as additional stimulus measures run the risk of exacerbating already bulging housing and credit markets.

The most pressing issue is that the leadership must continuously grapple with the deeper, more fundamental aspects of its society. It is this deeper, inevitable transformation that will ensure China’s longevity and make its rise a truly long-term phenomenon.

For companies around the world, two trends are relevant: China’s capacity and intent to grow its overseas foreign direct investment (OFDI), and the almost endless scope for growth in its domestic consumption. These spell opportunity. Growth in China’s commodity demand may be on a relatively downward trend on the back of slowing GDP growth, but it still remains the number one driver of the sector.

Many countries have long felt China’s economic rise through ever-growing bilateral trade figures and government-directed outbound investment. However, new outward investment by private, more market-oriented companies suggest that a next stage of China’s global integration has arrived. The next phase of Chinese OFDI will yield tremendous commercial and political opportunities for its economic partners – this requires a more holistic and sophisticated response from policy makers and businesses.

While the headlines say investment-led economic growth is slowing in China, making it tougher for raw material suppliers to service big-ticket capital projects, China’s increasingly urbanised consumers will seek better lifestyles, eschew factory jobs and seek to own cars and homes. Multinational companies will have to realign their business models towards the newly emerging urban centres of inland China. With China currently repositioning itself to sustain its success over the long run, foreign companies must rethink their own China strategies.

Kobus van der WathFounder & Group Managing [email protected]

The China AnalystMacroeconomy 宏观经济

Exports Imports Export Growth (rhs) Import Growth (rhs)

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2012 2011 2013

Export growth outpaces import growth


China’s Monthly Exports and Imports (USD bn, %, 2011-July 2013)

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106

108

Jan 10 Jan 11 Jan 12 Jan 13



China’s Monthly Consumer Price Index (%, 2010-July 2013)

China’s Official Purchasing Managers’ Index (2010-July 2013)

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55

60

Jan 10 Jan 11 Jan 12 Jan 13

Ten straight months of expansion



Y-o-Y Growth of China’s Monthly Retail Sales (%, 2008-July 2013)

YTD Growth of China’s Monthly Fixed Asset Invest-ments (%, 2008-July 2013)

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The China Analyst


How to Procure from China #12– Logistics CoordinationThe Beijing Axis Procurement Process Flow encapsulates the full extent of project engagement, from the point of first enquiry to the range of services in the solution process and benefits provided for the client. In this edition, we focus more closely on step 12 of the Procurement Process Flow: Logistics Coordination.

The Beijing Axis Procurement Guidelines for Logistics Coordination

Logistics is an essential element in procurement. Any minor omissions in the process could cause serious problems such as schedule delays and damage to products which jeopardise the buyer’s interest and potentially lead to financial losses. While The Beijing Axis (TBA) is not directly involved in the logistics business, it works closely with logistics partners in China and internationally to provide coordination, assistance and facilitation between clients, logistics service providers and third-party inspection service providers to enhance the logistics process.

Identify, evaluate and select service providers. Beside suppliers, TBA also provides a one-stop service by identifying, evaluating and selecting Chinese and international logistics service providers to fit a client’s particular logistics need. Based on the nature of the products, TBA evaluates logistics service providers’ capabilities by running RFPs to assess their capabilities including export-country inland transportation; sea transportation and import-country inland transportation; ownership and access to transportation and handling facilities; experience in similar projects; and commercial competitiveness including commercial terms and shipping rates (e.g. from simple sea freight to more complex DDP quotations). A single service provider or a group of service providers could be recommended as an optimised solution.

Assist in contract negotiation. TBA enhances communications between clients and logistics service providers, negotiates the contract price and finalises the details of on-the-ground operations.

Process management and coordination. TBA works closely with suppliers and relevant service providers by providing advice and monitoring the progress of necessary preparation work that needs to be completed in order to prevent mistakes and mitigate risks. TBA also manages third-party inspection service providers for loading and unloading surveys. TBA staff also supervise the packing and container loading processes in the factory, stowage and lashing at port, and monitors the loading and unloading process.

Assist with document management and payment processing. TBA coordinates between suppliers, logistics service providers, third-party inspection service providers and clients in order to ensure the accuracy and quality of all relevant inspection reports, commercial documents and shipping documents. TBA also facilitates and expedites the process of relevant payments.

Facilitation of claims. TBA coordinates between suppliers, logistics service providers, shipping lines, third-party inspection service providers, insurance companies and clients (buyers) when incidents occur during handling before shipment, during shipment, handling after the vessel arrives at the destination port as well as inland transportation. The multinational and multilingual characteristics of the TBA team enables it to communicate, negotiate and expedite the process with various parties when the client lacks on-the-ground staff. TBA also helps facilitate insurance claims as per the client’s needs.

By The Beijing Axis Procurement

Strategic Procurement Facilitation

Supplier Analysis

Supplier Engagement

Supplier Process Management

Oper

ation

al Pr

ocur

emen

t Pro

cess

Analy

sis

Understanding product specifications

RFQ, RFP and RFT process

Contractadministration

Logistics coordination

Negotiation ContractingSite visit

and supplier auditCommercial and

technical evaluation

Supplier evaluation and long list

Supplier identification and universe list

compilation

Quality management (QA/QC) and

expediting

Installation and commissioning

support

After sales service support

RFI, supplierpre-qualification

and shortlist

1 2 3 4

5 6 7 8 9

10 11 12 13 14

The Process Flow and Service Delivery Platform of The Beijing Axis Procurement

The China Analyst


Foreign Direct Investment into China

Summary ӹ In 2012, FDI into China amounted to USD 111.7 bn, down by 3.7%

y-o-y. FDI into China fell for seven consecutive months from June 2012 to December 2012 with lingering concerns that China’s economic development will continue to slow in 2013

ӹ In 2012, wholly foreign-owned enterprises were still the major vehicles of investment into China, accounting for around 77% of total actually utilised capital

ӹ In 2012, 86% of FDI into China originated from other Asian countries/regions. Hong Kong, as the main bridge for inbound investment into mainland China, is still the largest source of capital, contributing USD 71.3 bn or 63.8% of total inward FDI

ӹ The decrease in y-o-y FDI deals is due to the fact that foreign

firms were hesitant to invest in China amidst a global economic slowdown

ӹ In H1 2013, non-financial foreign direct investment (FDI) into China amounted to USD 62 bn

ӹ In June 2013, FDI into China saw its strongest surge in more than two years, with FDI totalling USD 14.4 bn and yearly FDI firmly on track of achieving the government’s estimate of USD 120 bn. This monthly peak in FDI may allay investors’ fears in China’s growth prospects

Notable FDI deals in H2 2012 and 2013 ӹ In August 2012, Rockwell acquired the high-voltage inverter

business of Jiuzhou Electric for USD 83 mn

ӹ In August 2012, spice and flavouring maker McCormick & Co. reached a deal to buy China’s Wuhan Asia-Pacific Condiments Co. for USD 141 mn

ӹ In December 2012, Diodes Inc. announced plans to acquire BCD Semiconductor Manufacturing Ltd for USD 151 mn

ӹ In March 2013, the Carlsberg Group announced a USD 460 mn partial take-over offer for Chongqing Brewery Company Co. Ltd

ӹ In August 2013, Whirlpool Corp agreed to buy a 51% stake in Chinese home-appliances maker Hefei Rongshida Sanyo Electric Co. for USD 552 mn

ӹ In August 2013, France’s L’Oreal SA announced its offer to buy Magic Holdings International Ltd., a China-based maker of cosmetic facial masks, for about USD 845 mn

China Capital: Inbound/Outbound FDI & Overseas Resource Investment In the first half of 2013, FDI into China increased by 4.9% compared to that of the first half of 2012. The trend is also seen in China’s outbound FDI growth with the country becoming the fifth-largest outbound investor in the world in 2012. While resources and energy assets are still the main targets of overseas investments, Chinese outbound M&A activities increasingly cover a wider range of industries than before. By The Beijing Axis Capital

Source: MOFCOM; The Beijing Axis Analysis

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30%

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J F M A M J J A S O N D J F M20132012

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FDI FDI Growth (rhs)

Monthly Inbound FDI in China and y-o-y Growth Rate (USD bn, 2012 - H1 2013)

Annual Inbound FDI into China (USD bn, 2005-H12013)

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2006 2007 2008 2009 2010 2011 2012 H1 2013


FDI in China by Source Country / Region (USD bn, 2012)


Japan7.4

Singapore6.5

Others9.6

Taiwan6.2

US 3.1S. Korea 3.1

UK 1.0

Germany 1.5The Netherlands 1.1

Switzerland 0.9

Hong Kong71.3

The China Analyst


Chinese Outbound Foreign Direct Investment Summary

ӹ In 2012, China’s non-financial OFDI amounted to USD 77.2 bn, a significant increase of 28.6% y-o-y

ӹ In H2 2012 and H1 2013, The Beijing Axis Capital followed 182 overseas investment activities by Chinese companies (including on-going transactions and concluded deals of previously announced transactions), among which 72 were resource-related investments and 110 non-resource investments

ӹ In terms of resource deals for H2 2012 and H1 2013, Australia became the most attractive region for Chinese investors with 25 deals followed by Africa and Europe, with 19 and 15 deals respectively

ӹ In H2 2012, in terms of resource deal size, oil and gas deals conducted or under negotiations by China’s three energy giants – CNOOC, Sinopec and PetroChina – together with Chalco’s coal transaction, were notable

ӹ China currently has 16 trade and economic zones in 13 countries, generating an output value of USD 10 bn annually

ӹ In H1 2013, China’s OFDI amounted to USD 45.6 bn with the largest deals in the resources sector, including CNOOC’s acquisition of Canadian company Nexen, China’s largest acquisition to date

Notable Chinese OFDI Deals in H2 2012 and H1 2013 ӹ In September 2012, the Texas Clean Energy Project (TCEP) signed an

MoU with Sinopec Engineering Group for an EPC contract, as well as China Exim Bank, which agreed to invest USD 1 bn in the large-scale commercial coal gasification power project

ӹ In October 2012, Pacific Century Group acquired ING’s Asian insurance units for USD 2.1 bn

ӹ In November 2012, State Grid Corp of China acquired a 41.1% stake in ElectraNet, a large Australian power supplier

ӹ In December 2012, BHP Billiton agreed to sell its stake in the Browse liquefied natural gas (LNG) project to PetroChina for USD 1.63 bn

ӹ In February 2013, Citic Resources Holdings Ltd and parent company Citic Group announced plans to buy a minority stake in Alumina Ltd, a large Australian alumina refiner, for USD 468 mn

ӹ In March 2013, China Shipping Terminal Development Co, a unit of China Shipping Container Lines Co, agreed to buy a 24% stake in APM Terminals Zeebrugge NV, a Belgian container port terminal,

ӹ In June 2013, Dalian Wanda Group invested in two projects in the UK; one being the purchase of a 92% stake in yacht-maker Sunseeker and the other a high-end real estate development in London

ӹ In June 2013, China’s Fosun International and AXA Private Equity sweetened their takeover offer for Club Méditerranée (Club Med) to USD 729 mn. They aim to accelerate Club Med’s expansion in fast-growing emerging markets such as China

ӹ In June 2013, Shuanghui, the leading Chinese pork producer submitted an offer to buy Smithfield, a leading US pork producer.

