1. The China Analyst Now online atwww.thebeijingaxis.com/tcaA knowledge tool by The Beijing Axis for executives with a China agendaSeptember 2011Building a new eraChinas business in the developing world Features Resources for Infrastructure: Chinas Role in Africas New Business Landscape6China and Latin America: Untapped Sources of Added Value10 Rising Stars: Chinas Emerging Construction Machinery Manufacturers14The New Scramble for Africa: Emerging Powers on the Emerging Continent18RegularsChina Sourcing Strategy: A New Approach to Procurement28China Capital: Inbound/Outbound FDI & Financial Markets 32Strategy: Mapping China in the Global Contracting Industry/CCC36 Regional Focus: CHINA-AFRICA 42 Regional Focus: CHINA-AUSTRALIA44 Regional Focus: CHINA-LATIN AMERICA46 Regional Focus: CHINA-RUSSIA 50

2. Tanzania National Stadium Modern Sports Stadium Dar es Salaam, Tanzania Ndola, Zambia Capacity: 60,000 people Capacity: 40,000 people Completed in 2007 Construction to commence in 2011 EMBLEMS OF A NEW ERA Sheraton Hotel & Towers Dakar Grand Theatre Oran, Algeria Dakar, Senegal The first Sheraton hotel in Algeria Covers two hectares; capacity of 1,800 people Completed in 2002 Completed in 2011Notable Chinese Construction Projects in Africa Lom Pangar Hydropower Project African Union Conference Centre CameroonAddis Ababa, Ethiopia Includes 30-megawatt power stationCovers a floor area of 51,887 square metres Construction to commence soon Under construction 3. The China Analyst The Beijing AxisAt the Highest LevelReflecting on the momentous events happening in the world right now and in the last few turbulentyears, it is clear that the world is changing significantly. China is a big part of this change; in fact, its emer-gence has become instrumental to a new era that is affecting every region of the world, yet none moreso than the developing world. China is bringing unprecedented change to Latin America and Africa, anda changing business landscape brings new opportunities. In the last edition of The ChinaOf course this edition also features all the usual sections on Analyst, we looked at the changingChinas trade and investment, procurement, and regional busi- business landscape within China,ness. And I am also pleased to announce the launching of a focusing on certain key industriesnew website dedicated to The China Analyst, at www.thebeijin- and outlining the opportunities gaxis.com/tca, where the contents of this and previous editions that can still be found for foreign can be found in an interactive online format. companies. In this edition, we shift our focus to Chinas impact on theI trust our readers will enjoy this edition of The China Analyst, wider world, and especially onand as always we welcome your feedback. the regions where Chinas pres- ence and influence have beenKobus van der Wath strongest, namely the developingFounder & Group Managing Director, The Beijing Axis world.kobus@thebeijingaxis.comAfrica and Latin America have experienced the most signifi-The China Analyst - September 2011cant impact of Chinas newfound engagement with thedeveloping world, an impact which the cover of this maga- Published byThe Beijing Axiszine has boldly dubbed a new era. Chinas expanding reach3806 Central Plazais having a profound impact on Africa. Here, Chinas brandof state-led capitalism is serving to breach a heritage of risk 18 Harbour Roadaversion by foreign investors, and in doing so, contribute to Wanchaieconomic growth in many parts of the continent. As our firstHong Kong, PRClead feature illustrates, by means of an essential exchange ofresources for infrastructure, China is playing a crucial role inTel: +86 (0)10 6440 2106a new construction boom on the continent. Fax: +86 (0)10 6440 2672www.thebeijingaxis.comWith a rapidly growing trade and investment relationshipExecutive EditorKobus van der Wathin recent years, Chinas business with Latin America has to alarge extent been characterised by an exchange of resources kobus@thebeijingaxis.comfor manufactured goods. Yet as our second lead feature envi-EditorBarry van Wyksions, the relationship is now set to enter a new phase ofbarryvanwyk@thebeijingaxis.comhigher value added investment and trade, with wide impli-cations for Latin America.Editorial Board Lilian Lucaluca@thebeijingaxis.comChina is not the only new player in these developing regions, Cheryl Tanghowever. In our fourth lead feature we outline the trade andcheryl@thebeijingaxis.cominvestment activities in Africa of the other BRICS nations,revealing how the likes of India and Brazil are in their ownJavier Cuatways contributing to the shaping of Africas new business javiercunat@thebeijingaxis.comlandscape.Dirk Kotzedirk@thebeijingaxis.comWith the business that these emerging nations, and espe-cially China, are doing in the developing world, the landscapeTo view the contents of previous editions of The China Analyst, see Previ-in regions such as Africa and Latin America is changing, andous Editions on page 55. To subscribe free of charge to The China Analyst,please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca.opportunities for businesses are doing likewise. This editionof The China Analyst is also about these changes and oppor- For advertising opportunities, please contact Haiwei Huang attunities, and about how Chinas business in the developinghaiweihuang@thebeijingaxis.com.world is indeed building a new era.4 The Beijing Axis 4. Table of ContentsSeptember 20116FEATURES Resources for Infrastructure: Chinas Role in Africas New Business Landscape Chinese companies active in Africa are reshaping the continents business landscape, yet at its core the rela- tionship rests on one simple although vital exchange. 10FEATURES China and Latin America: Untapped Sources of Added Value Trade and investment between China and Latin America have increased ten-fold in the last decade, yet the two regions are now set to enter a new higher value added stage of their relationship. 14FEATURES Rising Stars: Chinas Emerging Construction Machinery Manufacturers Chinas three largest construction machinery manufacturers, XCMG, Sany and Zoomlion, have been success- ful in emerging markets and are aiming to catch up with global leaders in the industry. How did they do it? 18FEATURES The New Scramble for Africa: Emerging Powers on the Emerging Continent Led by China, the BRICS nations are at the forefront of a new scramble for projects and deals in Africa. Yet apart from China, how are the other four BRICS doing in this new scramble on the continent? 22MACROECONOMY Macroeconomic Monitor: Chinese Inflation - One of the Biggest Fears of 2011 With inflation having reached 6.5% in July 2011, this edition looks at the Chinese governments monetary and fiscal policy options to fight a scourge for which Chinas central planners have a legendary fear. 24NEWS China Business News Highlights Recent headline business stories in China, leading with the business deals following foreign trips by Chinas leaders, Chinas power shortage in H1 2011, and Chinas latest construction marvels. 26TRADE China Trade Roundup A review of Chinas trade performance in Jan-Aug 2011, and an overview of Chinas trade in services. 28PROCUREMENT China Sourcing Strategy: A New Approach to Procurement China procurement is changing, and procurement managers need to adapt to a new opportunity landscape. 32INVESTMENT China Capital: Inbound/Outbound FDI & Financial Markets Analysis on the latest on FDI in China and OFDI by Chinese firms, and a review of Chinas OFDI approval processes. 36STRATEGY Mapping China in the Global Contracting Industry In this edition we illustrate the presence of Chinas contractors in different markets of the world. 38STRATEGY CCC: China Inc.s Leading EPC Contractor A closer look at the corporate strategy of arguably Chinas most internationalised contractor. 41REGIONS Regional Overview: BRIICS A macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa. 42REGIONS Regional Focus CHINA-AFRICA China-Africa trade and investment analysis, and the series Chinese Contractors in Africa, featuring CCECC. 44REGIONS Regional Focus CHINA-AUSTRALIA China-Australia trade and investment analysis, and the series Australia State Watch, featuring Victoria. 46REGIONS Regional Focus CHINA-LATIN AMERICA China-Latin America trade and investment analysis, and an interview with the Mexican Ambassador to China, Jorge Guajardo. 50REGIONS Regional Focus CHINA-RUSSIA China-Russia trade and investment analysis, including the series China-Russia Resources Watch. 52The Beijing Axis News - March-September 2011 The latest The Beijing Axis Group news. 54EVENTS Upcoming Events A selection of upcoming China and global events focusing on the mining and engineering sectors.Back About The Beijing Axispage Company profile and contact information. 5. The China Analyst FeaturesResources for Infrastructure: Chinas Role in AfricasNew Business LandscapeChinese companies active in Africa are reshaping the continents business landscape as part of a complexpartnership that has reignited and vastly expanded ties from a previous era. Chinas ways of doing busi-ness in Africa today is different from all those of yesteryear, yet the broad engagement can be under-stood through the prism of one vital exchange: Resources for infrastructure. By Barry van WykI n the 1970s, Chinas financing and construction of a 1,870 customers inland are on average 50% higher than the costs km-long railway giving landlocked Zambia access to the of shipping costs in other low-income developing regions. Tanzanian port of Dar es Salaam was a monument toChinese engagement and solidarity with Africa in a previous Yet now a new China with vastly different priorities and stra-era. In a flush of post-colonial exuberance, Africa was under-tegic outlook is back in Africa, where it is instrumental ingoing a construction boom. Drawing on colonial-era plans, Africas new construction boom that is reshaping the busi-various schools, hospitals and roads were being built inness landscape on the continent. In contrast to its piecemealGhana, for example, and in the Democratic Republic of Congo interaction with African countries in previous decades, China(then Zaire), the Inga hydroelectric project was completed in is now comprehensively engaged with almost all of Africas 541977 at a cost of USD 260 million, while a 1,100 mile power countries lending money, providing aid, trading, investing,line to Katanga also saw the light of day.and more than all else: building infrastructure and extractingresources. This over-simplified description of Chinas businessYet when the Katanga line was eventually completed in 1982in Africa goes to the heart of how Africas business landscapeat a cost of USD 1 billion, it was four times over the original is changing under the influence of a new superpower hungrybudget. Only 18% of Ingas hydroelectric capacity and 20% for natural resources and well-suited to provide Africa withof the capacity of the new power lines were ever used, andsomething it is sorely in need of: infrastructure.the sharp fall in the price of cocoa in 1961 put paid to KwameNkrumahs construction projects in Ghana. Designed to carry Levels of engagement: Trade and investmentfive million metric tonnes of cargo annually, with a lack of newinvestment, mounting debt, poor management and mainte-The China that built the railway in Africa in the 1970s is anance, moreover, Zambias new railway never carried moredistant shadow of the China of today that routinely buildsthan 300,000. From being a symbol of a new era of Africasrailways, roads, ports and other infrastructure in various partsdevelopment, this railway badly managed and insufficientlyof the world. In the 2000s, as the size of Chinas economy inmaintained became emblematic of Africas lost construc- quick succession surpassed that of Italy, France, the UK, andtion boom turned to protracted bust.Germany, Chinas energy consumption expanded four timesfaster than expected to 16% of global demand in 2006. WhileInstead of a boom of new steel and concrete, Africa expe- Chinas GDP expanded at an annual rate of 10% over 2000-rienced decades of lost growth. In 2008, the World Bank12008, its annual demand for industrial raw materials such asestimted that access to the most basic services in Africa steel (16%), aluminium (20%), copper (13%) and nickel (23%)increased only modestly between the early 1990s and the all grew even faster. In the ten years preceding 2008, Chinasearly 2000s, and only slightly in the last decade. Electricity, consumption of crude oil nearly doubled, and during thefor example, is still available to little more than 20% of Africas same period its consumption of copper and iron ore tripledtotal population, and piped water to just 12%.while that of aluminium quadrupled. Between 2000 and2008, China accounted for two-thirds of the worlds entireCompounding the problem was the fact that Africa wasgrowth in demand for steel and aluminium and virtually alllargely left to its own devices in terms of infrastructure in the growth in global demand for copper and nickel.1990s when both African and donor investment in infrastruc-ture was scaled back relative to other priorities such as child This rapid growth in Chinas natural resource use contrib-immunisation and education, partly due to the mistakenuted to a windfall in trade between China and Africa, a majorbelief that private investors would step up to fill the infra-supplier of raw materials. Bilateral trade stood at just overstructure financing gap. As a result, while Africas construc-USD 10 billion in 2000, yet in 2010 it breached USD 125 billion,tion sector deteriorated, poor road, rail and harbour infra-exceeding Africas trade with any other partner, the closeststructure added 30-40% to the costs of goods traded among ones being the US with around USD 115 billion, France withAfrican countries, and the costs of moving foreign imports to around USD 66 billion, and the UK with around USD 31 billion(see chart on next page). This China-Africa trade pattern basi-1 See Access, Affordability and Alternatives: Modern Infrastructure Servicesin Africa, Africa Infrastructure Country Diagnostic. The International Bankcally encompasses an exchange of a diverse range of Chinesefor Reconstruction and Development, World Bank, Feb. 2008 manufactured goods for African raw materials.6 The Beijing Axis 6. FeaturesFeatures The China AnalystAfricas Major Trade Partners (USD bn, 2000-10) Major Investors in Africa OFDI Flow (USD bn, 2003-09)ChinaUKUS France150 France120 2003US 2004 90 2005 2006 60 UK 2007 2008 30 2009China02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 051015 20Source: UN Comtrade; The Beijing Axis AnalysisSource: OECD Statistical Database; China National Bureau of Stistics; The Beijing Axis AnalysisAlong with the US and emerging economies such as BrazilExport credits to support national exporters. In 2009,and India, Chinas imports from Africa are as expected char-China disbursed USD 29.6 billion in export creditacterised by a disproportionate share of oil and minerals.globallyChinas trade with Africa has as a result been very lucra- Natural resources-backed lines of credit, or the Angolative for resource-rich African countries, and these African Mode, where Chinas Exim Bank uses natural resourcecommodity suppliers have become crucial suppliers for exports or preferential access to them as collateral forChina. South Africa is Chinas only African trade partner frominfrastructure projects and as a means to repay loanswhich it imports substantial amounts of products that areMixed credits, where financing packages combinenot resources, while Chinas leading suppliers of oil (Angola), concessional and market rate loans, such as a mixtureManganese (South Africa), chromium (South Africa), cobalt of FDI and export credit3(the DRC), and platinum (South Africa) are all African.Laying down a methodology: The Angola ModeChinas annual flow of Outbound Foreign Direct Investment(OFDI) to Africa in recent years is still far in arrears of the US, As Chinas engagement with Africa has deepened during theFrance and the UK (see chart above, right). In 2009, Chinaslast decade, its deals on the continent came to broadly fit aOFDI stock in Africa reached USD 9.3 billion, still marginallymould. As a country that recently emerged from civil war yetbehind that of Switzerland, the Netherlands and far behindthat is rich in natural resources and sorely in need of infra-the US, France and the UK (which has the most invested stockstructural renewal, Angola has become one of the biggestin Africa, namely USD 61.4 billion). Chinese investment inrecipients of Chinese financing for infrastructure projects inAfrica reflects a similar predilection for resource-rich coun-Africa, one of Chinas largest trading partners on the conti-tries as is the case with trade, and in 2009 a full 76% of Chinesenent, and a major source of its oil. In 2004 Angola signed aFDI in Africa was concentrated in resource-rich countries. In deal with China that would become emblematic of Chinas2009, the main sectors for Chinese OFDI stock in Africa wereinfrastructure for resources relationship with Africa.mining (30%), manufacturing (22%), and construction (16%).Angola received a USD 2 billion loan from a Chinese policyYet while Chinese levels of OFDI in Africa still lag far behind bank, China EximBank, for the development of infrastructure,those of Western countries, China and other emerging part-including electricity generation, telecom expansion, railwayners are following new paths of investing in Africa. Europe rehabilitation and water. As part of the repayment terms forand North America have typically relied on FDI and Official the loan, Angola agreed to supply China with 10,000 barrelsDevelopment Assistance (ODA) in Africa, but emergingof oil per day. In a pattern that would be repeated frequentlypowers such as China are adopting a more holistic approachafterwards, a Chinese construction/engineering companyto broaden their economic relationship with Africa that was awarded contracts for the infrastructure projects, whilecombines trade and investment with development coop-rights for extracting natural resources was afforded to aeration. Thus while developing partners such as China,Chinese oil company.India, South Korea and Brazil are not only engaging withAfrican countries that Western countries have avoided in the3 Deborah Brautigam, author of The Dragons Gift, has put Chinas totalpast, they are also increasingly using alternative financingpurely concessional loans, zero-interest loans and grant commitments tomethods. China in particular uses the following financing Africa at USD 2.1 billion in 2009, while she estimated Chinas preferentialexport credit commitments to Africa for 2007-09 at around USD 2 billionmethods in Africa2: and non-concessional finance at around USD 5 billion annually. In sum, all2 For more detail see African Economic Outlook 2011, ADB, OECD, UNDP, Chinas alternative financial flows to Africa reached an annual average com-UNECA, 2011, p. 112.mitment of USD 7.1 billion over 2007-09. The Beijing Axis 7 7. The China Analyst FeaturesInternational Contract Revenue in Africa, Chinas and Rest Chinese contractors have become highly competitiveof Worlds Share (USD mn, 2001-09) bidders for publicly tendered infrastructure projects. A 20072001 7.4% 92.6%survey of 35 Chinese construction companies active in Africa found that around 50% of Chinese projects in Africa were2002 9.9%90.1% actually won via an international bidding process. The extent China of Chinese contractors success in Africa is illustrated in the2003 11.8% 88.2% fact that in 2001 Chinas share of contract revenue in Africa2004 14.7%85.3%Rest of World was a mere 7.4%, yet by 2009 this had climbed to 36.6% (see chart to the left), making it the dominant player, far ahead of2005 21.4%78.6%Italy with 15% in second place and France with 10% in third.2006 28.4% 71.6% Africa is now Chinas largest market in terms of contract revenue with 41.1%, even more than Asia with 36%. Similar2007 26.9% 73.1% to Chinese trade and investment in Africa, the revenue of200842.4% 57.6% Chinese contractors is highly concentrated in a few resource- rich countries. In 2009, the leading six countries (Algeria,200936.6% 63.4%Angola, Sudan, Nigeria, Libya and Ethiopia), mostly oil and gas-related economies, accounted for USD 18.1 billion or 71% 0 10,000 20,000 30,000 40,000 50,000 60,000Source: ENR; The Beijing Axis Analysis of Chinas total revenue (see chart opposite page).Repaying loans for infrastructure development with natural Chinese contractors in Africa have been most successful inresources is not a new concept. The first reported example ofcivil infrastructure projects such as transport and construc-such a deal involving China in Africa was actually not 2004 in tion. As stated above, around 50% of Chinese contractorsAngola, but 2001 in the DRC when China provided USD 280in Africa seem to prefer international bids, yet around 40%million for dam construction and received loan paymentswere accounted for by grants, concessional loan projects andin oil. After 2004, however, such deals became more widely other mechanisms in which the Chinese government play aused by China in Africa, and also expanded to other resourcesstrong role. The case of Angola, where Chinese commercial,such as bauxite, chromium, and iron ore. It should be noted, investment and contracting activity has been vigorous forhowever, that the Angola mode is not the only mode ofalmost a decade now, can be held up as an example of theengagement for Chinese companies in Africa, yet they are progression of Chinese contracting over time. The establish-common in countries such as Angola, the DRC and Sudanment of Angolas first loan agreement with China Exim Bankwho have only recently emerged from conflict and instability.in March 2004 facilitated the entry of Chinas large SOEs into Angola, and in the time since dozens of Chinese contractorsThe process of concluding Angola Mode deals is typically have established operations there.4borne out of intergovernmental agreements that deter-mine the purpose, amount, maturity and interest rate of theAlthough Chinese contractors typically still focus more onloan, followed by the signing of a loan agreement oftenthe lower value added part of the