ӹ In July 2013, Chinese state-controlled firm AVIC announced plans to buy the commercial business of German aircraft engine maker Thielert as it seeks to capitalise on a surge in demand for diesel plane engines in China and other emerging markets

Chinese OFDI Trends in the Developed World ӹ Since the global financial crisis, Europe and the US have been

attracting increasing flows of Chinese OFDI

ӹ Investments into Europe have gone from less than USD 1 bn in 2008 to about USD 10 bn in the last two years

ӹ China is diversifying its outbound direct investment in Europe to other sectors including agriculture, manufacturing, wholesale and retail, rental and commercial services, construction and financial

ӹ Chinese investors see the UK as the best spot to invest in Europe. The trend seems to be in real estate. As major Chinese investors invest in real estate in London, it is prompting more and more Chinese interest in potential investments in the UK capital

ӹ China’s investment into Australia during 2012 increased by 21% compared to that of 2011. Currently, China is Australia’s largest trading partner with assets from farmlands to listed companies. The ever-increasing investments into Australia from China have been causing tensions with many Australians who believe that their government is allowing ‘too much’ Chinese investment

ӹ The acquisition of Canadian Calgary-based oil and gas company Nexen Inc. by China National Offshore Oil Corporation (CNOOC) for USD 15.1 bn has been approved, marking China’s largest ever overseas acquisition. Initially there were issues regarding the approval of the deal by the Committee of Foreign Investment in the United States (CFIUS) due to US national security concerns

ӹ Chinese figures show that China’s total investment in the US surged to USD 9.3 bn in 2012, from USD 1.9 bn in 2007. Meanwhile, US figures show that China’s cumulative investment jumped from USD 3.4 bn to USD 22.8 bn in the same period

ӹ In July 2013, senior US and Chinese officials agreed to restart stalled negotiations on a bilateral investment treaty, which could open up more than 100 Chinese industries to investment by US businesses, such as automakers, banks, and chemical and energy companies. Chinese companies could potentially win smoother access to the US

2005 2006 2007 2008 2009 2010 2011 2012 H1 20130

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China’s Annual Outbound Non-financial FDI and y-o-y Growth Rate (USD bn, 2005 - H1 2013)


The China Analyst


Major Chinese Outbound Investment Activities In Resources, October 2012 - August 2013

# Date Announced Target / New Company Target Country Acquirer / Investor Commodities Value Stake Status

1 Aug 2013 Apache’s Egyptian oil and gas business Egypt Sinopec Oil & Gas USD 3.1 bn 33% Ongoing

2 July 2013 Rio Tinto’s Northparkes mine Australia China Molybdenum Gold, copper USD 820 mn 80% Ongoing

3 June 2013 Novatek Russia CNPC Gas USD 810 mn 20% Concluded

4 June 2013 Marathon Angola Sinopec Oil USD 1.52 bn 10% Concluded

5 May 2013 SPAusNet Australia China State Grid Clean energy USD 810 mn 20% Ongoing

6 May 2013 Hattat Holding Turkey Harbin Electric Coal USD 2.4 bn N/A Concluded

7 May 2013 Rafako Poland China Energy Engineering Coal USD 560 mn N/A Ongoing

8 May 2013 BG Group Queensland Curtis LNG Project Australia CNOOC Oil & Gas N/A 40% Ongoing

9 May 2013 Stonewall Resources South Africa Shandong Qixing Iron Tower Company Limited Gold USD 140 mn N/A Ongoing

10 May 2013 Barra Energia do Brasil Petroleo e Gas Ltda Brazil CNPC Oil & Gas USD 2 bn N/A Ongoing

11 Apr 2013 Oilhub Korea Yeosu Co. South Korea China National Aviation Fuel Oil USD 130 mn 26% Ongoing

12 Apr 2013 Ecuador Copper Mine Ecuador China Railway Construction and China Nonferrous Copper USD 2.04 bn N/A Ongoing

13 Apr 2013 East Siberian Metals Russia China Nonferrous Iron Ore USD 750 mn 50% Ongoing

14 Apr 2013 Ashburton Project Australia Shandong Energy and Shandong Lunan Iron, gold USD 2 mn 65% Concluded

15 Apr 2013 ConocoPhillips’ stake in Kashagan oilfield Kazakhstan CNPC Oil & Gas N/A 8.4% Ongoing

16 Apr 2013 Elemental Minerals Limited Republic of Congo Dingyi GP INV Potash N/A N/A Ongoing

17 Apr 2013 Kalgoorlie Mining Co. Australia Zijin Mining Gold N/A N/A Ongoing

18 Mar 2013 Sintez Russia China State Grid Clean energy USD 1.14 bn N/A Concluded

19 Mar 2013 Marathon Oil Corp's stakes in two offshore oil & gas fields Angola PetroChina Oil & Gas N/A 10% Ongoing

20 Mar 2013 Eni SpA's offshore natural-gas field Mozambique PetroChina Oil & Gas USD 4.21 bn 20% Ongoing

21 Feb 2013 IJM Corp BHD Malaysia Guangxi Beibu Hydro USD 650 mn 40% Concluded

22 Feb 2013 Chesapeake Energy Corp.'s oil and natural-gas field USA Sinopec Oil & Gas USD 1.02 bn 50% Ongoing

23 Feb 2013 ConocoPhillips' two Exploration Assets Australia PetroChina Oil & Gas N/A 20%/29% Ongoing

24 Feb 2013 Alumina Ltd. Australia CITIC Resources Holdings Ltd. and CITIC Group Aluminium USD 468 mn 7.8%/5.2% Ongoing

25 Feb 2013 African Resources Copper Mine Zambia Yinfu Gold Corporation Gold USD 2 mn 65% Concluded

26 Jan 2013 Alumina refinery project Guinea China Power Investment Aluminium USD 6 bn N/A Concluded

27 Jan 2013 Solar Chile Chile SkySolar Clean energy USD 1.36 bn N/A Concluded

28 Jan 2013 Pioneer Natural Resources USA Sinochem Oil USD 1.7 bn 40% Concluded

29 Jan 2013 Refineria del Pacifico Ecuador China National Petroleum Corp. Oil & Gas N/A 30% Ongoing

30 Jan 2013 Southern Cross assets of St. Barbara Ltd Australia Hanking Gold Mining Gold USD 22.5 mn 100% Ongoing

31 Jan 2013 Kichi-Chaarat Closed Joint-Stock Company Kyrgyzstan China CAMC Engineering Co. Ltd Gold, copper USD 4.8 mn 16% Ongoing

32 Jan 2013 St Barbara Southern Cross Operations Australia Hanking Holdings Gold USD 23.6 mn N/A Ongoing

33 Dec 2012 Copel, Furnas Brazil China State Grid Alternative USD 220 mn N/A Ongoing

34 Dec 2012 Cambodia Petrochemical Cambodia Sinomach Oil USD 2.3 bn N/A Ongoing

35 Dec 2012 Lobe Iron Ore Project Cameroon Sinosteel Steel USD 660 mn N/A Ongoing

36 Dec 2012 Talison Lithium Australia Chengdu Tianqi Industry and CIC Lithium USD 840 mn 65% and 35% Ongoing

37 Dec 2012 A123 USA Wanxiang Alternative USD 260 mn 100% Concluded

38 Dec 2012 Palabor Mining South Africa Hebei Steel, General Development, Tewoo Copper USD 380 mn 35%,25%,20% Ongoing

39 Dec 2012 OZ Minerals Australia Minmetals Copper USD 1.39 bn 100% Concluded

40 Dec 2012 Encana's natural gas project in Canada Canada PetroChina Oil & Gas USD 2.2 bn 49.9% Ongoing

41 Dec 2012 Northeastern Lion Limited Indonesia Hanking Holdings Nickel USD 50 mn 70% Ongoing

42 Dec 2012 Exxon Mobil's West Qurna-1 Oil Field in Iraq Iraq CNPC Oil & Gas N/A 60% Ongoing

43 Dec 2012 International Base Metals Namibia Heilong Mining and West Minerals Copper USD 31.6 mn 17.9% (53.9% - 30% - 6%) Ongoing

44 Dec 2012 Palabora Mining of Rio Tinto South Africa Consortium by HBIS, General Nice, Tewoo, and IDC Iron Ore USD 610 mn 74.5% Ongoing

45 Dec 2012 BHP Billiton's Australian Browse LNG project Australia CNPC Oil & Gas USD 1.63 bn Minority Ongoing

46 Nov 2012 Ethiopian Electric Power Commission Ethiopia China Power Construction Alternative USD 290 mn N/A Concluded

47 Nov 2012 ElectraNet Australia China State Grid Clean energy USD 510 mn 41% Ongoing

48 Nov 2012 Total Nigerian Oil Field Nigeria Sinopec Oil & Gas USD 2.46 bn 20% Ongoing

49 Nov 2012 Sovereign Gold Australia Jiangsu Geology & Engineering Co Gold USD 21 mn 30% Ongoing

50 Oct 2012 Vatukoula Gold Fiji Zhongrun Resources Gold USD 20 mn 24% Ongoing

51 Oct 2012 Vatukoula Gold Mines Fiji Zhongrun Mining Gold USD 8 mn 17% Concluded

52 Oct 2012 Carrizo Oil & Gas's Niobrara shale oil and gas assets in Colorado USA Lanzhou Haimo Technologies Oil & Gas USD 27.5 mn 14.3% Ongoing

53 Oct 2012 Brazilian off-shore blocks Brazil Sinochem Group Oil N/A 10% Ongoing

54 Oct 2012 Coal of Africa South Africa Haohua Energy Coal USD 100 mn 23.6% Ongoing

Source: Various media; Company reports; The Beijing Axis Analysis

The China Analyst

22 І The Beijing Axis 23 І The Beijing Axis

The China Analyst

Mapping China in the Global Commodities TradeWorld commodities trade is dominated by exports to China, with its three largest sources of minerals being Australia (36%), Latin America (24%) and East Asia and Pacific (14%). Meanwhile, China’s commodities trade deficit with the rest of the world amounted to USD 157 bn in 2012, equivalent to just under 99% of its total commodities trade. While China’s continued slowdown is being felt the hardest in Australia and Latin America, there are numerous explorations for new sources in underdeveloped Africa - whose fourth place on China’s list of top commodities suppliers underlines its future potential. By The Beijing Axis Strategy

AfricaChina East Asia & Paci�c

Europe & Central Asia

South Asia

Latin America

& Caribbean

Australia Middle East

North America

Others

Africa

Australia

China

Europe & Central Asia

Latin America & Caribbean

East Asia & Paci�c

Middle East

North America

South Asia

Export Breakdown

Import Breakdown

Trade Breakdown

Total Commodities

Trade

Imports

Exports

112.5 bn

136.8 bn

161 bn

22.3 bn

26.9 bn

2.4 bn

95.8 bn

45.7 bn

148.4 bn

Source: UN Comtrade; The Beijing Axis Analysis

The China Analyst


MCC: China’s Leading Metallurgical Engineering and Construction Contractor

Forging a global champion

MCC is a central state-owned enterprise (SOE) engaging in EPC (engineering, procurement and construction), natural resource extraction, papermaking, equipment fabrication, and real estate development. MCC’s history dates back to 1982, when the State Council approved the incorporation of China Metallurgical Construction Co., which was then affiliated with the former Ministry of Metallurgical Industry. In July 1994, MCC was formed as the core of China Metallurgical Construction Co. In 1998, at the State Council’s request to form large enterprise groups, all design and surveying institutes and construction companies as well as some scientific research institutions that used to be affiliated with the former Ministry of Metallurgical Industry were merged into MCC. Its subsidiary, China Metallurgical Corp Ltd, co-invested by Baosteel Group Corp, was established in 2008 and became listed on the Shanghai and Hong Kong Stock Exchanges in 2009. Today, MCC is China’s largest metallurgical engineering contractor and one of the world’s most active overseas contractors, with business operations in over 90 countries. With 55 subsidiaries, it ranked 280th among the Fortune Global 500 in 2012. Here, we profile MCC on the basis of two high-profile projects.

Universal Studios Singapore

One of MCC’s most successful overseas projects to date is its completion of Universal Studios Singapore, in which MCC acted as the EPC contractor for the construction of the entire theme park. When MCC was awarded the USD 500 million turnkey contract in July 2008, it officially marked MCC’s largest overseas civil construction project and the largest construction project undertaken by a Chinese contractor in Singapore.

Covering 22-hectares, Universal Studios Singapore is even larger than Universal Studios Los Angeles and would be the world’s fourth Universal Studios theme park. Its sister theme parks took an average of four to five years to complete, but MCC proposed an audacious plan to complete the project within two years.

To make this plan a reality, MCC had to make full use of the skills and expertise from the group’s numerous subsidiaries. MCC’s leadership realised early on that it could not rely on a single subsidiary to manage the project and its current domestic project management models would also be unable to meet the construction needs of the project. For this project, MCC implemented a new management model, in which two of its subsidiaries, MCC TianGong Group and

China Metallurgical Engineering Technology Co, would jointly manage the project, with the idea that the two subsidiaries’ strengths in construction and design would complement each other during project execution. In addition to having two subsidiaries jointly lead the project, MCC also relied heavily on its partnership with Baosteel Group, China’s largest steel producer, to fulfil the project’s structural steel requirements.

Due to the sheer number of steel structures required (over 100 individual structures totalling over 28,000 tonnes), the complexity of the structural requirements and the tight project schedule, no local sub-contractors were capable of taking on a steelworks project of this size and nature. MCC used an all-China solution, relying on its own internal resources to solve this problem. In China, China Metallurgical Engineering Technology Co would complete the detailed design work and then have China Metallurgical Corp Ltd fabricate and process the steel structures. Upon completion, the steel structures would be shipped to Singapore and assembled and installed by MCC TianGong Group.