construction value chain,concessional in nature between China Exim Bank and the their ability to undertake construction projects at cheaperborrower. The capital is then disbursed in tranches in terms prices have made them very competitive and, in the caseof project completion, and paid directly to Chinese contrac- of Angola, have broken the monopoly of Portuguese andtors in China, which are selected by Exim Bank and Chinas Brazilian contractors. Due to the volume of their needs andMinistry of Commerce and sanctioned by the beneficiary the lack of quality products available for sourcing locally,government. With such a methodology in place, the main Chinese contractors bring most of their workers and mate-Chinese actors in Africa are rials from China (although in Angola some Chinese compa- Lending agencies: Chinas policy banks, China Eximnies have in the last few years begun to set up local factoriesBank and China Development Bank through theto produce some industrial inputs). After a few years, mostlyChina-Africa Development (CAD) Fundprivate Chinese companies also began entering Angola, Extractors and builders: Large state-owned enter- largely to subcontract from the larger companies and to setprises and some private ones operating in the extrac-up a procurement chain for providing equipment and mate-tive and construction/engineering industries rials from China. Other business people: Small to medium-sizedChinese businesses and individual entrepreneurs that Windows of opportunity: Africas new business landscapemay appear subsequently China is engaging with Africa like no other country has everGetting their hands dirty: Chinese contractors in Africa done before, and in the fundamental exchange of Africas resources for Chinese-built infrastructure, China is makingCollectively, these actors are re-shaping Africas business 4 For an assessment of the various estimates provided for the numberlandscape, yet none are doing so more obviously than Chinas of Chinese state-owned and private companies in Angola, see L Corkin,construction and engineering contractors. Having originallyChinese Construction Companies in Angola: A Local Linkages Perspective,relied solely on Chinese government-financed projects, p. 17.8 The Beijing Axis 8. Features Features The China Analysta significant contribution to addressing a lasting struc-Leading Countries for Chinese Contractor Revenue in Africatural bottleneck in Africa. The infrastructure for resources and Number of Chinese Contractors in Country (USD mn, 2009)22deals it concludes in Africa are unique in the way they lock 6,000African countries into using their resources for infrastruc-ture revenue never actually comes in, obviating the need17 5,000for taxation. China is transcending conventional patterns ofengagement of straightforward FDI and ODI, and has insteadfashioned an elaborate system where a strong government4,000role and alternative financing methods can overcome risk,and the leveraging of Chinas own booming constructionindustry can see Chinese contractors building much-needed3,000civil infrastructure as well as value-adding processing indus-17tries such as refineries and petro-chemical complexes in 2,0001412Africa. 15China is a strong player in Africa both in upstream activi-1,000 8 67 9ties such as exploration and extraction, as well as in down-stream activities such as processing. Chinas demand for11 5 40oil and minerals has created a new level of competition forAlgeria Angola Sudan NigeriaLibya Ethiopia Congo(B) Egypt DRC BotswanaAfricas resources, and has contributed to higher prices, to Source: China Statistical Yearbook 2010; The Beijing Axis Analysisthe benefit of Africa. In countries such as the DRC and Angolawhere previous failed construction booms have formed partmore time in Africa they will become more aware of theirof protracted instability, China has undertaken projects own shortcomings and more receptive to the value offeredwhere many other investors have regarded the risk as being by foreign companies with the right knowledge and experi-too high. The sustainability and flexibility of Chinas contem-ence. For such foreign companies, the challenge will be toporary engagement in Africa, moreover, should contribute utilise these opportunities in the right industries, at the rightsignificantly to Africas current construction boom not beingtime. Chinas increased business in Africa has also createdas forlorn as the previous one, and that would make it a truedemand for services essential to doing in business in Africa,new era for Africa.providing new opportunities for banks, law firms, and various other service providers.This is not to say that the impact of China in Africa is flawless,yet this should not be the expectation for something that is These are but a few examples of how Chinas infrastructurenot an exercise in altruism. Chinese projects in Africa are in for resources engagement is creating new business opportu-essence turnkey projects, in theory fulfilled by contractors nities for foreign firms in Africa. Yet perhaps the best oppor-who then sign off on the engagement, and hence the extenttunity of all is the fact that Africa itself is changing. As Chinasof the true lasting value add on the ground in Africa is some- activities in Africa increases, Africa is gradually transformingtimes brought into question by some observers, especiallyitself from a perennial backwater to a new source of growthsince China exports a significant share of its labour to Africa. with diversifying economies, expanding consumer markets,Yet this could be changing, as we have seen, as Chineseand working infrastructure making Africa open for businesscompanies seek to establish local manufacturing capabilities like never before.on the continent, in addition to establishing several specialeconomic zones and other forms of skills transfer. Barry van Wyk, Senior Consultant barryvanwyk@thebeijingaxis.comThe strong role played by government-to-government inter-action in Chinese deals in Africa has in practice often meantthat many of Africas mineral rights are sold in closed dealsand not in public auctions. Yet the increasing number ofChinese extractive companies and construction/engineeringcontractors in Africa has opened up a vast new opportunitylandscape for foreign companies on the continent, bothin terms of potential partnership and new clientele. Thusin areas where Chinese companies are still comparativelyless adept, such as consulting and industrial design, manyopportunities for partnerships are now open to foreign firms.Chinese firms in Africa still lack a deep understanding of localbusiness as well as cultural and regulatory issues, and hereagain foreign companies with experience in Africa can profit.Foreign companies could also explore joint bids with Chinesecompanies for construction projects. As Chinese firms spend The Beijing Axis 9 9. The China Analyst FeaturesChina and Latin America: Untapped Sources of AddedValueBilateral trade between China and Latin America has increased ten-fold in the last decade, preparingthe way for a massive wave of Chinese investment in the region in 2010. While both bilateral trade andinvestment are expected to increase further in the coming years, questions remain on how balancedand sustainable the relationship will be. This article argues that both regions are set to enter a new stageof their relationship that will be characterised by increasing Chinese investments in more value addedindustries and eventually higher value added exports from Latin America. By Javier CuatOnly ten years ago, upon Chinas entry into the Worldimports and 2% of its total exports (see charts below). TenTrade Organisation (WTO), China was the worlds years later, trade between China and LatAm amounted toseventh-largest economy, growing at 7.3% y-o-y andUSD 179.3 billion, a tenfold increase, with LatAm accountingaccounting for just over a tenth of global economic growth. Infor 6.5% of Chinas total imports and 5.6% of its total exports;2010, with a global financial crisis still persistent in the United and China accounting for 12.3% of LatAms total imports andStates (US) and Europe, China became the worlds second-12.9% of LatAms total exports.largest economy, growing at 9.6% (H1 2011) and contrib-uting one-third to total world GDP growth. The emergenceOverall, China is not only more important to LatAm today thanof China as a global economic power has greatly benefited ten years ago and vice versa, but the two regions are progres-the global economy. In Chinas phenomenal rise, one thing sively becoming more dependent on each other as importantis clear: as China grows, other countries benefit. As Chinas sources of growth compared to other regions, exemplified byexported-oriented economy keeps churning out increasingly the free trade agreements China has signed in recent years withhigher value added goods, other countries can now purchaseChile, Peru and Costa Rica. This trend became more evidentpreviously unattainable products at competitive prices. during the most recent financial crisis, during which Chinasstimulus package and unrelenting demand for commoditiesYet this trend has also to varying degrees presented thehelped LatAms exports to China counterbalance a decreaseregions and countries within Chinas trade, investment andin demand from the US and Europe. For its part China foundgeopolitical radar with a number of challenges. Antidumping the perfect partner to serve its own demand, diversifyingand protectionist measures in the US and Europe, labour and its sources of fuel and metals needed to power and build itscommunity issues in Africa, and territorial disputes in Asiaeconomy during the financial crisis and into the future.are just some examples. Latin America (LatAm), with its ownparticularities, is no exception. According to the Economic Commission for LatAm and theCaribbean (ECLAC), China today ranks among LatAms topThe relationshiptrading partners, particularly in countries such as Brazil, Chile,Peru and Argentina, where China accounts for 15%, 24%,When China entered the WTO, annual trade between China16% and 9%, respectively, of each countrys total exports.and LatAm amounted to USD 14.4 billion, with LatAmWhats more, China is now the largest importer of goods andaccounting for 2.7% of Chinas total imports and 2.9% of itsservices from Brazil and Chile, and the second-largest fromtotal exports; and China accounting for 2.3 % of LatAms totalPeru, Argentina and Cuba. However, these exports remainChinas Trade with LatAm and the Caribbean (USD bn, Chinas Trade with LatAm and the Caribbean (%, 2001-10)2001-10)100 14% China as % of LatAm ExportsChina as % of LatAm ImportsExports 12% 80 LatAm as % of China ExportsImports 10% LatAm as % of China Imports 60 8% 6% 40 4% 20 2%0 02001200220032004 20052006 2007 2008 2009 2010 20012002200320042005 2006 2007 2008 2009 2010Source: UN Comtrade; The Beijing Axis AnalysisSource: UN Comtrade; The Beijing Axis Analysis10 The Beijing Axis 10. Features FeaturesThe China Analystconcentrated in raw materials such as copper, iron ore, andA survey by the China-Brazil Business Council (CBBC) revealedsoybeans, which account for nearly 60% of total exports. that 93% of Chinese investments in Brazil in 2010 were under-Similarly, Chinas exports to LatAm are mainly electronictaken by state-owned companies, while 6% were undertakenitems, autoparts, equipment and machinery, and textiles. by companies belonging to provinces, and 1% by private companies. The survey also found that Chinese investmentsIndeed, the trade relationship between China and LatAm in 2010 totalled USD 12.6 billion (slightly higher than ECLACsis essentially built on the exchange of natural resources forfigures), 82% of which involved mergers and acquisitions.manufactured goods or low value for high value added prod- Sinopec made the largest investment when it acquired a 40%ucts. While this makes a lot of sense from the countries factor stake in the Brazilian operations of Repsol-YPF for USD 7.1endowment and comparative advantage point of view, it also billion (see table on next page). Of Chinas total investmentpresents great challenges for LatAm manufacturers who have commitments in 2010, 95% were concentrated in the areasseen Chinese exports progressively replace their market shares of oil and gas, agribusiness, mining, and ironworks. However,at home, in other LatAm markets, and especially in the US. this trend appears to shifting in 2011, with announced Chinese investments in LatAm and the Caribbean thus far amountingRegarding investment, Chinas FDI stock in LatAm breachedto USD 7.13 billion (see chart below), with a stronger focus onUSD 41 billion at the end of 2009, accounting for up to 18%higher value added industries.of total Chinese FDI stock in the world. LatAms investmentstock in China, on the other hand, dwarfs that number, hitting If the figures from 2010 and the announced figures of H1USD 112.6 billion in 2008, or roughly 14% of the total foreign 2011 are any indication, they show that China is becomingcapital absorbed by China. A closer look into the GDP figuresincreasingly entrenched throughout the region, possiblyfor both regions illustrates that current levels of Chinese FDImarking the start of a new phase of economic relationsin LatAm and the Caribbean are comparatively low. In addi- between China and LatAm which features stronger tradetion, they are mostly concentrated in tax havens such as the links that are accompanied by growing investment in notCayman Islands and British Virgin Islands, which accounted only natural resources, but also manufacturing, infrastruc-for 96.7% of all Chinese FDI into LatAm between 2003 and ture and services. As examples, Huawei, ZTE and Lenovo are2009. Excluding the two tax havens, LatAm only receivedbecoming prominent investors in the telecommunicationsabout USD 126 million in Chinese FDI, or less than 1% of the and electronics sectors, and BYD, Chery and Geely are leadingannual total. Overall, there is Chinese under-investment in allthe charge in the auto industry.sectors but especially in higher value added industries. The fundamental challenges facing the China-LatAm relation-2010 - Breakthroughship are two-fold. Firstly, how to increase and diversify Chinese FDI in the region beyond raw materials to more value addedIn 2010, with an estimated investment of USD 15.25 billion,industries; and secondly how to improve trade by means ofChinas investment in LatAm was more than twice the amount exporting more value added LatAm goods. Both challenges, asit invested in the region in the period 200609, namely USDthey unfold, will present substantial opportunities for both sides.7 billion. Chinas 9% share of FDI in the region now makesit the third-largest foreign investor in LatAm, trailing onlyForever imbalanced? Unlikelythe US and the Netherlands, which accounted for 17% and13%, respectively (see chart below). By country, the mainOver the long term, the greatest opportunity but also chal-destinations for Chinese FDI were Brazil, Argentina and Peru,lenge facing Chinese companies in LatAm is successful inte-all of which have established strong trade links with China. gration with the host economies. The model it is presentlyBrazil, Chinas BRICS counterpart in the region, was by far theutilising in a number of countries, characterised by the acqui-biggest benefactor of this investment wave, with USD 9.6 sition of natural resource assets, the extraction and low valuebillion in Chinese FDI in 2010.added exports back to China, and under-developed commu- nity relations, has both a limited political and business shelfOrigin of FDI in LatAm and the Caribbean* (%, 2006-10) Chinas LatAm FDI Destinations by Country* (%, 2010-Q3 2011) USD 864.17 bn USD 112.63 bnUSD 15.25 bnUSD 7.13 bn100% 1008% 10% Latin America Others Colombia 80%8030%28% CaribbeanCosta Rica FinancialMexico Centres60 60%7%Ecuador10%Netherlands 5% Peru13%China 4% 40 40% 2% Argentina 10%9% UK4%Brazil5%3% Japan4%20 20% Spain25%17%Canada 00% 2010 Q1-Q3 2011 US2006-20092010*Note: Data for 2010 is confirmed investments; data for 2011 is announced investments.Source: ECLAC; The Beijing Axis Analysis Source: ECLAC; The Beijing Axis AnalysisThe Beijing Axis11 11. The China AnalystFeaturesMajor Announced Chinese Foreign Direct Investments in LatAm (2010-11) highlighted deals denote those in non-resources sectors YearMonthInvestorStatusUSD mnPartner/targetSectorSubsectorCountry2010 Jan Honbridge HoldingsConcluded 400Sul-Americana de MetalsMetalsIron ore Brazil2010 Feb Sany Heavy Industry Ongoing200 Build a manufacturing plant ManufacturingHeavy machineryBrazil2010 Mar East China MineralConcluded 1,200 ItaminasMetals Iron ore Brazil Expl. & Develop.2010MarCNOOC Concluded 3,100 Bridas EnergyOilArgentina2010MarState GridOngoing 1,050 Quadra MiningMetalsCopper Chile2010AprWISCO Concluded 4,700 A JV steel millMetalsSteelBrazil2010MayState GridConcluded 1,720 Cobra, Elecnor and IsoluxPower Power grid Brazil2010MaySinochemConcluded 3,070 Peregrino FieldEnergyOilBrazil2010AugTongling Nonferrous & Planning 3,000 A copper mineMetalsCopper Ecuador China Railway Construction2010 Sep Chery Ongoing 400 n/aTransport Auto Brazil2010 Oct Sinopec Ongoing 7,190 Repsol/YPF EnergyOilBrazil2011 Jan CR Zongshen Concluded 80Kasinski Transport Motorcycle Brazil2011MarChongqing Grain Group Concluded 2,400 n/aAgriculture Soybeans Brazil2011AprLenovoOngoing 900 Positivo Electronics PC Brazil2011AprHuaweiOngoing 363 Build a plantTelecom Mobile phone, tablet PCBrazil2011AprZTE Concluded 200 Build a plantTelecom Tablet PCBrazil2011MayChongqing PolycompConcluded 60Owens Corning PlantMaterialFiber glassBrazil International Corp.2011MayXCMGConcluded 200 n/aManufacturing Heavy machineryBrazil2011MayGeely Concluded 10Nordex Transport Auto Uruguay2011JunChina CNR CorpOngoing 127 TTransTransport TrainBrazil2011JunQingshan Mining Ongoing 3 JDC Mining CoMetalsGold, silver & copperMexico2011JunTCL Ongoing 21Radio Victoria FueguinaTelecom Mobile Argentina2011JulBOMCO Concludedn/a BRCP, AsperbrasEnergyPetroleum equipmentBrazil2011AugICBCOngoing 600 Standard Bank ArgentinaFinance BankingArgentina2011AugMidea Group Ongoing 223 Carrier CorporationManufacturing Home appliancesArgentina,of UTC GroupBrazil, Chile2011 Sep Taiyuan Steel, CITICOngoing 1,950 CBMM MetalsNiobiumBrazil Group and BaosteelTotal for Q1-Q3 2011 7,137Source: China Global Investment Tracker, Heritage Foundation, Carta da China No 56 June 2010, China-Brazil Business Council; Observatario Iberoamericano de Asia - Pacificoand press releases. Note highlighted deals denote those in non-resources sectors.life. While benefits of both existing and proposed Chinese construction equipment manufacturers, decided to put downinvestments are real, trade tensions from the LatAm side are roots in the region by investing USD 200 million in a manu-emerging and creating contradictions for both parties. Wefacturing plant in the Brazilian state of Sao Paulo. One yearsaw a good example of this at the beginning of 2011, whenlater, XCMG, its closest Chinese competitor, followed in itsthe Brazilian Finance Minister called for a revaluation of the footsteps. We have seen similar examples in the automobilerenminbi following a massive USD 15 billion flow of Chineseindustry in Mexico, where Chinese automakers Zhongxing,investments into Brazil during 2010. Geely and Changan, through a partnership with Mexicos Autopark, have all announced plans to establish auto-makingMore importantly, LatAm now more than ever represents an facilities. Chinas ZTE has started manufacturing smartphonesopportunity for Chinese manufacturers to enlarge their globalin Argentina together with local white goods manufacturerfootprints and market shares, especially in markets whereBGH and has also announced it will start producing tablettheir international competitors have a significant presence. computers in Brazil. The list goes on in a number of high-Aware of Chinas price advantages, constantly improvingvalue-added industries (see table above). Leading Chinesetechnology standards and overall positive macroeconomiccompanies are looking at a number of LatAm countries asoutlook for the LatAm region (recently revised by the Worldkey launchpads from which to market their products not onlyBank to 4.6% growth for 2010), Chinese manufacturing in other LatAm markets but also in North American markets.companies are realising that an export-oriented develop-ment strategy towards LatAm without a footprint is a dead- According to ECLAC, 90% of Chinas confirmed investmentend game. Various factors, i.e. consolidated market shares atin LatAm has targeted the extraction of natural resources.home, the need to better understand their customers in the Looking into Chinas upgraded endowment factors overregion, and strong balance sheets built on export revenuethe years, the scale, nature and international ambitions ofwith low production costs, have laid the foundation forits domestic champions together with recent Chinese OFDIcapital investments to grow and deepen in the years to come. figures in the region, one can expect an increasing number of Chinese manufacturing companies to invest in high valueIn February 2010, Sany Heavy Industry, one of Chinas largestadded industries in the region. While investments in oil,12 The Beijing Axis 12. Features Features The China Analystgas and mineral resources will remain at the top of Beijingschallenge but probably one of the best opportunities for theagenda, less value added Chinese investments in LatAmregions export diversification ambitions.going forward would not make much sense from a globalsupply chain point of view. If trade relations continue to Cross-border opportunities for LatAms exporters do notunfold as they have in the last decade, Chinese manufacturersonly exist in the natural resources side of Chinese demandand infrastructure developers will need to integrate LatAm but also in food, beverages, agribusiness, leather and fabrics,in their supply chains in the long run as much as LatAm is plastics, chemicals, pharmaceuticals, machinery and elec-willing to. So expect this trend to intensify. tronics, among other sectors. While market entry strategies may vary greatly - from organic to inorganic growth, fromOver the long term, the greatest opportunity but also chal-JV partnerships to