Besides using Chinese engineers and workers for the installation of the steel structures, MCC also used ample Chinese workers for project construction. Singapore’s strict labour standards require all foreign labourers to take the Singapore Ministry of Manpower’s examination and attend government-organised security and safety training courses before being able to work on-site. Despite these hurdles, MCC still managed to fly-in over 800 Chinese workers to participate in project construction, without which it would have been nearly impossible to complete the project in such a short timeframe. Singapore’s labour laws have very strict rules governing the working hours and working environment of local workers. By using mostly Chinese workers for project construction, MCC was able to minimise the impact of this ‘burden’.

Due to these and various other reasons, MCC was able to finish construction of Universal Studios Singapore by 31 December 2009, with no reported incidents of worker injury/death or fire. The project won the 2010 “Luban Award”, which marks the highest honour for quality standards for a Chinese construction project given by the Ministry of Construction and the China Construction Industry Association. In addition, in 2010, the project also won the Singapore Green Building Award, Singapore Company of the Year Safety Award and Singapore Steel Design Award. As a result of its successful delivery of Universal Studios Singapore, MCC was later contracted for the construction of the Maritime Experiential Museum and Aquarium attraction by the same project owner.

The success of China’s ‘Going Out’ policy, initiated in the early 2000s, can partially be measured by the rise of Chinese contractors in the international EPC and construction market, where 52 made the ENR’s (Engineering News Record) 2012 list of the ‘Top 225 International Contractors’. Despite their success in penetrating overseas markets, Chinese contractors have faced their share of challenges and difficulties. In this article, we focus on the success and tribulations of China Metallurgical Group Corp’s (MCC) (ranked 42nd in the 2012 ENR list) overseas operations in order to draw wider lessons on the phenomenon of Chinese contractors expanding overseas. By Li-Chia Ou

The China Analyst


Sino Iron Ore Project

To date, MCC’s most challenging overseas project is the massive Sino Iron Ore project being developed at Cape Preston, in Western Australia’s Pilbara region. It is the largest magnetite mining and processing operation under construction in Australia and one of China’s largest investments in Australia’s resources sector. It is owned by Hong Kong-based CITIC Pacific through its 100% subsidiary, CITIC Pacific Mining (CPM), headquartered in Perth.

CITIC Pacific formed its own project management team for the project, which concluded with the establishment of a wholly-owned subsidiary, CPM, in Perth. The lead contract for the detailed design, construction and commissioning of the mine, processing facilities and materials handling was granted to MCC. MCC, in turn, divided the work into various groups and assigned subcontractors (mostly to its own subsidiaries), to be responsible for a specific group of works.

From the start, the project was beset by problems, starting with an incomprehensive feasibility study that did not factor in the time needed for government approval into the project schedule. After government approvals were significantly delayed, the rest of the project suffered delays as well due to a ‘domino effect’. In addition, the majority of CPM’s top management team was comprised mostly of Chinese nationals with a limited number of Australians. This resulted in top management having very little local knowledge and decisions being made without taking into consideration local realities and practices. Important decisions were therefore made based on what would work in China and not whether it was the correct thing to do in Australia.

MCC also made its fair share of mistakes and miscalculations which further compounded the project’s downward spiral. Due to the complicated requirements of the project, some of the equipment needed was beyond the capabilities of even the very best Chinese manufacturers. As a result, MCC had to subcontract the procurement of various highly specialised packages to numerous non-Chinese suppliers. In dealing with these non-Chinese suppliers, MCC made a number of mistakes in terms of procurement coordination and supplier management. For example, mills purchased from Chile for one of the lines were built ahead of the six originally planned lines in an attempt to save time and jumpstart revenue. However, this caused serious delays and confusion throughout the entire project and contributed to MCC’s rising worldwide procurement costs.

On top of these issues, MCC also faced persistent labour shortages and underestimated the cost of labour. MCC looked at the project schedule and labour costs from the perspective of a Chinese capital project, with the hope and expectations that, if things got behind schedule or over budget, masses of inexpensive but skilled Chinese labour could be brought in at a moment’s notice to put the project back on track. However, Australia’s toughened visa laws put an end to MCC’s plans to import cheaper Chinese labour. This left CITIC Pacific and MCC, who did not factor in the high salaries in Australia, exposed to the full brunt of rising labour costs as the skills shortage intensified.

The Sino Iron Ore project is now more than three years behind schedule and construction on four more production lines has yet to begin. The budget for the project has more than tripled from the initial USD 2.5 billion to an estimated USD 8 billion, and there is a real possibility that the cost will increase even more in the future.

Key takeaways from MCC’s experience abroad

Many of MCC’s experiences abroad have shown to be replicated by other Chinese EPCs in their own international expansions. The

two case studies presented in this article have offered some of these common experiences applicable to most Chinese EPCs going abroad. While predominantly successful in expanding into overseas markets, Chinese EPCs have shown that they still do need support in certain areas until they acquire the relevant expertise. Below are a few of the key takeaways:

ӹ Capabilities across the supply chain. Generally, large Chinese EPCs have many subsidiaries with the combined capabilities that can cover the entire EPC value chain. With access to in-house procurement, design teams and a construction workforce, an entire project can be coordinated in a streamlined and efficient manner. Furthermore, Chinese EPCs can be particularly effective for metal and mining companies operating in underdeveloped areas that lack the necessary infrastructure to export minerals. With their experience in power and civil infrastructure on top of mining and processing, Chinese EPCs are ideally positioned to offer an EPC turnkey solution in areas requiring additional infrastructure.

ӹ Access to several diverse cost-saving sources. Aside from having access to low-cost labour and raw materials, Chinese EPCs also have at their disposal other means with which to offer cost-competitive bids. Many state-owned EPCs have preferential financing arrangements with state-owned banks that can extend into equity ownership and other debt financing options. Specifically for international projects, export tax rebates can achieve substantial procurement savings for certain materials and equipment.

ӹ Growing aptitude in highly regulated markets. Chinese EPCs have proven their ability to singlehandedly undertake projects in many African and Southeast Asian countries that have minimal regulatory enforcement. However, when working in markets that have strict local standards and CSR needs, support and supervision through project management contractors/consultants comfortable with the local environment will facilitate a smooth project execution. That is not to say that all Chinese EPCs struggle in these markets; a few have learnt some hard lessons and have responded by showing that they can adapt quickly and profitably.

ӹ Project management still a challenge. Thus far, Chinese EPCs have tended to struggle with the complexities of managing projects in international markets. Working in different cultural, social and legal environments has led to miscommunications that have caused delays or cost overruns. Cultural and language barriers also play a role in the lack of efficient collaboration with local partners/stakeholders. Support and supervision from contractors with previous experience working with Chinese EPCs can go a long ways towards mitigating potential risks.

While we have looked at the most extreme spectrums of MCC’s overseas operations to draw our lessons, it must be noted that overall, MCC has a very successful overseas track record. High-profile international successes such as the Gerdau Acominas steel mill project in Brazil and Sumitomo Wakayama coke oven project in Japan show that although challenges do exist, Chinese EPCs have the capabilities to match their international peers. Without question, MCC is a pioneering force in the global construction and EPC market, paving the way for other Chinese EPCs to follow in its footsteps of expanding internationally.

Li-Chia Ou, Senior Consultant [email protected]

The China Analyst


capital investment and slowing public spending offers little hope for a fast rebound in coming quarters

ӹ Indonesia’s GDP expanded by 6.02% in Q1 2013 from a year earlier, marking the country’s slowest growth rate since the third quarter of 2010. Declining investment, which has been dragging Indonesia’s economic expansion, has added pressure on the current administration to fine-tune its policies to become more investor-friendly ahead of general elections in 2014. Over the past year, the government has slapped an export tax on raw minerals, issued regulations forcing foreign mining companies to cut their stakes in local mining firms and tightened import quotas for beef and horticulture

ӹ China’s GDP growth eased back to 7.7% in Q1 2013 from the 7.9% pace set in Q4 2012, raising concerns that a recovery that started in the second half of last year was already losing steam. The performance came as China pumped record amounts of credit into the economy in an attempt to buoy growth. Evidence that the rebalancing of China’s economy is underway provided one of the few bright spots, with domestic consumption contributing 4.3 percentage points to China’s growth in Q1 compared to a 2.3 percentage point contribution from investment

ӹ South Africa’s GDP grew by 1.9 % y-o-y in Q1 2013, down from 2.5% in the previous quarter and marking its weakest pace in four years. A marginal recovery at the country’s strike-hit mines was not enough to offset a steep drop in manufacturing activity, with the agricultural and utilities sectors also experiencing a contraction. Tougher times may still lie ahead with workers across the mining and auto industries threatening to strike over wage increases, and power constraints potentially cutting into factory production

Regional Overview: BRIICSGrowth slows across the BRIICS economies

ӹ Brazil’s GDP expanded a disappointing 1.9% in Q1 2013 from a year earlier. Slower economic growth along with a recent spike in inflation (including a government-controlled rise in bus, train and metro ticket fares), among other factors, prompted Brazilians to protest against the government’s perceived ineffectiveness in handling Latin America’s largest economy. Weak consumer spending and declining industrial production underscore fears that Brazil’s economy may be headed for a third straight year of subpar growth

ӹ Russia’s economy expanded by 1.6% in Q1 2013, its slowest rate since 2009. The slowdown can largely be attributed to a sharp decline in the output of mineral resources. Resource extraction, which includes oil, gas, coal and metals, declined by 4.9% y-o-y, confirming that Russia’s metallurgical sector is experiencing tough conditions amidst falling demand and a subsequent slide in prices

ӹ India’s economy grew 4.8% from a year earlier in Q1 2013, slightly faster than an upwardly revised 4.7% growth in Q4 2012 which marked the slowest pace of growth in nearly four years. Upside risks to inflation, a high current account deficit and a steep fall in the local currency pose the biggest obstacles to growth. Furthermore, weak private consumption,

Source: IMF; The Beijing Axis Analysis

Source: Trading Economics; The Beijing Axis Analysis*Note: Unemployment rate for all countries as of May 2013, except for China (Q1 2013, India (Dec 2011), Indonesia (Feb 2013) and South Africa Q1 2013)

Source: IMF; The Beijing Axis Analysis

Legend

Population, 2012

GDP, 2012

GDP growth, 2012

GDP per capita, 2012

Brazil

197 mn

USD 2,396 bn

0.9%

USD 12,079

South Africa

51 mn

USD 384 bn

2.5%

USD 7,507

Russia

142 mn

USD 2,012 bn

3.4%

USD 14,247

India

1,223 mn

USD 1,825 bn

4.0%

USD 1,492

China

1,354 mn

USD 8,227 bn

7.8%

USD 6,076

Indonesia

244 mn

USD 878 bn

6.2%

USD 3,592

BRIICS Inflation and Unemployment (%, May 2013)

2.1

4.7 5.5

7.4

5.6 4.1

3.8

5.9

5.2

0

5

10

15

20

25 25.2

6.5

5.8

Inflation

Unemployment rateBRIICS Real GDP Growth (%, Q1 2012 vs Q1 2013)

8.1

5.3 6.3

4.8

2.4

0.8

7.7

4.8

6.0

1.6 1.9 1.9

0

2

4

6

8

10

China India Indonesia* Russia South Africa Brazil

Q1 2012 Q1 2013

The China Analyst


China-Africa Briefing

ӹ China’s new president, Xi Jinping, attended the fifth BRICS summit in Durban, South Africa in March 2013. Before and after the summit, President Xi also visited a number of African countries, addressing concerns among leaders about the uneven nature of trade relations and promised an equal relationship that would promote development throughout the continent

ӹ Since assuming power, President Xi has hosted a number of African leaders in Beijing, including Nigerian President Goodluck Jonathan, Mozambique’s President Armando Guebuza and President Ernest Bai Koroma of Sierra Leone. They have negotiated billions of dollars worth of deals and business cooperation between the countries

ӹ The 18th CPC National Congress held in November 2012 was closely watched by leaders from Africa’s finance, commerce and industry sectors for signs of potential prospects and future opportunities between China and Africa. Overall, the Congress boosted the hopes and confidence of African entrepreneurs as well as Chinese businessmen in Africa, who aim to take advantage of opportunities arising from increased Chinese investment in Africa and Africa’s ongoing industrialisation

ӹ Former Chinese President Hu Jintao and Ugandan counterpart Yoweri Museveni exchanged messages of congratulations in October 2012 to celebrate 50 years of diplomatic relations. In recent years, the two sides have strengthened mutual trust and carried out active cooperation in the areas of economy and trade, infrastructure construction, energy, education and health care

ӹ According to the Ethiopian Ambassador to China, Ethiopia hopes to attract more investment from Chinese manufacturing companies. While China is one of the most significant investors in the development of infrastructure in the country as well as a notable technology provider, an increasing number of Chinese manufacturers are expected to take advantage of Ethiopia’s low energy costs, abundant labour supply and high quality raw materials

China-Africa Trade

Total Trade ӹ In 2012, China-Africa trade reached USD 198 bn. China’s

imports from Africa continued to grow at a much faster pace (21.4%) than its exports (16.7%), widening its trade deficit with the continent

Regional Focus: CHINA-AFRICA For the year 2012, China-Africa trade reached USD 198 billion – a 19.3% increase over 2011 –reaffirming budding trade ties between the two regions. In this edition, we report the latest China-Africa trade data, review major China-Africa trade and investment deals, and also spotlight China’s relationship with the Intergovernmental Authority on Development (IGAD).

China Imports from Africa ӹ China’s imports from Africa totalled USD 113.1 bn in 2012 ӹ Trade data for 2012 reveals that the five leading African exporters

to China were South Africa, Angola, Nigeria, Egypt and Libya

China Exports to Africa ӹ China’s exports to Africa totalled USD 85.2 bn in 2012

ӹ Trade data for 2012 reveals that the five leading export destinations for Chinese goods in Africa were South Africa, Nigeria, Egypt, Algeria, and Ghana

China-Africa Investment

Trends ӹ The cumulative stock of Chinese investment in Africa has

rapidly grown from less than USD 500 mn in 2003 to USD 22.9 bn in 2012. At the same time, the number of Chinese companies investing in Africa now exceeds 2,000, mainly targeting the finance, mining, manufacturing, construction, and agricultural industries

Major Recent Deals and Developments ӹ In August 2013, Yangzhou-based Perfect China acquired

the Val de Vie estate in the Western Cape, marking the first Chinese investment in South Africa’s wine industry. Perfect China, through its 51% shareholding in Perfect Wines of South Africa, purchased the 25-hectare wine farm which includes 21 hectares of vineyards, a manor house and wine cellar

ӹ In July 2013, Chinese firm Sepco III signed a deal to build a 318 MW coal-fired plant in eastern Morocco as part of a plan to cope with the country’s rapid growth in electricity demand. The total cost of the project is estimated to be USD 360 mn and will be primarily funded by the China Exim Bank

ӹ In March 2013, a range of agreements on infrastructure, agriculture and commerce were signed between China and

2011 2012 2013F201020092008200720062005200420032002

Chinese Imports from Africa

Chinese Exports to Africa

0

20

40

60

80

100

120

140

China-Africa Imports & Exports (USD bn, 2002-2013F)

Source: China Customs , UN Comtrade; The Beijing Axis Analysis

China-Africa Trade, Ten Largest Partners (USD bn, 2011 vs. 2012)

Source: China Customs; UN Comtrade; The Beijing Axis Analysis

Algeria Congo DRC Sudan

South Africa

Angola

GhanaEgypt LibyaNigeria

0

10

20

30

40

50

60

70 2011

2012

The China Analyst


Tanzania during President Xi Jinping’s two-day visit. One of the largest projects is a new USD 10 bn port and industrial zone in Bagamoyo, set to be constructed by China Merchants Group

ӹ In January 2013, the Ivory Coast government announced it had secured a USD 500 mn loan from China Exim Bank for the country’s largest hydroelectric dam to be built by Sinohydro Corp. Work commenced on the 275MW plant at Soubre in January and will continue for more than four years, with operations scheduled to begin by late 2017 or early 2018

ӹ In January 2013, Ghana’s Volta River Authority (VRA) announced it had secured a USD 286 mn loan from China Development Bank for the development of ferry crossing and landing beaches along Volta Lake

ӹ In January 2013, Chinese state-owned company Shandong Taishan Sunlight Group announced plans to invest up to USD 2 bn in an advanced coal exploration project in Zimbabwe

ӹ In November 2012, Zimbabwe company Hwange Colliery Company Limited (HCCL) signed a deal with a Chinese firm whereby the coal miner would export over USD 28 mn worth of coal annually. HCCL would export an average of 250,000 tonnes of coal per year to Norinco Motors. HCCL also signed a USD 22 mn equipment deal whereby it would get equipment from the Chinese firm

ӹ In November 2012, Chinese commercial vehicle maker Beiqi Foton Motor Co signed an MoU with the government of Cameroon to invest USD 500 mn in a plant in the Southwestern port city of Kribi. The factory is expected to begin operations in July 2013, with an annual production capacity of 5,000 trucks and vans

ӹ In November 2012, the Nigerian government signed an MoU with two Chinese firms, Sino Hydro and Gezhouba Group Company Ltd (CGGC), to build two hydro-power stations in the country, including a 3,050 MW station in Mambilla and a 700 MW station in Zungeru. China Exim Bank will finance 85% of the USD 3.2 bn Mambilla project, while the Zungeru Hydro project is mainly being financed on a long term export credit loan from China Exim Bank

ӹ In October 2012, Malawi and China signed an MoU to facilitate group travel for Chinese tourists and investors coming into the country. Tourism operators in Malawi will now be able to operate group tour packages and work closely with Chinese tour operators in attracting and increasing the number of Chinese tourists. Malawi joins only a handful of countries in Africa as approved destinations for Chinese tourists

ӹ In October 2012, the International Brand Management Centre (IBMC) and Trade and Investment South Africa signed an MoU to assist South African enterprises to gain access to the Chinese market. IBMC will provide comprehensive services to introduce and promote South Africa’s products and services to the Chinese market, as well as develop local distributors and distribution channels for South African enterprises and exporters

ӹ In October 2012, Xi’an Aircraft Industry Co., the Aviation Industry Corporation of China and the Air Forces of Cameroon signed a deal to deliver a turboprop passenger jet to Cameroon, the sixth African country to use the China-made aircraft

ӹ In September 2012, Hainan Airlines commenced operations at its Ghana-based African subsidiary, Africa World Airlines. Africa World Airlines is the first airline company in Africa to secure an investment from the CADFund

ӹ In September 2012, the Tanzanian government signed an MoU with China over the construction of a USD 1.2 bn natural gas pipeline from Mnazi Bay in Mtwara Region to Dar es

Salaam. The signing of the MoU is a follow-up development to the commercial loan agreement the government previously signed with China Exim Bank

ӹ In September 2012, China Airport Construction Corporation (CACC) signed an MoU with Ghana to undertake a feasibility study for the design of Ghana’s second international airport in Accra. The new airport would address the capacity constraints and anticipated traffic growth at Kotoka International Airport

ӹ In September 2012, the Tanzania-Zambia Railway Authority (Tazara) and the Chinese government concluded a USD 42 mn agreement that will see the company implement 12 projects aimed at improving operations. Once fully executed, the projects would collectively double Tazara’s number of locomotives by 2015

Africa Regional Focus: China and the Intergovernmental Authority on Development (IGAD)

Brief Regional Profile ӹ IGAD consists of eight African countries: Djibouti, Eritrea

(suspended in 2007), Ethiopia, Kenya, Somalia, South Sudan, Sudan and Uganda. In 2011, IGAD countries had a combined GDP of USD 284 bn, with an average real GDP growth rate of 2.7%. This includes Ethiopia with a 7.5% growth rate and Sudan which contracted by 4.5%

ӹ NYSE-listed JinkoSolar Holdings announced in September

2012 that it had signed a cooperative agreement with China Jiangxi Corporation for International Economic and Technical Co. in order to build a 50 MW solar power plant in Garissa to be connected to Kenya’s national grid. The plant is set to be one of the largest grid-connected solar power plants in Africa, producing about 76,473 MWh annually

ӹ China’s two largest telecom equipment manufacturers, Huawei Technologies and ZTE Corp, jointly won a telecommunications contract in October 2012 with Ethiopia’s government, ending a seven-month bidding contest. While the exact value of the contract remains undisclosed, the contract is reportedly worth between USD 1.2 bn and USD 1.3 bn

ӹ China Merchants Holdings (International) entered into an agreement at the end of 2012 with Djibouti Ports and Free Zones Authority (DPFZA) to acquire a 23.5% stake in Port de Djibouti SA (PDSA) for USD 185 mn. PDSA, a strategic location for Chinese shipping activities in the region, includes a multi-purpose terminal, a container terminal and a dry port

China-IGAD OFDI (USD mn, 2003-2011)

Note: Eritrea was suspended in 2007. Data for Somalia is unavailable. In 2011, Chinese OFDI into South Sudan was USD 0.05 mn and USD 18.13 mn for Djibouti.

Source: 2011 Statistical Bulletin of China’s OFDI; The Beijing Axis Analysis

0

500

1,000

1,500

2,000

2,500

2003 2004 2005 2006 2007 2008 2009 2010 2011

Djibouti Ethiopia Kenya

Sudan Uganda

The China Analyst


China-Australia Briefing: Iron ore supply developments; China and Australia look at food security

ӹ China and Australia conducted the 19th round of free trade agreement (FTA) talks in Beijing. Trade Minister Richard Marles travelled to Beijing in July 2013, where he met with Commerce Minister Gao Hucheng to continue discussions on the FTA. Some of the key issues which remain are the Chinese investments into Australia and market access for each other’s agricultural products

ӹ Former PM Julia Gillard Beijing visit in April 2013 was capped off by the signing of a Strategic Partnership between China and Australia, which includes an annual leaders’ dialogue. Apart from this milestone, it was also confirmed that Australia will have direct currency trading with the Chinese Renminbi. This means that Australian companies doing business in China will not need to convert into US dollars first. Australian banks Westpac and ANZ were granted licenses to start trading

ӹ In January 2013, after extensive delays and cost overruns, Australia’s Gindalbie Metals finally shipped its first cargo of magnetite from the Karara iron ore project in Western Australia (WA) to China. The USD 3.1 bn project is the first major magnetite producer in WA’s Midwest and is backed by China’s Angang Steel Company, which recently increased its stake in the project to 52.16%. The project is said to be on track to reach its full capacity of 9 mn tons per year by April

ӹ In December, a joint Australia-China report was released with the goal of establishing a cooperation framework in agricul-ture between the two countries to enhance global food secu-rity. Entitled ‘Feeding the Future – A Joint Australia-China Report on Strengthening Investment and Technological Cooperation in Agriculture to Enhance Food Security’, the report is the first time that the two governments worked together on this type of project. Australia is seeking to make its agriculture and food production systems more competi-tive and China seeks a secure food supply for its expanding middle class. The ‘Australia in the Asian Century’ white paper published by the Australian government in October 2012 included an imperative to make Australia’s agriculture and food production sectors globally competitive, with produc-tive and sustainable agriculture and food businesses

ӹ The trend for food security can be clearly seen in the rising

Regional Focus:

CHINA-AUSTRALIA 2012 saw an interesting shift in Sino-Australian trade with a slowdown in China’s imports, prompting a narrowing of the trade gap between the two countries. M&A deal developments continued to the end of 2012 and the first half of 2013, with a noticeable increase in focus on the food production and agricultural sectors. This is signalling yet another growing pillar in the Sino-Australian agenda, which has long been dominated by mining and energy.

number of deals targeted at food production and agriculture. Between 2008 and 2011, total global outward investment flows in the agricultural sector increased four-fold, reaching USD 650 mn in 2011, with interest in Australia increasing from USD 3.23 mn to USD 19.5 mn. China’s sovereign wealth fund, China Investment Corp, is said to be one of three large funds interested in Australian dairy company Van Diemen’s Land Co, which is seeking to raise USD 189 mn to expand its milk production

China-Australia Trade

Total Trade ӹ 2012 saw an interesting shift in Sino-Australian trade as both

the China Customs (CC) and the Australian Bureau of Statistics (ABS) mark a narrowing of the trade gap. Total trade stood at USD 122.3 bn for CC and USD 121.5 bn for ABS. CC marks China’s trade deficit with Australia at USD 46.8 bn, while the ABS marks a USD 29.5 bn trade surplus for Australia

ӹ Compared to the first half of 2012, H1 2013 shows a stronger total trade between the two countries, with CC’s figures at USD 62.8 bn (USD 59.6 bn for H1 2012), and USD 64.1 bn for ABS (USD 59.6 bn for H1 2012)

Australia State Watch: Northern Territory

ӹ With a gross state product (GSP) of USD 18.7 bn in 2011-12, the Northern Territory is Australia’s smallest economy

ӹ The state is a net exporter with exports of USD 5.5 bn and imports of USD 4.8 bn in 2012