wholly foreign owned enterprises, fromlenge facing LatAm companies seeking to compete in China export development to assembling and/or manufacturing,is to diversify their exports towards more value added prod- from partnering with a local distributor(s) to developingucts. While a significant number of LatAms manufactured ones own distribution channels one thing is clear: ignoringexports compete with products China itself produces, one the Chinese consumption market is neither possible nor wiseshould not forget that China is the worlds second-largest if one aims to remain competitive over the long term.importer of manufactured goods. So from a sectoral andproduct perspective, the challenge is not that there is no Final wordmarket for LatAms manufactured goods in China, but ratheridentifying what the specific products with the greatest If 2010 meant anything for China-LatAm trade and invest-potential are and how to market them effectively.ment relationship, it was change. We are leaving behind a stage in the relationship characterised by booming bilateralThe Chinese market is more complex than any other market trade, few investments and strong unbalances, and enteringof comparable size, and therefore requires an on-the-ground, a new stage characterised by the utilisation of new sourcescustomised and dedicated strategic approach. Even though of added value. This stage will not only be characterised byChina is a large market for a number of products, entering the trade but also by increasing Chinese investments in moreChinese market is not an easy task and profits are usually the value added industries and eventually higher value addedresult of a long-term investment in understanding the Chineseexports from LatAm. If this happens, and we think it will, theculture, the specifics of your market and network building.exchange of natural resources for manufactured goods willJust as one cannot ignore that the emergence of Chineseprove to be not the trend itself but the catalyst and continu-manufacturing companies is disrupting domestic competition ation of a bigger trend. Both regions are set to take stepsin a number of industries in LatAm, and increasingly in more towards a more balanced, sustainable, value added andcapital and technological-intensive products, one cannot mutually beneficial relationship. While Chinese OFDI figuresignore that the Chinese marketplace represents a tremendousfor 2010 and H1 2011 provide some hints, it is still uncertainopportunity for international companies. China ranks among which countries, sectors and companies will be the protago-the worlds largest consumers and importers of power gener-nists in the coming decade.ating equipment, aircraft and parts, computers and industrialmachinery, agricultural products, consumer and luxury goodsHow do LatAm companies look at China and how do Chineseamong a large spectrum of sectors and products.companies look at LatAm? While the challenges involved in business transactions are complex, a change in perceptionBrazilian aircraft company Embraer, along with Mexican will be key as old perceptions have on many occasions beenbread maker Bimbo, are just two examples of successful as unbalanced as the trade and investment relationship.LatAm ventures in the Chinese market. Embraer, which China should not be perceived as a neo-colonial power asopened its first office in Beijing in 2000, continued with the much as LatAm is no ones backyard. The first, and most prob-construction of a spare parts distribution centre at Beijing ably the biggest, barriers that LatAm companies face whenInternational Airport, and the signing of a joint venture with engaging with China are not that different than what theAviation Industry Corporation of China in 2003. EmbraerChinese face when engaging with LatAm. These are culture,has delivered more than 70 aircraft in China and has already language, protocol, and lack of information, and they impactachieved a 52% share of Chinas market for aircraft with uphow we understand the opportunities and challenges.to 120 seats in 2009. With two plants in China, Bimbo is apioneer in marketing packaged baked goods in China, espe-Working out the information deficits and bringing the marketcially in Beijing and Tianjin, and is expanding to other cities. realities to the corporate landscape in China and LatAm will further assist and facilitate mutually beneficial and moreDespite such precedents, LatAms business presence in Chinavalue added trade and investment. Government bodies,is still mainly dominated by the so-called multilatinas, with aindustry associations, chambers of commerce, corporatestrong component coming from the natural resources sector, players and service providers must work in that direction.while LatAms small and medium-sized enterprises lag behindtheir counterparts in terms of presence and market penetra-The rules are changing but the game is just beginning.tion. As LatAm becomes increasingly integrated with China,bringing the regions small and medium-sized enterprises toJavier Cuat, General Manager: Beijing Axis Strategythe Chinese market not only represents a major competitive javiercunat@thebeijingaxis.com The Beijing Axis 13 13. The China Analyst FeaturesRising Stars: Chinas Emerging Construction MachineryManufacturersBuoyed by increasing demand, especially in emerging markets, Chinas construction machinery playershave been actively enhancing their international reach and catching up with their foreign counterparts.Chinas three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlinesthe different strategies adopted by these rising stars and their global expansion plans. By Ankit KhaitanStarting from a mere USD 1 billion worth of sales in 1999,Global Market Share of Construction Machinery Industry inChinas construction machinery industry saw a decade Terms of Sales Volume (2002 vs. 2009)of high growth with sales reaching USD 60 billion inNorthEuropeJapan Others ChinaAmerica2010. This phenomenal growth in demand was fuelled byrapid growth in both the developed coastal areas of China100and more recently, inland areas. In developed areas, the16%genesis of growth was local governments expansion of small 29%cities, while in inland China it was a growing market for infra-8010%structure and housing. Currently, for every 1% increase in theurbanisation rate, 13 million people move from rural areas to4%cities, but this number still lags far behind that of developed6028%13%countries and the global average. The Chinese governmenthas set a clear target of achieving an urbanisation rate of 60%by 2020, indicating that China still has a long way to go in 22%this regard.4028%Another key demand driver for construction machinery isthe strong growth in fixed asset investments spurred mostly 20by downstream segments, including infrastructure and 32%property investments. For instance, social housing, though18%comparatively smaller investments, is significant in construc-tion project volume and substantially increases the need for0 20022009equipment. Additionally, demand from foreign markets has Source: CCMA; Off-Highway Researchalso grown, allowing Chinas construction machinery exportsto experience rapid growth in recent years. Together, thesecomprehensive production lines. In contrast, Zoomlionfactors have bolstered the development of the construction is Chinas second-largest, and the worlds tenth-largest,machinery industry in China, making it the worlds fastest-construction machinery manufacturer. It emerged outgrowing and third-largest market and catapulting the three of Changsha Construction Machinery Research Institute,largest players onto the world stage.a leading state-owned research institution focusing on construction machinery, effectively affording it a strongBeginnings competitive advantage.According to a report by Off-Highway Research (a consul- Consolidation and government supporttancy specialising in the research and analysis of interna-tional construction), Chinas share of the global construc-Though the industry in China is highly fragmented with overtion machinery market jumped from 18% in 2002 to 32% 900 companies vying for market share, a majority of themin 2009 in terms of sales volume (see chart above, right). only manufacture components or engage in sub-assemblyChinas three leading pioneers in this regard are Sany Heavy due to the hefty upfront financial investments that areIndustry, Zoomlion and XCMG, which have emerged as the required. In addition, intense competition between boththree dominant manufacturers that together account for domestic and foreign participants as well as rising demandabout 30% of the market in China, larger than the top threefor improved and advanced technology have forced smallforeign companies active in China (see chart on next page).operators to either be acquired by more established playersIndeed, these three are now ranked in the top ten in terms ofor simply exit the game.sales revenue globally. In fact, the large in-house companies have supplementedOut of these, Sany and XCMG only started operating in theorganic growth and scaled up rapidly through consolida-early 1990s but quickly transformed themselves from beingtion. In the past decade, Sany has acquired assets from itssingle product machinery companies to ones that boastparent company to expand its capabilities while Zoomlion14 The Beijing Axis 14. FeaturesFeaturesThe China AnalystApproximate Market Share of Chinas Constructionbalanced between its two largest segments, concrete andMachinery Industry (2010) crane machinery, contributing 43% and 34% to total revenue, Caterpillar VolvoXCMGZoomlionrespectively, in 2010 (see chart on next page). Komatsu HitachiXGMAOther Chinese Sany leads the local market for truck mounted concrete Kobelco Sany Heavy Other Foreign pumps and full hydraulic rollers; its production of pumptrucks is one of the best in the world. Compared to Zoomlion,it is less diverse and its most important segment, concrete,10%9% alone contributes more than 60% of its total sales revenue. 