ӹ Its main mineral and energy commodities in 2012 were lique-fied natural gas (USD 2.8 bn), manganese ore (USD 870 mn), and iron ores and concentrates (USD 117 mn)

China Annual and Monthly Trade with Australia (USD bn)

Source: China Customs, The Beijing Axis Analysis

Chinese exports to Australia (lhs)Chinese imports from Australia (lhs)Annual trade balance (rhs)

-80

-90

-70

-60

-50

-40

-30

-20

-10

0

0

10

20

30

40

50

60

70

80

90

02 03 04 05 06 07 08 09 10 11 12

Australia Annual and Monthly Trade with China (USD bn)

Source: Australian Bureau of Statistics, The Beijing Axis Analysis

-10

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

80

02 03 04 05 06 07 08 09 10 11 12

Australian exports to China (lhs)Australian imports from China (lhs)Annual trade balance (rhs)

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

0

1

2

3

4

5

6

7

8

9

2012

China exports to Australia (lhs)

China imports from Australia (lhs)

Monthly trade balance (rhs)

2013Jan Feb Mar Apr May Jun Jan Feb Mar Apr May Jun

0

1

2

3

4

5

6

7

8

9

Australian exports to China (lhs)

Australian imports from China (lhs)

Monthly trade balance (rhs)

Jan2012 2013

0

1

2

3

4

5

6

7

8

9 bn

Feb Mar Apr May Jun Jan Feb Mar Apr May Jun

The China Analyst


ӹ Key industries in terms of contribution to the Northern Territory’s GSP are mining (19.0%), construction (12.3%), ownership of dwellings (10.6%), public administration and safety (8.3%), and manufacturing (6.7%)

ӹ In 2011-12, Japan was the Northern Territory’s largest trading partner, with total trade reaching USD 3.2 bn (33.4%), followed by China (USD 1.1 bn, 12%) and Singapore (USD 665 mn, 7%)

ӹ Northern Territory’s trade with China has accelerated at a CAGR of 18.8%, from USD 232.5 mn in 2002 to USD 1.1 bn in 2012. The state registered its highest ever annual trade surplus with China at USD 1.3 bn in 2008

China-Australia Investment

Major Recent Deals ӹ In July 2013, China Molybdenum Co., China’s second-largest

producer of the steelmaking material, agreed to pay USD 820 mn for Rio Tinto’s 80% stake in the Northparkes copper-and-gold mine in Australia. The mine exports most of the copper concentrate it produces to customers in Japan, China and India

ӹ In May 2013, the Chinese government-owned State Grid Corporation of China (SGCC) agreed to buy a 19.9% stake in Australia’s SP AusNet from Singapore Power International (SPI) for USD 810 mn. SGCC’s subsidiary, State Grid International Development (SGID), also plans to buy a 60% stake in SPI (Australia) Assets Pty from SPI. Both deals would still require regulatory approvals from China and Australia

ӹ In April 2013, Dragon Energy executed a farm-in and joint venture with Shandong Energy Australia Pty Ltd (Shandong Energy), a 100% China state-owned Australian entity of Shandong Energy Linyi Mining Group Co Ltd, and Shandong Lunan Geo-Engineering Exploration Institute (Lunan) for its Ashburton Project in Western Australia. Shandong Energy and Lunan will jointly fund USD 1.8 mn of exploration in order to earn up to a combined interest of 65%

ӹ In February 2013, China state-owned investment firm CITIC Resources Holdings Ltd confirmed that it would be investing USD 468 mn into Australia’s Alumina Ltd. CITIC will buy more than 366 mn shares in the Melbourne-based company, which represents 13.04% of its capital base

ӹ In January 2013, China Hanking Holdings Limited announced its intention to acquire St Barbara Limited’s Southern Cross

Operations (SXO) for USD 23.8 mn. Hanking is one of the largest independent iron ore concentrate producers in northeastern China, engaging in the exploration, mining and processing of iron ores

ӹ In December 2012, BHP Billiton decided to sell its stake in the Browse liquefied natural gas (LNG) project to PetroChina, China’s leading oil and gas producer, for USD 1.63 bn. BHP is selling an 8.33 % stake in East Browse and 20% of West Browse. The remaining partners in the Browse project – Woodside Petroleum, Royal Dutch Shell Plc, BP, Mitsui & Co and Mitsubishi Corp – have the right to match PetroChina’s offer

ӹ In November 2012, China’s State Grid announced it would buy a 41.1% stake in ElectraNet, an Australian power supplier. The deal will reportedly cost USD 523 mn. ElectraNet oper-ates South Australia’s power transmission grid, which is set to grow as mining investments generate demand for power in the more remote parts of the state. Meanwhile, State Grid has a need to grow overseas given that it has reached its limits geographically in China

ӹ In November 2012, CK Life Sciences International acquired the Cheetham Salt business of ASX-listed Ridley Corp for USD 157 mn. Cheetham Salt is Australia’s largest producer and refiner of solar salt products through the operation of 10 solar salt fields and 3 refineries, whereas CK Life Sciences International is a part of Hong Kong billionaire Li Ka-shing’s Cheung Kong Group

ӹ In November 2012, the Shanghai Zhongfu Group’s Kimberley Agricultural Investment Pty Ltd (KAI) successfully bid for the Ord River East Kimberley Expansion Project. This is antici-pated to be one of the largest agricultural green-field projects to be undertaken in Australia, with KAI intending to invest USD 729 mn to develop the Goomig Farm Area and the Knox Plain for large-scale sugar production

ӹ In November 2012, China’s Shandong Group Co. purchased 51% of Australia’s Focus Minerals Ltd for USD 232 mn, with the approval of Australia’s Foreign Investment Review Board (FIRB)

ӹ In November 2012, FIRB approved the USD 100 mn place-ment deal between China’s Haohua Energy International and ASX-, JSE- and AIM-listed Coal of Africa Ltd. The South Africa-focused coal mining company aims to use the funds to upgrade the Vele colliery, in order to simultaneously produce semi-soft coking coal and thermal middlings coal for both the international and domestic markets

FIRB-approved Chinese Investments by Sector (USD bn, 2011-12)

Source: FIRB, The Beijing Axis Analysis

Northern Territory Trade with China (USD mn, 2002 – 2012)

Source: Australian Bureau of Statistics, The Beijing Axis Analysis

0

250

750

1,000

1,250

1,500

0

250

750

1,000

1,250

1,500

Northern Territory exports to China (lhs)Northern Territory imports from China (lhs)Annual trade balance (rhs)

02 03 04 05 06 07 08 09 10 11 12

Real estate59171

Mineral exploration& development

52

Manufacturing30

Services21 Others

9

0%

20%

40%

60%

80%

100%

The China Analyst


Please provide an update of the China-Australia trade and investment relationship. Has there been any noticeable paradigm shift away from mining and resources?

The overall trade and investment relationship is in good shape, largely because the political element to the overall bilateral relationship is in extremely good shape as well. In April, Australia’s then Prime Minister, Julia Gillard, engaged with the Chinese leadership including Xi Jinping and Li Keqiang very soon after China completed the second half of its own leadership change in March. There were two favourable outcomes for business which came out of that meeting. One was the agreement to hold a top-level strategic dialogue on an annual basis. Another was the announcement of the direct convertibility between the Renminbi and the Australian Dollar, only the third currency in the world to achieve that status with China. The fact that Australia was very much prepared to take that step, as was the Chinese government, shows the confidence surrounding the relationship in the short, medium and long term.

Although a large part of the relationship is built around mining and resources, there is recognition on both sides to try and diversify into other sectors. An area where we’re seeing further development

is in services. If you look at the services sector as a percentage of GDP in Australia, it’s up at around 80% of our economy. As we see a trend towards deregulation and increasing levels of sophistication in China, I think there is an awful lot more Australia can do to lift the services sector in China.

Other areas starting to see growth include food and beverages, an area where Australia has traditionally been quite strong. Within the SME area, which makes up an overwhelming majority of corporate Australia, we are starting to see improved channels to market through online opportunities. Yihaodian, China’s largest food e-commerce site, is already carrying a number of Australian products and we are looking at working with Yihaodian to take it to the next level.

In the wine market, Austrade is trying to encourage companies to break into China’s second- and third-tier cities due to intense competition in highly populated areas. Since 2008, we have held a ‘wine road show’ twice a year, which is creating product awareness in regional areas by leveraging the Australian brand name as an umbrella to bring some more wine products into the market.

What are the broad opportunities and challenges for Chinese firms in Australia?

Chinese entities look at Australia as an opportunity to test the market largely because it is a concentrated population with only 22 million people. Australia is also relatively easy to access from China and is a sophisticated retail market. Once they test the market and refine their business model, Chinese firms are then in good shape to tackle either North American or European markets. We’ve seen that happening in the health sector. With TCM, Australia is working closely with China on a range of regulations and getting transparency into TCM products that can be used in Australia. In that sense, we’re one of the more advanced countries.

Other challenges tend to be more about investment rather than trade. I actually think we’ve got quite a positive story to tell about Chinese investment into Australia. Since 2007, we’ve consistently been putting the message that Australia welcomes foreign investment and we have seen a huge uptake in the number

Sino-Australian Economic Relations: Alan Morrell, Senior Trade Commissioner of Austrade, on newly emerging business opportunities between China and AustraliaWith the recent conclusion of the 19th round of free trade agreement (FTA) negotiations between China and Australia, as well as the release of several noteworthy white papers outlining Australia’s response to China’s growing influence in the global economy, The Beijing Axis sat down with Alan Morrell, Senior Trade Commissioner of Austrade in Beijing, to discuss emerging cross-border opportunities between two of the world’s leading economies.

Mr Alan Morrell, Senior Trade Commissioner of Austrade in Beijing.

The China Analyst


of applications as well as the overall dollar amounts of foreign investment into Australia, particularly in mining and resources. We’ve approved over 300 applications, with only 6 deals having any conditions attached to them – none have been rejected. On a global level, that is an enviable record. I think our system has done a pretty good job of dealing with a huge amount of Chinese investment that has come relatively quickly.

Are there any particular areas of opportunity for Chinese firms in the Australian renewable energy resources sector– wind, hydro, and solar power?

Solar is an area of particular strength. We have good capabilities in solar and we know that is of interest to the Chinese solar industry. While we’ve got some good technologies, we need to partner with larger players who have access to commercial scale. That seems to be a good match between China and Australia, and is an area where we are looking at potentially expanding. Australia has Cooperative Research Centres (CRCs) that are very strong in R&D in the commercial space. Solar is one of the areas where those CRCs can also play a very positive role.

We have also seen significant investment from China into wind energy. Goldwind is a great case study, not only because they have successfully entered into the Australian market; but also because they entered Australia in a deliberate and measured way. They first completed a pilot project, established their office, developed good local relationships, and employed a number of Australians in key positions – all backed up by management from China.

Does the Foreign Investment Review Board (FIRB) have general recommendations on how Chinese investors can approach investment in Australia? Are there any specific sectors of interest from Chinese firms?

The FIRB has worked hard to develop a deeper understanding of its role in China and visit regularly. As recently as three months ago, the FIRB undertook a range of activities that included round table discussions with existing and potential investors. They not only visited Beijing and Shanghai, but they also went to Jinan, Changsha, Ningbo, etc. While they want to talk to Chinese businesses that have a very clear idea about what they want to do in terms of investing in Australia, they also like to meet those who have a general level of interest. Investors are encouraged to talk to the FIRB, particularly any areas of sensitivity or difficulty, in the early stages.

While the more obvious interest is in resources and agribusiness, the sector we are also pushing from an Australian perspective is tourism infrastructure, which includes hotels, resorts and supporting infrastructure. At the moment, we have some 80 projects in Australia looking for overseas investment. Another area where there is always a level of interest is in general infrastructure such as ports and railway projects.

What is your perspective on the ongoing free trade negotiations between China and Australia, and how will the upcoming election affect future talks?

The 19th round of negotiations was held in Beijing in June. While this may seem like a lot of rounds it needs to be seen in the right context. A comprehensive FTA with an economy such as Australia would really be breaking new ground. China hasn’t done this with any other large economy previously, apart from neighbouring

countries, which are in a different category for a variety of reasons. New Zealand’s FTA encompasses fewer industry sectors, whereas Australia’s FTA is expected to cover more than 50 sectors.

There has been a lot of progress made over the course of those rounds. China also recently signed a trade agreement with Switzerland. All of this has given renewed vigour around a FTA between China and Australia. While there are discussions about a further round of negotiations, I think that will probably need to take place after our upcoming elections. A timetable is less important than trying to work through to get an FTA that is of value to both sides.