7% Nonetheless, after Sany acquired the excavator and truck5%crane businesses from its parent, its level of business diver- 4% sification started closing in on Zoomlions, with product 32% 1% categories expanding to include concrete machinery, road 11%construction machinery, excavator, pile driving machinery,hoisting machinery and port machinery.8%3% 11%XCMG is the worlds largest manufacturer of truck cranes,Source: CCMAwhich account for most of its total revenue. The comprehen-sive line of products it offers includes construction mobilehas targeted third parties to scale up its product offerings. cranes, crawler cranes, wheel loaders, concrete boom pumps,For example, Zoomlion acquired Hunan Puyuan Constructionpiling rigs, aerial fire trucks, asphalt pavers and cold millingMachinerys truck crane business and Zhongbiaos environ- machines.mental and sanitation machinery business in 2003.Over the years, Chinese companies in various industries haveThis consolidation is being further encouraged by the successfully moved up the value chain by offering a widegovernment, who is actively promoting consolidation inrange of products and the construction machinery industrythe industry to avoid disorderly competition among localis no different. Foreign companies have historically servedmanufacturers. Furthermore, equipment manufacturing isthe Chinese excavator market by leveraging their strongone of the seven strategic emerging industries identified inexpertise and precision quality. Yet according to CCMA data,the 12th Five Year Plan that the government will focus on soChinese companies now control one-third of the global exca-as to foster the development of a sound market environment; vator market, up from 22% in 2006. Such strategic moveshence consolidation will be an ongoing trend in the industryhave undeniably boosted their overall competitiveness andgoing forward. Chinese construction machinery manufac-allowed them to capture market share from their foreignturers are also afforded tax breaks and other incentives from competitors in China and in other emerging markets.local Chinese governments, enabling them to take a longterm view of the market rather than just focusing on shortGoing global M&A and partnershipterm profits.The global presence of US-based Caterpillar and JapansIt is worth noting that foreign enterprises have had little Komatsu has been strong for decades as they beganopportunity to compete against local competitors in thisexpanding abroad early on when growth in their domesticconsolidation drive due to regulatory restrictions, and havemarkets slowed with urbanisation reaching a saturationbeen unable to acquire majority stakes in joint ventures with point. Following a similar strategy, Zoomlion, Sany anddomestic firms. This has allowed local rivals to gather marketXCMG have been encouraged to expand into foreign marketsshare from foreign companies and at the same time narrowbecause of their solid positions in the Chinese market, world-the capability and quality gap by integrating independent class products, sustainable low cost advantage and Chinasenterprises abilities via strategic acquisitions. Moreover,expansive infrastructure projects. Sany in particular has ledforeign enterprises have simply not been able to increase domestic equipment manufacturers in overseas expansion.production fast enough to meet rising demand, diluting theirmarket shares.However, the three differ in their overseas expansion strat-egies. Zoomlion focuses on a direct M&A route to expand,Different specialisations integrating its costs and scaling its position in China whileleveraging its targets distribution network and technicalThe product portfolios of Chinas three largest industry playerscapacities. CIFA, a global manufacturer based in Italy, was amostly overlap, yet there is diversity in their product offerings very strategic acquisition for Zoomlion that strengthened theand this unique characteristic defines some of the dynamics latters R&D capabilities and helped increase its global marketin the industry. Zoomlion has the worlds most diverse rangeshare. In contrast, Sany has preferred to expand by buildingof products including concrete machinery, tower cranes, its own plants in foreign countries. For instance, Sany recentlyroad and earthmoving machinery, environmental sanitationbuilt research and development centres in Brazil (2010) andmachinery, and bulk material transportation equipment.Germany (2009) as part of an ambitious international expan-Despite such a diversified portfolio, revenue sources are sion plan. Also, it is the first Chinese construction machineryThe Beijing Axis15 15. The China AnalystFeaturesXCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1and enter the top five global construction machinery compa-2010) nies. For its part, Sany plans to scale up rapidly to achieve Concrete ExcavatorsMechanicalthese numbers as soon as 2012. To accomplish this, Sany is MachineryScrapersbuilding plants in overseas markets with great potential suchEnvironmental as Indonesia, North African countries and South Africa, a stra- Crane MachineryMachinery Compactiontegic step that will open new channels to market its prod- Road and Pilingucts. Zoomlion is following similar tactics and expanding MachineryOthersquickly to acquire brands, technology and distribution100 6%channels, with a keen focus on emerging markets. Similarly, 7%9% 4% XCMG recently announced the acquisition of two European 12% 3% suppliers, marking its first international acquisitions aimed20%3%80 12%at boosting its value chain and extending its technological10% capabilities in key component production.6012%37%Chinas three leading construction machinery manufacturersseem well placed to achieve these goals, yet each of them still40have much potential to improve their technology. To be sure, 69%to enhance their competitive position, Chinese machinerymanufacturers are constantly upgrading their technological2052%44%capabilities and focusing on technical innovation, but theystill have some ground to cover before they start taking onthe world leaders. That said, these firms have demonstrated0 a remarkable ability to incorporate technology and quickly XCMGSanyZoomlionSource: CCMA; Bloomberg adapt. As a case in point, Sany invented the first 66-metretruck-mounted concrete pump in the world.player to set up factories in India and the US, where it recentlyopened a USD 60 million assembly plant which in AugustChinese construction machinery manufacturers are set to2011 started assembling trucks mounted with concrete- become some of the largest beneficiaries of the infrastruc-pumping equipment. XCMG, Chinas largest construction ture boom in emerging markets where competitive prices aremachinery maker, has opted to cooperate with foreign capitalkey, and with improving technology and evolving interna-and foster close partnerships with overseas dealers. Thetional expansion plans, the likes of XCMG, Sany and Zoomliongroup has already established close cooperation with nearly are gearing up for bigger challenges.100 dealers who help sell its products all over the world, butmost notably in emerging markets such as Indonesia, BrazilAnkit Khaitan, Consultantand Russia. ankitkhaitan@thebeijingaxis.comAmong these key differences, there is one commonalitythat exists in the internationalisation strategy of all three ofChinas major machinery manufacturers - they have beenaggressively marketing their product overseas though newdistributing channels with a core focus on emerging markets,namely Brazil, Russia, India and Africa. Emerging markets aresweet spots for these companies because it is difficult toaccess developed US and European markets where dominantand established players, such as Caterpillar, emphasise theirvalue-added after sales services. Emerging markets, on theother hand, are more price sensitive, and prices of machineryequipment from Chinese manufactures are typically 15-20%below foreign competitors, providing buyers in emergingmarkets with a considerable overall cost saving. Anotherimportant reason is that, like China, these countries areexperiencing a similar urbanisation process and are conse-quently investing a lot towards infrastructure improvement,providing Chinese enterprises a potential market to tap into.Reaching higher: The years aheadXCMG, Zoomlion and Sany have revealed their sales targetsfor the 12th Five Year Plan period (2011-15). XCMG andZoomlion aim to achieve USD 20 billion each in sales by 201516 The Beijing Axis 16. CHINAAFRICABUSINESS FORUM 2011SAVE THE DATE | 20 OCT8.00 am - 7.00 pmThursday, 20 October 2011Gallagher Estate, South AfricaThis one day Business Forum will bring together key businessleaders, industry specialists, project managers and others toexplore the exciting current dynamic of the China - Africa rela-tionship.For enquiries call +27 11 463 9184 or email Candice atcandice@siyenza.za.com or fax your request to +27 11 463 8432.Organiser: Sponsor:Siyenza Management (Pty) Ltd The Beijing Axis Ltdinfo@siyenza.com www.thebeijingaxis.com 17. The China Analyst FeaturesThe New Scramble For Africa: Emerging Powers on theEmerging ContinentThe BRICS of China, India, Brazil, Russia and South Africa and China in particular are at the forefrontof a new scramble for projects and deals in Africa. Each one brings to the continent its own distinct busi-ness nous, yet collectively the BRICS are instrumental in transforming Africas business fortunes. Leavingaside Chinas dominant position in Africa, this article focuses on the activities of the other BRICS nationson the continent. By guest contributor Charlie PistoriusThe global balance of power is shifting into the handsBRICS Trade Profile (As a % of Country Total, 2009)of the rapidly industrialising emerging growth giants, 60especially the BRICS block of economies: Brazil, Russia,India, China and South Africa. The BRICs (excluding South50Africa as the smallest strategic member) are today fuelling Africathe global recovery with their huge demand requirements, 40 DevelopedEconomieshigh growth multiples and vast deployment of capital.Explosive population growth and rapid urbanisation in30 Emerging Economiesthese economies have engendered a vital demand for food South, Eastand energy security, and an urgent need for capital stock20 & Southeast Asiabuild-up, in particular transport, power, communication and Latin Americahousing infrastructure. In Africa the emerging BRICS have10latched onto Chinas coattails in seeking commercial favour0and opportunity, although each with their own individualChina India Brazil Russia SABRICSmodus operandi and business methodology. Yet they all have Source: UNCTAD Statistical Yearbook 2010the same purpose, namely to secure a foothold in Africasvast and rich resource offerings. But the story is not merelyis impressive. Between 2000 to year-end 2009, India origi-one described by an exchange of outgoing raw materials innated the majority of deals, 812 in all; China managed 450;return for inbound capital, tools and cheap final products. As Russian firms undertook 436 deals; South Africa at least 237;the floodgates for broader and more ingrained partnerships and Brazil 190. For the year 2010 up to the end of May 2011,are opening, so too will Africas story change in its balance of China led the way by undertaking 195 new deals, followedtrade and investment.by India with 183, Russia 102, Brazil 51, and South Africa 40, according to UNCTADs World Investment Report (2011).The BRICS Way The trade relationship between the emerging economiesThe large BRICS economies (as well as other emerging players and Africa is, however, the one that best defines the scalesuch as South Korea and Turkey), all have the same compara-of their overall commitment and interest on the continent.tive advantage in their outward engagement: they are ableCollective bilateral trade between the BRICS and Africa forto access large pools of finance and cash reserves (mostly instance ballooned from a mere USD 24.3 billion in 2000through state incentives and subsidised support), and they to USD 193.4 billion in 2010 - though Chinas share of USDalso uphold a version of the Developmental State Model that123.3 billion alone makes up 64% of the total. Of Africas totalencourages a statist approach to business - explicit in thetrade volume with the world, the BRICS collectively accountcase of China - that enables private enterprise and mercan-for an impressive 22%, which hardly measured 10% in 2000.tile commerce, rather than perpetuating poor managementShockingly however, South Africas intra-Africa trade onlyapproaches which translates into an unproductive utilisation measured 2.3% of Africas global total in 2009, dropping toof strategic assets. 