Can you provide an overview about the establishment of the Asian Century Business Engagement (ACBE) Plan to help Australian SMEs harness commercial opportunities in Asia?

The plan was developed from the white paper released in 2012, which outlined a number of long-term objectives over the next 20-25 years. The paper was quite well received in most areas including by Australian business. Out of that came the ACBE, which is meant to support the objectives expressed in the white paper. The ACBE features three elements working together: individual companies, the Australian government, particularly Austrade, and industry associations. It seeks to develop some of the good ideas companies have, which can benefit from the support of both industry associations and the government.

There are 26 projects, of which 14 are related to China. The Citrus Australia project is a good example which focuses on improving the industry’s knowledge of its end user, and then working back up the line to meet the demands of the Chinese consumer. In another area, Australia is arguably the number one country in the world for mining services and we already have a large number of companies involved in supplying services to the Chinese mining industry. We know that a number of mine sites in China have a problem with access to, and use of, water. Water Australia has a project which seeks to bring expertise from Australia into an area of need in China.

What areas need attention to further strengthen business relations between Australian and Chinese companies?

The big issue is that China is a market that you really have to fully engage with. China has been the second largest recipient of global FDI for at least 20 years. The natural result of that is that you now have a large number of international companies based in China, the impact of which is felt within China, surrounding countries, and across most of Southeast Asia. Therefore, to strengthen business relations, I think Australian companies need to understand the implications of what is happening in China and the opportunity and challenges this presents.

The China Analyst


Regional Focus:

CHINA-LATIN AMERICAIn 2012, bilateral ties continued to strengthen, exemplified by rising trade figures as well as the possible formation of a high profile forum between China and Latin America akin to FOCAC in the near future. In this edition, we review these evolving issues and highlight Chile’s role as the most competitive economy in Latin America and its thriving trade relationship with China.

China-LatAm Briefing: Trade deals following Chinese President’s tour; Food security cooperation is on the increase

ӹ In June 2013, after President Xi Jinping’s tour of South America, Xi announced a broad range of trade deals, including: nearly USD 2 bn earmarked for Costa Rica including the moderni-sation of an obsolete oil refinery in the Caribbean port El Limon that will capable of processing 65,000 barrels of oil a day when completed. A USD 400 million deal to upgrade a strategic highway linking the capital city of San Jose to El Limon was also signed

ӹ At the conclusion of the China/LatAm Agriculture Cooperation Forum held in Beijing in June 2013, Agriculture Minister, Han Changfu, noted that China has earmarked USD 50 mn to finance agriculture projects in LatAm, with a particular focus on technological development

ӹ From late November to early December 2012, Jia Qinglin, chairman of the National Committee of the CPPCC and China’s top political adviser, became the first CPPCC leader to visit Costa Rica and Argentina. In Costa Rica, Jia said the two coun-tries could set an example for cooperation between countries of different sizes, especially in domains such as energy, infra-structure, investment and finance. In Argentina, Jia said since both China and Argentina were developing countries and emerging markets, it was of great significance for them to promote a strategic partnership in key areas such as energy, electric power, infrastructure, finance and agriculture

ӹ In October 2012, the 6th China-Latin America and the Caribbean (LAC) Business Summit was jointly organized by CCPIT, the People’s Bank of China, Hangzhou Municipal People’s Government and the Inter-American Development Bank (IDB). In the two-day summit, Chinese and LAC entre-preneurs discussed various issues such as expanding invest-ment, increasing business added value, financial and business services, smart cities, natural resources and the growth of SMEs, with more than 1,200 conferences staged involving the agriculture, building materials processing, manufacturing, service, automotive and energy industries

ӹ In September 2012, China’s Minister of Commerce Mr Chen Deming held meetings with various Ecuadorian government departments including the Ministry of Foreign Affairs and the Ministry of Foreign Trade during his visit to Ecuador. Both sides aim to strengthen economic and trade cooperation in the fields of energy, mining and infrastructure in the coming years

China-LatAm TradeTotal Trade

ӹ In 2012, China’s total bilateral trade with LatAm reached USD 243.6 bn, an increase of 7% y-o-y

ӹ Brazil, Mexico and Chile were China’s largest trading partners in LatAm, accounting for 33.4%, 14.9% and 13.8%, respectively, of China’s total trade with the region during 2012

ӹ China registered a trade surplus of USD 6.8 bn with the region in 2012, in contrast to a USD 18.8 bn deficit in 2011

China Imports from LatAm ӹ In 2012, China’s total imports from LatAm amounted to USD

118.4 bn, an increase of 4% y-o-y ӹ Approximately 73.6% of LatAm’s exports to China in 2012

originated from just three countries, namely Brazil (44%), Chile (17.4%) and Venezuela (12.2%)

China Exports to LatAm ӹ China’s total exports to LatAm in 2012 reached USD 125.2 bn,

an increase of 10.2% y-o-y ӹ In 2012, approximately 60.7% of China’s exports to the region

were concentrated in Brazil (26.6%), Mexico (21.9%) and Panama (12.2%)

China-LatAm Investment

Major Recent Deals ӹ In August 2013, Argentina’s government awarded a USD 4

bn contract for the construction of two hydroelectric dams to a consortium led by China Gezhouba Group

ӹ In July 2013, the Ecuadorian government announced China National Petroleum Corp (CNPC) has agreed to help finance the construction of the USD 12 bn Pacifico refinery project in Ecuador. The 300,000 barrel per day Pacifico project is a joint venture between Ecuador and Venezuelan state oil company PDVSA and aims to start output in 2017

ӹ In June 2013, China’s Chinalco Mining Corp. International approved a USD 1.32 bn expansion project for its Toromocho copper project, one of the largest copper projects in Peru. The expansion aims to increase production capacity at Toromocho by 45% and is expected to be substantially completed by the second quarter of 2016

China-LatAm* Trade (USD bn, 2003-2013F)

Source: CEIC; UN Comtrade; China Customs; The Beijing Axis Analysis*Note: Latin America here refers to the Latin American Integration Association (LAIA). LAIA’s members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, México, Paraguay, Peru, Uruguay and Venezuela.

Chinese Exports to LatAm Chinese Imports from LatAm

0

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F

The China Analyst


ӹ At the beginning of April 2013, Chinese state-owned oil enterprise Sinopec signed an agreement with Mexican oil company Pemex. The two-year deal aims to strengthen busi-ness relations between the two companies and encourage increased exports of crude oil to China

ӹ In March 2013, China announced it will invest USD 2 bn to back IDB public and private sector projects in LAC. USD 500 mn will be used to fund IDB public sector loans and up to USD 1.5 bn will fund private sector credit over the next three to six years

ӹ In February 2013, the Chinese state-owned company Citic Group signed an agreement with the Venezuelan government for prospecting and mapping the country’s mining reserves

ӹ In December 2012, State Grid Corp. of China, China’s largest grid operator by capacity and reach, announced it was chosen by the Brazilian government to build a power trans-mission project that will transmit energy from Belo Monte to Brazil’s south and south eastern states for USD 438 mn. Once completed, State Grid will operate a total of 9,931 km of transmission lines in Brazil

ӹ In December 2012, Bolivia signed an MoU with Chinese Sinohydro Corp for the development of the Cachuela Esperanza hydropower project in the north eastern part of Beni

ӹ In December 2012, Honduran President Porfirio Lobo announced his government will open a trade office in China as a step toward establishing full diplomatic relations

ӹ In December 2012, Mexican pork producers received new market access to China, opening the door for Mexican origin pork and pork offal exports. Mexico’s National Service of Health, Food Safety, and Food Quality (SENASICA) announced that China’s Quality Supervision, Inspection and Quarantine General Administration (AQSIQ) approved the necessary export certificates that will enable four Mexican establish-ments from the state of Sonora to ship pork to China, with industry insiders predicting pork exports to China will reach 20,000 mn tonnes in the coming years

ӹ In November 2012, IDB approved USD 153 mn in loans for the establishment of a new equity investment platform for LAC in partnership with China Exim Bank. The platform will support economic and financial integration between LAC and China in the infrastructure, agribusiness, energy and mining industries

ӹ In November 2012, Banco Santander Chile, the country’s second-biggest lender by assets, became the first Chilean bank to raise money in China’s bond market by issuing RMB 500 mn (USD 80 mn) in two-year renminbi-denominated paper, otherwise known as “dim sum” bonds

ӹ In September 2012, Foxconn Technology Group announced plans to spend USD 494 mn to build five new factories in an industrial park in Itu, a city near Sao Paulo, Brazil that will be tasked with manufacturing Apple’s iPhones and iPads, among other electronic components

ӹ In September 2012, Chinese and Venezuelan officials signed an agreement to jointly develop one of the world’s largest gold mines. Estimated to hold about 17 mn ounces of gold, China’s Citic Group will provide engineering, construction and processing services for the development of Las Cristinas gold mine

ӹ In September 2012, the Nicaraguan government signed an MoU with newly-created HK Nicaragua Canal Development Investment Co., Ltd (backed by Chinese telecom giant Xinwei), for the construction of the USD 30 bn “Great Canal of Nicaragua”, which will connect the Caribbean and Pacific coasts of Nicaragua

China-LatAm Country Watch: Chile

Brief Country Profile ӹ Often touted as the most competitive economy in the region,

Chile is the sixth-largest economy in LatAm. With a nominal GDP of USD 268.3 bn in 2012 and a relatively small population of 17.4 mn people, Chile’s GDP per capita stands at about USD 15,363, the highest in LatAm

ӹ Chile is the world’s largest copper producer and is responsible for about one-third of global output. In 2012, Chile’s GDP grew an estimated 5.5%, leading the LatAm region in terms of economic expansion

China-Chile Bilateral Ties ӹ China and Chile established diplomatic relations in 1970,

making Chile the first South American country to form diplomatic ties with China

ӹ China and Chile signed a free trade agreement (FTA) in November 2005, which came into force in October 2006 and recently expanded though a supplementary agreement on investment in 2012. Under the FTA, the two countries are expected to make 97% of products duty free within 10 years

ӹ Following the signing of a landmark FTA, Chile has witnessed a surge of exports, especially non-mining goods, to China, which now account for 13.2% of Chile’s total exports

ӹ In 2012, Chile’s total trade with China reached USD 33.2 bn, an increase of 5.8% y-o-y, with both countries aiming to double trade to USD 60 bn by 2015. Chile is now China’s third-largest trade partner in South America

ӹ China’s total imports from Chile increased by 0.28 % y-o-y to approximately USD 20.63 bn in 2012. While copper and mining-related goods make up the bulk (89%) of China’s imports, other imports such as fruit, wine and fish meal (often used as fertiliser) have experienced rapid growth

ӹ China’s total exports to Chile in 2012 reached USD 12.6 bn, an increase of 16.3% y-o-y

ӹ According to figures from the Chilean government, China’s cumulative investment into Chile from 1974 to 2012 reached USD 103.9 mn; however, in the first half of 2013 alone, Chile’s Foreign Investment Committee (CIEChile) has approved 54 Chinese applications with a net value of USD 1.2 bn

ӹ Chinese companies have expressed strong interest in investing in Chile’s infrastructure and energy sectors and are actively seeking cooperation opportunities in green energy and innovation. As an example, China’s Sky Solar Holdings, a solar-energy developer, announced plans to invest USD 1.36 bn in Chile in January 2013. CIEChile has placed a special emphasis on securing Chinese investment since 2010

China’s Total Trade with Chile (USD bn, 2004-2013F)

Source: UN Comtrade; China Customs; The Beijing Axis Analysis

2004 2005 2006 2007 2008 2009 2010 2011 2013F2012

China – Chile FTA signed in November 2005 and put into force in October 2006

In April 2008,Supplementary Agreement was signed

Chinese Exports to ChileChinese Imports from Chile

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The China Analyst


Regional Focus: CHINA-RUSSIA

2012 and the first half of 2013 saw a large amount of announced investment deals between China and Russia across various sectors, particularly in the manufacturing industry. Business activity jumped in late May-June, driven by Russian President Vladimir Putin’s high-level visit to China, which was accompanied by a massive business delegation.

China-Russia Briefing: High-level government visits; and Joint naval drills

ӹ In July 2013, China and Russia conducted joint naval drills, China’s largest ever with a foreign partner, boosting relations between both parties. With both nations increasing joint military drills over the past decade, this record breaking joint naval drill had been inevitable. With this partnership looking to strengthen over time, security around these two countries shall be better than ever

ӹ Chinese Vice Premier Zhang Gaoli met President Vladimir Putin on June 20th, a month after the meeting with President Xi Jinping. Sincere greetings and congratulations were given by both sets of parties towards each other. These continuing amicable meetings will surely lead to a long term relationship which will benefit both in the future

ӹ In March 2013, President Xi Jinping had a meeting with Russian President Vladimir Putin. This was just after Xi Jinping was made President of the People’s Republic of China. There were three major issues on the agenda, which were managing expectations about the relationship, expanding bilateral trade in energy and arms, and co-operation on international secu-rity affairs. Relationship-wise, both parties share a common interest in helping their leaders earn more respect across the globe and do not want to give the impression of a second-coming of the Cold War. In bilateral energy trade, China wants to obtain as much cheap and reliable energy without being solely dependent on one nation and Russia wants to retain its pricing power and not be in a position where it sells solely to one nation. In terms of military cooperation, China does not want to pay high prices for arms and Russia does not plan on giving any arms that may endanger its own nation

China-Russia TradeTotal Trade

ӹ Bilateral trade between China and Russia has continued to increase during the whole of 2012, reaching USD 88.1 bn, and an increase of over 22% y-o-y (see chart top right)

China Imports from Russia ӹ China’s imports from Russia in June 2012 amounted to USD

3.3 bn, up 5.4% y-o-y

ӹ China’s imports from Russia during the whole of 2012 amounted to USD 44.1 bn, a steady increase of 9.4% y-o-y

China Exports to Russia ӹ China’s exports to Russia in June 2012 amounted to USD 4.0

bn, up 13.7% y-o-y

ӹ China’s exports to Russia during the whole of 2012 amounted to USD 44 bn, an increase of 13.1% y-o-y

China-Russia InvestmentMajor Recent Deals

ӹ In July 2013, Rosneft, an oil giant in Russia, announced plans to invest in the development of Russia’s Eastern Siberia and Far East. China is expected to be a major investor in this project as it lies on the border, through the RCIF. The invest-ment will be used for development in the oil field, moderniza-tion of the Komsomolsk oil refinery, and oil products

ӹ In July 2013, VTB Capital from Russia has signed a memo-randum of understanding with Chinese investment bank CITIC Securities. The aim of this agreement is to make financial proceedings a lot smoother between the two borders but also it would benefit the capital markets, private equity invest-ments and FX operations. The CEO of VTB Capital said this would help clients from Russia invest into the Chinese market much more easily as it is the most attractive for investing

ӹ In May 2013, China and Russia increased their joint equity fund by USD 2 bn to increase its investment projects. The first investment of USD 200 mn went to a minority stake in Russia Forest Products. They are now looking to expand in agriculture, logistics and machinery and believe it will show that Chinese and Russian businesses can work together. The ‘Big Four’ Chinese banks have now opened up subsidiaries in Russia after meeting Dmitriev, a member of the Russian state delegation

ӹ In April 2013, China proposed to Russia to join forces to build and operate floating nuclear power plants. These should be fully operational by 2016. The idea is to provide energy, heat and water to remote and arid areas of the country. The vessel shall have two modified KLT-40 naval propulsion reactors that will provide up to 70 megawatts of electricity or 300 mega-watts of heat, sufficient for a city with a population of 200,000

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9

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

2012 2013

China-Russia Monthly Trade (USD bn, 2012 – H1 2013)

Source: China Monthly Economic Indicators; China Customs; The Beijing Axis Analysis

The China Analyst


ӹ In February 2013, EuroSibEnergy, the largest Russian inde-pendent power company, and China Yangtze Power, the largest listed hydropower company in China, announced the begin-ning of a joint venture to develop hydro and thermal power projects in Russia. The joint venture is called YES Energo Ltd and will begin by examining two hydropower and one thermal project in Eastern Siberia to increase power from 3GW to 10GW

ӹ In February 2013, it was reported that work on a long-delayed Sino-Russian oil refinery is expected to start in June in Tianjin, according to an industry insider. The Tianjin project, with a total investment of USD 5.8 mn, was originally due for completion by 2012. CNPC is taking 51% of the shares, while Russia’s oil producer, Rosneft, takes the remaining 49%. In September 2010, Vice-Premier Wang Qishan and Rosneft chief Igor Sechin laid the cornerstone for the refinery, expecting the joint venture to reach an annual capacity of 13 mn tons and unleash more opportunities in the future. Since then, overall progress has been slow

ӹ In November 2012, the co-owners of Russian potash miner Uralkali issued exchangeable unlisted bonds to VTB Capital, a subsidiary of the country’s second-largest bank VTB , and to Chengdong Investment Corporation, a subsidiary of China’s CIC. It was not the first joint transaction of VTB and CIC. In May,

China’s Imports from Russia (USD bn, 2011 vs 2012)


29.5

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5

10

15

20

25

30

35

40

45

2012

Mineral fuels/oils

Wood

Nickel

Fish/molluscs

Ores, slag and ash

Fertilisers

Other 22.9

2011

Total: USD 44.1 bn Total: USD 40.3 bn

9.4%

Imports of oil and fuels increased by almost a third

China’s Exports to Russia (USD bn, 2011 vs 2012)


2012

Nuclear

Electrical machinery

Vehicles

Footwear

Apparel (knitted)

Articles of iron and steel

Other

2011

Total: USD 44 bn Total: USD 38.9 bn

13.1%

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35

40

45

Signi�cant increase in vehicles

5.3

7.2

5.9

8.5

China’s OFDI Flow into Russia (USD mn, 2004-2012E)

Source: Statistical Bulletin of China’s OFDI; The Beijing Axis Analysis

0

200

400

600

800

1,000

2004 2005 2006 2007 2008 2009 2010 2011 2012E

Record high

they bought 7.5% stake in Polyus Gold, Russia’s largest gold producer, for USD 635 mn

ӹ In November 2012, the authorities of the Komi Republic jointly with the management of the China Civil Engineering Construction State Corporation (CCECC) began to draft a mechanism for implementing the Belkomur trunk railway construction project, the press service of the Komi Republic’s government said summing up results of talks in Shanghai

China-Russia Resources WatchNew China-Russia oil deal; new prospects for China-Russia natural gas cooperation

ӹ In June 2013, China and Russia signed a landmark agreement to double oil supplies to China over the next 25 years. The deal, one of the biggest ever in the history of the global oil industry, is worth around USD 270 bn and will bring Rosneft USD 60-70 bn in upfront pre-payment from China. The deal marks Rosneft’s shift to Asia from saturated and crisis-hit European markets

ӹ In June 2013, CNPC agreed to acquire a 20% stake in OAO Novatek’s USD 20 bn Yamal LNG project, allowing Russia’s second-largest natural gas producer to tap the Asia market. CNPC will join Novatek and France’s Total SA in the natural gas liquefaction venture. A long-term contract was also signed for the supply of at least 3 mn tons of LNG per annum once output commences at the end of 2016

ӹ In March 2013, it was reported that China Nonferrous Metal Industry’s Foreign Engineering and Construction Co. Ltd (NFC) will acquire a 50% stake in a joint venture with the East Siberian Metals Corporation (MBC) to develop the Ozernoye complex deposit, one of the world’s largest by zinc reserves. MBC will also sign an integrated engineering, procurement and construction (EPC) management contract and an offtake contract with NFC for the Ozerny ore mining and processing plant’s output

The China Analyst


The joint venture brings together The Beijing Axis’ strength in analytics, strategy formulation and implementation, transaction support, and outsourced and managed services, with IMPERIAL Logistics’ extensive resource base of transportation, warehousing and distribution operations in Africa and Europe, as well as best-of-breed integrative process and technology solutions. The combined team will have the ability to build a seamless distribution channel from China – and other Asian, low-cost manufacturing countries – to Africa, as well as from Africa to Asia.

“Partnership with a global company such as IMPERIAL is the logical next step in our growth plan,” said Kobus van der Wath, Founder and Group Managing Director of The Beijing Axis. “It enhances our current position as an international advisory and procurement firm, which counts the provision of a comprehensive range of procurement and supply chain managed services as one of our key service offerings to the market.”

With on-the-ground presence and extensive networks in Asia and Africa, the partnership will also provide strong support to companies that are looking to expand into these high-growth regions by offering a strategic and operational ‘soft landing’ to companies that are aiming to grow exports or establish a presence in these dynamic markets.

With over 35 years’ experience and operations spanning 14 countries on the African continent, IMPERIAL Logistics has extensive experience in logistics and supply chain management, and has achieved annual growth of over 15 per cent over the past decade.

“We deliver excellence in end-to-end logistics and supply chain management, enabling customers to grow in an efficient, proactive and cost effective manner,” elaborates IMPERIAL Logistics Chief Integration Officer Cobus Rossouw. “Our joint venture with The Beijing Axis reflects IMPERIAL Logistics’ commitment to ensuring that our clients are positioned to take advantage of global megatrends like the shift of economic and political power from West to East, and from developed to developing markets. The Beijing Axis’ expertise in low cost country sourcing and emerging market entry strategies combined with the international supply chain management capabilities of IMPERIAL Logistics boosts our clients’ chances of success in ventures between China – the rest of Asia - and Africa.”

“As one of the first regions visited by Chinese President Xi Jinping, Africa obviously holds a very important place in the country’s agenda,” contends van der Wath. “Apart from providing the wealth of raw materials that China needs in order to support its domestic development, Africa provides untold opportunities for Chinese companies, many of which are actively reshaping the continent’s landscape as part of a complex partnership that has reignited and vastly expanded ties from a previous era.”

In 2012, China-Africa trade grew by a significant 19.3 per cent from 2011, reaching USD 198 bn. Some analysts expect this figure to reach USD 385 bn by 2015.

The Beijing Axis boosted its procurement and international supply chain offering by entering into a joint venture with global logist ics and supply chain leader, IMPERIAL Logistics. The partnership will ensure that both companies and their clients are well-placed to reap the benefits of the thriving trade and development between the two fastest growing continents in the world – Asia and Africa.

The Beijing Axis Joins Forces with IMPERIAL Logistics

For more information, please contact:

Barbie CoManager: Marketing and Sales PlanningT +86 10 6440 2106 ext. 202E [email protected]

The China Analyst


The Beijing Axis News

Greater China and Asia

2013 Global Sourcing and CPO Forum – Shanghai, ChinaOn 11 July 2013, the Global Sourcing and CPO Forum was held at the Sofitel Shanghai Hyland in Shanghai. Kobus van der Wath delivered a presentation entitled China in the Global Supply Chain - Reviewing its LCC Status and Projecting its Future Competitiveness.

Mines and Money Beijing 2013 – Beijing, ChinaOn 17-20 June 2013, Mines and Money Beijing 2013 was held at the China World Hotel in Beijing. Javier Cuñat facilitated a panel discussion on investing in Africa’s mining industry.

SA Inc Luncheon – Beijing ChinaOn 15 March 2013, The Beijing Axis hosted the first SA Inc Luncheon for 2013. It was held at the Capital Club Library Room in Beijing. His Excellency Dr, Bheki Langa, the South African Ambassador, was the guest of honour.

The Inaugural Meeting of The Growth Net – New Delhi, IndiaOn 10-12 March 2013, The Inaugural meeting of The Growth Net was held at Taj Palace in New Delhi. Kobus van der Wath delivered a presentation entitled How will natural resources industries address press-ing strategic challenges?.

Sourcing Firms Roundtable – Shanghai, ChinaOn 18 December 2012, Sourcing Firms Roundtable was held in Shanghai. Kobus van der Wath opened the roundtable dis-

cussion, talking about the current global market, China’s role as a supplier and the issues and trends shaping the procure-ment landscape in China.

PICC and Hollard Insurance Event – Beijing, ChinaOn 5 December 2012, PICC and Hollard Insurance held the event: Investment Op-portunities, Risks and Risk Management In Africa was held in Beijing. Haiwei Huang, Associate Director, delivered a presenta-tion entitled The Sino-Africa Relationship and Its Future Evolution.

CHaINA Global Sourcing Forum – Shanghai, ChinaOn 7-8 November 2012, CHaINA Global Sourcing Forum was held at the Intercon-tinental Hotel in Shanghai. Kobus van der Wath delivered a presentation entitled China’s Transformation and the Future Merits of China Procurement – Revisiting the ‘Why, What and How’.

China Mining Congress and Expo 2012 – Tianjin, ChinaOn 3-6 November 2012, China Mining Congress and Expo 2012 was held at Tianjin Meijiang Convention and Exhibi-tion Centre in Tianjin. Kobus van der Wath facilitated a panel discussion on mining procurement while Javier Cuñat delivered a presentation entitled China in Africa: From Commodity Demand Driver to Infra-structure Partner. The Beijing Axis was also a part of the exhibition.