1.5% in 2010 (see chart on next page).As a bloc, the BRICS global outward FDI stock build-upBrazil: Not only Lusophone specialistsincreased substantially from USD 134 billion in 2000 to overUSD 1,085 billion in 2010 only a small smattering of thisTo date Brazils multinational firms have mostly been involvedwas, however, destined for Africa (roughly 2.7%). Developedin Africas construction and upstream exploration andeconomies still provide the largest vested interest of capital energy production. The likes of Petrobras, which is one ofstock in Africa roughly 40% originates from the European the global oil and gas leaders with 2009 revenues of overeconomies. Since 2000, the majority of BRICS outward invest- USD 118 billion, has staked increasing claims in Africa, espe-ments in Africa has been in cross-border M&A. Considered cially in Nigeria, Senegal and Angola, while also maintainingpurely by this measure, the number of BRICS engagementsexploration activity in Mozambique and Tanzania. Brazilian18 The Beijing Axis 18. Features FeaturesThe China AnalystRelative Share of Country/Blocs Bilateral Trade with Africastate-aligned enterprises to acquire resource assets. As a(As a % of Africas global total, 2000 vs. 2009)country it consumed effectively the same barrels per day of oil60as all of Africa did in 2009, just edging out Brazil. Russian firmsretain a skilled advantage in the extractive industries, and it istherefore expected that their recalibrated African focus will be50grounded in fixed investments and M&A activity, rather thantrade. Invested stock in Africa will very likely more than triplefrom current levels roughly USD 5 billion.40 2000 (Total: USD 246.4 billion)The enterprises that have shown most interest in Africas 2009 (Total: USD 673.3 billion)mineral resource sector to date has been the likes of Norilsk30Nickel (the worlds largest nickel and palladium producer, aswell as one of the largest in platinum and copper); Alrosa,which has diamond interests in Angola (where it is building20a hydroelectric dam backed by a concession to explore foroffshore oil and gas), Namibia (where it too is building an10electric plant) and the DRC; UC RusAl (the worlds largestaluminium producer) has revenue capacity in Angola, Guinea,Nigeria, South Africa and Botswana; and Severstal, which is 0preying heavily on West African gold deposits, already under- EU BRICS Emer- China US India South Brazil South Turkey Russia UAE Indo- took a USD 2.5 billion iron ore mining project in Liberia.ging KoreaAfricanesia PartnersSource: Africa Economic Outlook 2011In the energy sector, Russias state-owned oil and gas majorGazprom (with 2009 revenues over USD 141 billion) and Lukoilcompanies hold a comparative advantage in Lusophone (with revenues exceeding USD 86 billion), have both soughtcountries Angola and Mozambique. Mining giant Vale, the interests in Namibias gas fields, Tanzanias offshore blocks,worlds second-largest diversified mining company, has an and West African deep-water exploration and midstreamover USD 150 billion market capitalisation and wide foot- activity (Gazprom for instance invested in a production-print in Africa extracting coal and iron ore while exploringsharing agreement with Nigerian State Oil Company worthuntapped copper, nickel, platinum and diamond depositsUSD 2.5 billion). Renaissance Capital, a leading Russianin the frontier economies of Mozambique, Angola, Guinea,investment and equity firm, entered Sub-Saharan Africa inLiberia and Zambia. 2006, and has since organised a number of Africas largestIPOs and owns 25% of Nigerias Ecobank, with branches inBrazils African focus has shifted in line with other emerging11 African countries. Renaissance also established a USD 1giants, though it still trails far behind China. In the seven billion pure Africa Fund and deployed USD 500 million intoyears to 2009, Brazil invested in 25 Greenfield projects. Vale, Africa thus far. To date it has offices in South Africa, Nigeria,for instance, is planning to invest USD 15-20 billion in Africa Kenya, Zimbabwe, Zambia and Ghana, and now also offersover the next five years , and is leading the way forward for their gambit of sophisticated financial services in Rwanda.Brazilian interests in Africa. Petrobras has already deployedUSD 2 billion into Africa, also putting aside a further USD India: Versatile player3 billion for deepwater exploration off Nigeria and Angola.Brazils own Odebrecht Mining Services is its preferred India is a vital partner in Africa, and shares close cultural links,contractor for operations in Africa which in 2009 accounted especially in the eastern part of the continent. Indias tradefor over USD 2.4 billion in revenues, or 10% of its total earn- basket with Africa is broad and rising rapidly. From close toings. Brazil currently only sports a low level of bilateral trade,USD 40 billion in 2010, bilateral trade in 2011 is expectedhovering close to the USD 20 billion mark in 2010. It is widely to exceed the USD 50 billion mark and more than doubleestimated that Brazils trade will be hiked up by more than by 2015. Duty free trade deals have been signed with 34 of100% by 2015, reaching USD 45 billion. Its investment stock Africas least developed countries. Liberalisation of Indiasin Africa will also be upped from between USD 8-12 billion in foreign exchange market has opened up the floodgates for2010 (only an approximate 7% of its total global stock), rising direct investments abroad, deploying most of its capital intogradually to USD 15 billion by 2015.developed (rather than emerging) markets. Cumulatively,Indias invested stock in Africa is currently estimated to beRussia: Energy giantover USD 15 billion, more than Chinas. Multinational compa-nies such as the diversified industrial giant Tata, a leadingRussian firms with the largest foothold in Africa have been player in the steel and automotive sector (among many), havefocused on energy and mineral resource acquisitions. Growingmade substantial acquisitions globally and in Africa. The end-global energy concerns and profit-seeking motives havedestinations in Africa that takes the bulk of Indias interest arefueled Russias geo-strategic positioning in resources. Russiamostly in the COMESA1 block, as well as in Nigeria.has leveraged its Cold War relations with Africa and pursuedproactive government incentives to urge its champion1 The Common Market for Eastern and Southern Africa, with 20 memberson the continent.The Beijing Axis 19 19. The China Analyst FeaturesIndia in Africa is characterised by a diverse engagement, Africas Trade Coupling with BRICS (As % of Countrysunlike Russia and Brazil, and perhaps even more than China. Global Total, 1995 vs. 2005 vs. 2009)Indian interests in Africa have created a particular niche in 15telecoms, pharmaceuticals, hospitality, automotive and thebanking sector. Unlike the other BRICS, and in stark contrast12to Chinas engagement model, the Indian multinationalenterprises that are most active in Africa are private sectorones, with the Indian government offering strategic support, 9yet not driving the engagement. In mining and energy, aswell as the aforementioned sectors, Indian firms have signedlarge deals in more than 30 African countries from infra- 1995 6structure and pharmaceutical projects in Senegal, to power, 2005finance and automotive projects in Ghana, and automotive,2009energy and power infrastructure in Sudan, to the full spec-3trum of sectoral engagement in Kenya, South Africa, Nigeria,Zambia, Uganda, Tanzania, and in North Africa. 0ChinaIndiaBrazil Russia SAIndias mineral companies have been proactive in Africa.Source: UNCTAD Statistical Yearbook 2010Vendanta has signed multibillion dollar deals to investin Liberias iron ore, also directing over USD 1 billion into complimentary economic structure and geographic prox-Zambias Copperbelt, and hence retains a leading position inimity which allows it to tap in to the multilateral tradeAfricas zinc and cobalt production. Tata too has spent billionsagreements such as the Southern African Developmentin Cote dIvoire, Guinea and Liberia acquiring iron ore, and in Community (SADEC) or the Common Market for Eastern andAngola it has explored diamond deposits. Other Indian enter-Southern Africa (COMESA), while also playing an active roleprises are acquiring uranium from Namibia, while invest-in the continents politics by retaining a major voting sharements in Mozambique encompass coal, copper and iron ore.in the African Development Bank, while in its capacity asState-owned National Mineral Development Corp. (NMDC) African Union stalwart, it pushes initiatives such as the Newhas a market capitalisation of over USD 40 billion, and isPartnership for African Development (NEPAD).eager to make inroads across Africas commodity sector.South Africas intra-Africa trade has fluctuated betweenIn the oil and gas space, Indias ONGC Videsh Ltd. has made USD 14 and 15 billion over the past few years, accountinga mark in Sudan where it opened the Khartoum-Port Sudan for roughly 13% of its total trade with the continent in 2009,petroleum pipeline back in 2005; while another major, up from a 10% share in 2005 when its intra-African tradethe Indian Oil Corp. (with nearly USD 63 billion in 2009with Africa was USD 9.7 billion. Yet this number was downrevenue), and Reliance Industry at half the size, has peggedsignificantly to a decade low in 2010, to only 8.7% of Souththe African market as an untapped frontier for exploration. Africas global total - which is striking if one considers SouthIn the power sector, National Thermal Power Corp. (NTPC), Africas total trade grew 41% y-o-y in 2010 to reach newIndias largest power company, has secured over 3 million highs, though its intra-Africa share has dwindled. To put thistonnes per annum of liquefied natural gas (LNG) in Nigeria in in context, the other BRICS trade profile with Africa is led byexchange for building power plants. In the telecoms space,India with 6.7% of its global bilateral trade in Africa, Brazila record-breaking USD 10.7 billion acquisition was made bywith 6.1%, Chinas 4.1% and Russias small 1.8%. South AfricasIndias Bharti Airtel (Indias largest domestic telecoms firm) of total bilateral trade contributes roughly 40% of its entire GDP,Kuwaiti Zain Africa telecommunications operations, therebyfar more than Brazils comparative 14%, Russias 30%, andbecoming the worlds seventh-largest telecoms company,Indias 27%, but still less than Chinas 50%.and giving it a wide pan-African footprint. Subsequent to thedeal, Bharti said it would invest an additional USD 1 billion toRoughly one-fifth of Africas active FDI stock sits in Southexpand its African operations in 2011.Africa, and nearly 90% of all African portfolio flows gothrough the Johannesburg Stock Exchange making SouthThe objectives of India in Africa are, however, similar toAfrica a hugely important financial intermediary and conduit,Chinas: being highly diversified across all sectors of the with the role of deepening growth in Africas equity capitalAfrican economy, and with a very long investment time-and investment. South Africa is also the largest emergingframe. Both countries are similarly seeking to secure energymarket investor of FDI in Africa, accounting for roughly 17%resources and land for agribusiness and food production, andof Africas internal investment stock, and over 70% of intra-for India, Sub-Saharan Africa is seen as a new frontier marketAfrica flows, with USD 2.6 billion per year (which is nearlyfor its skilled workers, especially in the service sectors wheredouble Chinas official FDI flows to Africa). The share of stockIndia Inc. holds a global comparative advantage.by South African enterprises has increased from a mere 5%of Africas total to about 22% currently.South Africa: Gateway to the continentWhile SSAs total bilateral trade with China is four times theSouth Africa has a relative advantage in SSA in sharing a size of South Africas share, the latters relationship is deemed20 The Beijing Axis 20. FeaturesFeaturesThe China Analystmore complimentary in nature, with technologically-intensiveAfricas Trade Coupling with BRICS (Bilateral, USD bn)products and managerial know-how its greatest exports into150the continent. Yet South Africas import basket is no different 1995than any other actor. It is dominated by mineral resources andenergy-related products, mostly oil (76% of total imports). 