Asian Mining Indaba – SingaporeOn 29-31 October 2012, Asian Mining Indaba was held at Marina Bay Sands in Singapore. Kobus van der Wath, Founder

and Group Managing Director, delivered a presentation entitled Asia Mining in the Global Context.

Expomin China Promotion 2013 – Zhengzhou, ChinaOn 25 October 2012, The Promotion of Expomin China 2013 was held at Sofitel in Zhengzhou. Javier Cuñat, Associate Di-rector, delivered a presentation entitled Global Mining and Supply Opportunities for Chinese Manufacturing Companies.

Other events attended by The Beijing Axis in Greater China and Asia include:

World Food Programme – YAPS Event8 July 2013; Beijing, China

Foreign Correspondents Club31 May 2013; Beijing, China

Golden Jubilee of the OAU/AU25 May 2013; Beijing, China

SA-China Diplomatic Relations Anniversary13 March 2013; Beijing, China

INSEAD Venture Competition7 December 2012; Singapore

Asia Copper Week 201228-29 November 2012; Shanghai, China

Bauma China 201227-30 November 2012; Shanghai, China

SA Expo22-23 October 2012; Beijing, China

GMAC Monthly Meetings 2013Beijing, China

Africa

Understanding Chinese Contractors’ Success in Africa – Sandton, South AfricaOn 16 August 2013, Understanding Chi-nese Contractors’ Success in Africa was held at the restaurant of Gordon Institute of Business Science in Sandton. Dirk Kotze delivered a presentation entitled Under-standing Chinese Contractors.

African Mining in the Year of the Snake Cocktail Hour – Cape Town, South AfricaOn 5 February 2013, African Mining in the Year of the Snake Cocktail Hour was held at Brundyn + Gonsalves Art Gallery

A view of the Beijing skyline from The Beijing Axis’ office on a clear day (29 August 2013)

The China Analyst


in Cape Town. The Beijing Axis co-hosted the event with Cadiz Corporate Solutions.

Investing in African Mining Indaba – Cape Town, South AfricaOn 4-7 February 2013, Investing in Afri-can Mining Indaba was held at Cape Town Convention Centre in Cape Town. Kobus van der Wath moderated the keynote ses-sion: Winner Takes All: China’s Race for Re-sources and What It Means for The World.

Macquarie China Day in South Africa – Cape Town, South AfricaOn 1 February 2013, the Macquarie China Day in South Africa was held at Mount Nelson Hotel in Cape Town. Kobus van der Wath delivered a presentation entitled China’s Macro Trends and Implications for the Resource Sector.

The Economic Outlook Series Confer-ence 2013 – Johannesburg, South AfricaOn 24 January 2013, the Economic Out-look Series conference 2013 was held in Sandton. Kobus van der Wath participat-ed in a panel discussion entitled Doing Business in Dynamic Markets in 2013.

Smart Procurement World – Johannesburg, South AfricaOn 13-15 November 2012, Smart Procure-ment World was held at Gallagher Conven-tion Centre in Johannesburg. Kobus van der Wath delivered a presentation entitled Global sourcing of capital equipment from China.

Heavy Haul Rail Africa – Cape Town, South AfricaOn 6-7 November 2012, Heavy Haul Rail Africa was held in Cape Town. Dirk Kotze, Director and General Manager: Africa de-livered a presentation entitled Trends in the activities of Chinese companies in the African Rail Sector.

Other events attended by The Beijing Axis in Africa include:

BNP Paribas Mining and Commodity Conference 6 February 2013; Cape Town, South Africa

SAPICS 35th Annual Conference & Exhibition1-3 June 2013; Sun City, South Africa

Australia

CIPSA WA Regional Event – Perth, AustraliaOn 25 July 2013, The Beijing Axis was the Gold Sponsor for the CIPSA WA Regional Event: Networking-Meet & Greet with

Ease featuring Rachel Green. The event was held at The Club, University of West-ern Australia and Kobus van der Wath at-tended.

APAC Mining Procurement & Supply– Perth, AustraliaOn 5-6 June 2013, The Beijing Axis was the Networking Partner at the Mining Procure-ment and Supply APAC conference. The event was held at Crown Perth in Western Australia and Kobus van der Wath attended.

The AMPAC Summit 2013 – Perth, AustraliaOn 9 April 2013, the AMPAC Summit 2013 was held at the Pan Pacific Hotel in Perth. Kobus van der Wath delivered a presenta-tion entitled China’s long-term minerals de-mand and implications for Australia.

CFA Society Lunch – Perth, AustraliaOn 1 March 2013, CFA Society Lunch was held in Perth. Kobus van der Wath deliv-ered a presentation entitled Western Aus-tralian finance in a global context - “Punch-ing above its weight”.

Procurement Roundtable – Perth, AustraliaOn 25 February 2013, Procurement Round-table was held in Perth. Kobus van der Wath delivered a presentation entitled China’s Transformation and the Future Mer-its of China Procurement.

WA Mining Club Luncheon Meeting – Perth, AustraliaOn 28 February 2013, WA Mining Club Luncheon Meeting was held at Hyatt Regency Hotel in Perth. Kobus van der Wath delivered a presentation entitled Sino-Australian Relations in the Year of the Snake: China’s Prospects, Implications for the Resource Sector and Imperatives for Boardrooms in Western Australia.

Willis Chairman’s Luncheon – Perth, AustraliaOn 18 October 2012, Willis Chairman’s Luncheon was held in Perth. Kobus van der Wath delivered a presentation entitled China’s Prospects Towards 2013.

Other events recently attended by The Beijing Axis in Australia include:

Africa Downunder28-30 August 2013; Perth, Australia

CIPSA Strategic Procurement Forum14-15 August 2013; Perth, Australia

WA Growth Prospects 13 August 2013; Perth, Australia

Mining Procurement & Supply QLD4-5 December 2012; Brisbane, Australia

The CIPSA Strategic Procurement Forum30 November 2012; Brisbane, Australia

WA Mining Club’s October luncheon25 October 2012; Perth, Australia

Africa Dream Cocktail20 October 2012; Perth, Australia

Australia China Business Council China National Day dinner16 October 2012; Perth, Australia

Europe

Other events attended by The Beijing Axis in Europe include:

Mines and Money London Conference and Exhibition2-6 December 2012; London, UK

The Beijing Axis’ SA Inc Luncheon being held at the Capital Club in Beijing (15 March 2013)

H.E. Malusi Gigaba, Minister of Public Enterprises, South Africa

H.E. Regis Immongault, Minister of Industry and Mines, Gabon

H.E. Prof. Chinedu Nebo, Minister for Power, Nigeria*

H.E. Patrick Sendolo, Minister of Lands, Mines and Energy, Liberia*

H.E. Willem Isaacks, Deputy Minister of Mines and Energy, Namibia*

Karen Breytenbach, Senior Project Advisor, PPP Unit, National Treasury, South Africa

John Mudany, Finance and Commercial Director, Kenya Electricity Generating Company

Tim Turner, Director, Private Sector, African Development Bank

31st October - 1st November 2013Ritz Carlton, Beijing, China

Andrew Alli, Chief Executive Offi cer, Africa Finance Corporation

Tas Anvaripour, Head of Infrastructure Finance and PPP, African Development Bank

Liang Xuan, Chief Representative, Goldwind Middle East and Africa

Jason Lu, Senior Underwriter at Multilateral Investment Guarantee Agency, World Bank

Stephan Diefenthal, Vice President, DEG - Deutsche Investitions - und Entwicklungsgesellschaft

Pan Yantian, Executive Vice President, Goldwind International

Andrew Browne, China Editor, The Wall Street Journal and Dow Jones Newswires

Olamide Oladosu, Partner, Templars Law

Oliver Tunde Andrews, Director and Chief Coverage Offi cer, Africa Finance Corporation

David Humphrey, Global Sector Head Power and Infrastructure, Mining, Energy & Infrastructure Finance, Corporate and Investment Banking, Standard Bank

William Pesek, Columnist, Bloomberg

Lucy Hornby, China Correspondent, Financial Times

Siseho C Simasiku, CEO, Electricity Control Board, Namibia

Rumundaka Wonodi, Managing Director and Chief Executive Offi cer, Nigerian Bulk Electricity Trading Plc

Kane Amadou Mamadou, Directeur Général de la Société de production d’électricité et de gaz (SPEG)

SPEAKERS TO DATE INCLUDE:

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The China Analyst


Regulars• Macroeconomic Monitor• China Sourcing Strategy • China Capital • Mapping China• Regional Focus: China-Africa,

China-Australia, China-Latin America and China-Russia

FeaturesState of Change: Assessing China’s CompetitivenessForeign companies are facing the prospect of a competitive landscape sig-nificantly altered by emerging Chinese competitors.

How to Engage: The Rise of New Chinese ManufacturersChinese machinery suppliers are producing increasingly sophisticated goods, but are still struggling to increase their efficiency and adequacy of internal support processes.

Regulars• China Commodities• China Sourcing Strategy • China Capital • Mapping China• Regional Focus: China-Africa,


FeaturesChina’s Economy: Heading for a Firm Landing? As China’s entire socio-economic superstructure evolves, it is necessary to interpret China’s current cyclical adjustments from a long-term perspective.

China’s SOEs: Stalled Reforms or Agents of Change?Facing weaker growth prospects at home, China’s SOEs continue to expand overseas, disrupting the global marketplace and offering new cooperation opportunities.

Previous Editions of The China Analyst

Other Recent Publications by The Beijing Axis

To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com.

Regulars• Macroeconomic Monitor• China Facts & Figures • China Trade Roundup• China Sourcing Strategy • China Capital • Mapping China• Regional Focus: China-Africa,


FeaturesChina in 2030: Outlines of a Chinese FutureChina appears to have an awe-inspiring future ahead of it, and its economy its set to attain unparalleled dimensions, if the future turns out like we ex-pect.

China's Construction Industry: Strategic Options for Foreign PlayersEntering the Chinese construction industry is a challenging prospect for for-eign firms, yet opportunities still exist.

March 2011

April 2012October 2012

Regulars• Macroeconomic Monitor• China Facts & Figures • China Trade Roundup• China Sourcing Strategy • China Capital • Mapping China• Regional Focus: China-Africa,


FeaturesResources for Infrastructure: China’s Role in Africa’s New Business LandscapeChinese companies active in Africa are reshaping the continent’s business land-scape, yet at its core the relationship rests on one simple although vital exchange.

China and Latin America: Untapped Sources of Added ValueTrade and investment between China and Latin America have increased ten-fold in the last decade, yet the two regions are now set to enter a new higher value added stage of their relationship.

September 2011

The Sino-Africa Relationship and Its Future Evolution

PICC and Hollard Insurance

Beijing, ChinaDecember 2012

Sino-Australian Rela-tions in the Year of the Snake

WA Mining Club

Perth. Australia

February 2013

China’s Reform at a Crossroads

Oc ober 2 12 І www heb i in ax s com/ ca

China focused In ernat onal Adv sory and Procu ement

Fe tu es

Ch na Eco omy H ad ng f r a F rm Lan in ?

Ch na SOEs S a led R f rms or A en s of C ang ?

FO AC 2012 S no Af can P r ne sh p Ga ns Momen um

China in the Global Supply Chain

2013 Global Sourc-ing and CPO Forum

Shanghai, China

July 2013

The Activities of Chinese Contractors in Africa

GIBS Johannesburg,

South Africa

August 2013

China’s Transforma-tion and the Future Merits of China Procurement

CHaINA Global Sourcing Forum

Shanghai, ChinaNovember 2012

m

CHa NA 12 veSha ghai Nov mbe 2 12

Ch na s T ans o mat on and the utu e Me ts o China ocu ement

- Why What and How?

Ko us van de Wa hunde and G up Manag ng Di cto

T e ei ng Ax sobus@ heb i nga is om

China and the Global Resource Sector

AMPAC Summit 2013

Perth, Australia

April 2013

The Beijing Axis is an international advisory and procurement firm. Combining extensive experience and comprehensive capabilities, we collaborate with clients across their value chain via our strategy and management consulting; capital advisory; commodity trading; and procurement and supply chain managed services in order to raise their performance and profitability.

Through a unique combination of complementary services that span strategic intelligence and planning support, transaction support and outsourced/managed services, we partner with clients over the long term in key areas of their value chain. Ourclients are some of the world’s leading companies across various sectors and industries.

Strategy Capital Commodities Procurement


Beijing Singapore Perth Johannesburg

International Advisory and Procurement