120 20002005A number of SA Inc. players have been able to profit andestablish a solid footprint in Africa. Local telecommunica-90 2009tions leader MTN has arguably been one of the only compa-2010nies from South Africa to break into the difficult FrancophileAfrican marketplace. In all, MTN has been able to tap into the 60continents half a billion-plus mobile subscriber base, aidingits USD 11 billion 2010 revenues with operations throughout13 non-domestic African countries. 30Financial services group Standard Bank is the continentslargest banking group by assets, with 2010 revenues of USD16.6 billion via 17 African markets outside South Africa. Their0 China India Brazil RussiaSAnon-domestic African exposure grew to almost 10% of its Source: UNCTAD Statistical Yearbook 2010portfolio given the stronger growth potential compared to itsown saturated home market. Multinational brewer SAB MillerThe BRICS countries, however, still lack a coherent engage-has a strong presence in more than 10 African countries beer ment strategy in Africa, without which there is great risk inand beverage industries. Logistics major Imperial Holdingscrowding out local investment and sector competition andis facilitating capital deployment in huge projects in central, exacerbating the resource curse that has plagued the conti-east and southern Africa and amassed nearly USD 6.8 billion nent for so long. The commodity super cycle and changingof revenues in 2010. Leading South African construction fortunes of the developing world means a greater depend-and engineering company Aveng recorded almost USD 4.4 ence on food and resource security from Africa. The absencebillion in revenues in 2010 with operations in over 15 Africanof a specific BRICS Way leaves bilateral self-interest of thecountries. On the mining front, South African majors Anglorespective parties in a far greater seat of power, and henceAmerican, AngloGold Ashanti and De Beers collectively oper- will not translate into clear win-win outcomes for Africans.ated mines in 11 African countries, while mid-cap companies Unless a synchronised BRICS Way is sought, Africa will againsuch as African Rainbow Minerals (with a vastly diversified face a race to the bottom with inequitable distribution ofresource portfolio, mainly in South Africa) and copper andwealth and opportunities.cobalt miner Metorex (recently acquired by Chinese minerJinchuan for USD 1.32 billion) are both hungry to expand into The BRICS stepped up involvement in Africa has, however,Africa, and are already owners of lucrative assets in Namibia,unleashed African competitiveness in the global commerceZambia and the DRC. space, brought to the fore new models for Africas continueddevelopment, opened up the taps to source financing forConclusionprojects, and has hence brought an invaluable pool of tech-nical expertise and know-how with it. Practical cooperationAfricas new coupling with China and the emerging BRICS with the BRICS partners is bound to address the fragmentedeconomies is the driving force of growth on the continent,lack of regional integration, and given the commodity priceand those African economies that align with the development booms, a reciprocal spillover effect is set to offer Africans aof the emerging markets is set to meet great success. Africanew lease on life.itself is increasingly looking to adopt the DevelopmentalState as a growth model, taking from each of the BRICS aChinas engagement strategy in Africa has paradoxicallytenet that suits their own needs. Yet notably this economic ramped up interest from other emerging players, and tradi-development model is not aligned to a Western mode of free- tional partners alike. Not faltering in the midst of the globalmarket capitalism, instead one with both statist and socialistfinancial crisis, Chinese capital and physical efforts in Africa isdevelopmental pillars. It is perfectly evident that China and constantly being stepped. Whether others are threatened bythe rest of the BRICS are in Africa to stay, their vested timeChina gaining increasing market share and favour in Africa,horizon is seriously long-term, in excess of a hundred years, or merely waking up to Africas growing status as a resourcetheir ability to stomach risky environments and projectsand consumer destination.... the simple fact is that it is Africashas unleashed dormant or flailing assets, opening up newtime, and more competition and enabling commercial part-markets and opportunities. Their method of developmentnerships will leave Africans with greater hope, economicassistance has circumvented the previous resource curse means of production, and a tangible grasp on prosperity.fears and shown African stakeholders the impact of (espe-cially) Chinese capital and means - building essential infra- Charlie Pistorius, Emerging and Frontier Market Analyststructure to become the continents most enabling actor ofits socioeconomic development.Charlie Pistorius is a research analyst with Frontier Advisory (Pty) Ltd. The Beijing Axis 21 21. The China Analyst MacroeconomyMacroeconomic Monitor: Chinese Inflation - One of theBiggest Fears of 2011Inflation in China reached a peak of 6.5% in July, before dipping slightly to 6.2% in August - possiblyheralding a receding of high inflation. Yet high inflation remains a key theme in 2011, and this editionlooks at the Chinese governments monetary and fiscal policy options for fighting a scourge for whichChinas central planners have a legendary fear. By Dirk KotzeChina Consumer Price Index (Jan 2008Aug 2011)With around six months to go before the officialappointment of Chinas next generation of leaders,120stubbornly high inflation is high on the nationalagenda in 2011. Inflation has a somewhat mystified and over-blown role in the Chinese body politic. It is an article of faith 110among many China watchers that inflation has, throughoutChinese history, been the cause of many a revolution ordynastic change, and that this is what causes the CommunistPartys diligent attention to the issue. It is true that infla- 100tion is generally a scourge without which any governmentcan do, but by the history of social upheavals around theworld, Chinas current inflation is tame by comparison. More 90concerning is that, in a world of macroeconomic instabilityand uncertainty, the persistence of inflation ties the govern-ments hands in employing other policy tools at a time whenthe latter are sorely needed.80J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A08 091011Problematic pork prices Source: National Bureau of Statistics of China. Note: Previous year = 100.In July, Chinas Consumer Price Index (CPI, the main inflationlabour from the countryside runs out) and rising electricityindicator), reached a high of 6.5% compared to the same prices.time last year (see chart to the right), with the main culpritbeing rising food prices. Foodstuffs comprise around 30%Consumers rarely see inflation in terms of averages, butof Chinas National Bureau of Statistics (NBS) CPI calcula-rather in a biased way through exorbitant and very visibletion (see chart on the following page), and the 14.8% riseincreases in the prices of certain items. As such, consumersin the selected basket of food items in July was of particularof pork (i.e. almost all Chinese people) may feel that the porkconcern for Chinese policy makers. Firstly, food is a basic price represents all price rises, while the temporary spike instaple for survival, so whereas the poor can opt out of buyingvegetable prices may be seen as everlasting, not only duringexpensive movie tickets, they cannot opt out of buying food floods. This is the source of widespread scepticism of the offi- there is no escape from this type of inflation. Secondly, ascial inflation figures, and the problem of perception is thethe poor typically buy food with small mark-ups, inflationmost serious political fallout of inflation.is passed on to the poorer consumer, while those retailersselling to the rich can generally absorb inflation. Food infla- Taking recourse to interest ratestion thus amounts to a regressive tax on the entire popula-tion, a development that is all the more concerning in theFor Chinas central planners, inflation presents a similarlycontext of widening income disparities. restricting no way out scenario. Chinas policy makers hadit good for a long time, able to tweak and cajole an obedientAs with the inflationary spike that occurred in China in 2007,economy. In the tumult of the post-2008 world, however,the biggest culprit in Julys CPI figures was again the price ofthere is considerably less certainty, and even less predict-pork, Chinas staple meat. According to the NBS, the July price ability. As a tool for stimulating the economy, the loweringwas 56.7% higher than a year before, contributing by most of interest rates must for the time being be put on the back-estimates some 2 to 3 percentage points to CPI. Vegetable burner, a reality that dawns at a very inauspicious time, givenprices also saw a spike over the last year, but these were more the expiry of QE2 in the US, the drift in the Euro sovereignseasonal, as summer floods severely hampered harvests debt crisis, and not to mention the ending of Chinas ownacross southern and eastern China. China also suffers frompost-crisis stimulus efforts. Furthermore, the Peoples Bankstructural inflationary pressures, such as shrinking excess of China has not only been restrained from lowering interestcapacity, rising wages brought about by the emergence ofrates, but has