THE

THE
CHINA
CHINA ANALYST
ANALYST
A knowledge tool by THE BEIJING AXIS for executives with a China agenda JulyJuly
20082008

Getting a grip on high-value sourcing from China p.10

Features
The Scramble for Australia 6
Sourcing High-Value Capital Products from China 10

Regulars
China Sourcing Strategy 14
China Facts, Figures & Forecasts 18
China Business News Highlights 28
China’s International Relations 31
 3

Earthquake details...
Wenchuan County, Sichuan
12 May 2008
14:28:42

“Nothing and no one can destroy the Chinese people. They are
relentless survivors. They are the oldest civilised people on earth.
Their civilisation passes through phases but its basic characteris-
tics remain the same. They yield, they bend to the wind, but they
never break.”

Pearl S. Buck (1892 - 1973)

4
At the Highest Level
China gets Bronze as it overtakes Germany to become the word’s third largest economy; but de-
spite a testing first half of 2008, it is going for Gold.
China’s Olympian economy man-
aged to overtake Germany in the
past half-year to become the
world’s third largest economy. Re-
member, this comes after China
had sat at number seven until De-
cember 2005 when it overtook Italy,
the UK and France to be number
four by the end of January 2006. At
the highest level, China’s economic
growth, development and social
stability remains the utmost priority
for Beijing—and the nation remains
on the right general trajectory.
The main political priority over the
short term is staging a successful
Beijing Olympics. Having traveled
around Beijing during the past
months (calling on senior Olympics
administrators; visiting the village;
using the airport, underground sys-
tem, buses and taxis; and talking to
the people around me), I have
found that the stage is set for a fan-
tastic event. Beijing awaits you—
and while there are sure to be mi-
nor glitches, the event is on the
whole likely to add positively to
China’s global profile and status. It
will also bolster pride and national
unity.
But the Olympics is approaching as
we look back on a half-year that
has been one of China’s most test-
ing periods in recent history. The
first quarter was dominated by cold
weather and disruptive snow
storms that severely affected vast
areas of the country; while the sec-
ond quarter was marred by the dev-
astating Wenchuan earthquake in
Sichuan, and events in its tragic af-
termath.
On the economic front, China also
had its problems. Inflation edged
higher to long term record levels on
the back of food and energy price
increases. The central bank’s re-
solve was tested and strained by a
significant wave of speculative hot
money inflows while supply bottle-
necks became more evident in areas
such as coal distribution to some
power generators, food production
and other basic material supplies.
Meanwhile, some statistics and an-
ecdotal evidence pointed towards
foreign (and local) firms losing their
cost competitiveness, the inability of
some businesses to stay in export
markets and increases in firm clo-
sures in some regions and/or sec-
tors. For example, the media picked
up on the many small local (or HK
invested) firms in Guangdong that
closed down due to rising costs
while other reports highlighted that
many South Korean firms in Shan-
dong packed up for lower cost coun-
tries such as Vietnam.
All this in a 6-month period that saw
China’s stock market down around
50% year-to-date as global markets
took a beating. This decline left
China as the world’s worst perform-
ing stock market in US dollar terms
after having been the number one
performer in both 2006 and 2007
with triple digit growth in the index.
We also heard complaints that cor-
ruption remains a real issue, and the
environmental challenge presents
Beijing with a dilemma. To add to
the strained atmosphere, China
faced an international and public
relations challenge that frustrated
the Olympic torch relay due to op-
posing views on Tibet.
So, no doubt, it has been a tough
time. However, everything consid-
ered and despite the fact that these
difficulties are by no means insig-
nificant, China is not going to be
derailed from its development
track. In fact, dealing with chal-
lenges, internal and external
shocks and having to adjust poli-
cies in turbulent times are natural
elements of long term develop-
ment. Hoping for a smooth and
risk-free ride is unrealistic. Rather,
Beijing has demonstrated its ability
to deal with problems as they arise:
SARS in 2003, flooding in 2005,
this year’s snow storms and of
course the May earthquake.
As we enter the second half of
2008, Beijing wants to leave all
these negative shadows behind,
host a phenomenal event in Au-
gust, and continue urgent ‘work-in-
progress’ to accelerate China’s
development. In our view, that is
exactly what will happen. As such,
looking into the middle distance,
we think China remains on track for
the Silver; and longer term China is
going for Gold.
I trust that our readers will enjoy
this edition of THE CHINA ANA-
LYST—and we welcome all feed-
back. Finally, we wish China, all
visitors and of course all athletes a
successful 2008 Beijing Olympics!
Kobus van der Wath
Group Managing Director
THE BEIJING AXIS
China Business Solutions
kobus@thebeijingaxis.com
 5

Table of Contents
July 2008

6 The Scramble for Australia

Australia is playing a crucial role in China’s raw materials supply pipeline. Similarly, China is underpinning Australian
economic activity. We take a closer look as China’s Australian mining interest moves from trade to investment.

10 Sourcing High-Value Industrial Products from China

The era of Chinese high-value industrial exports is approaching, and the winners will be the foreign firms that success-
fully navigate the pitfalls and peculiarities.

14 China Sourcing Strategy

Looking at the WHY, WHAT and HOW of sourcing in China, we put forward a simplified high-level framework for think-
ing about China sourcing.

16 China Sourcing Blog Highlights

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

17 Macroeconomic Monitor
Is China’s Olympian economy slowing down at last? Although the growth rate has softened, further policy action may
be needed. Yet a slowing world economy has given Chinese authorities much more to think about in their balancing act.

18 China Facts, Figures & Forecasts

A selection of data illustrating growth, transformations and trends in Chinese commerce and industry, focusing on trade
and foreign investment.

20 China Trade Roundup

To illustrate the overall picture, breakdown and key trends in China’s trade map, the Roundup summarizes the latest
China trade statistics.

22 Financial Markets
Tracking the dynamics of China’s Shanghai and Shenzhen Composite Indexes, benchmark interest rates and the CNY
exchange rate regime.

23 FDI & OFDI

With FDI and OFDI increasing both in and from China, FDI & OFDI illustrates sources of FDI into China and unpacks
Chinese outbound investments, as well as mergers & acquisitions involving Chinese firms locally and abroad.

24 The C in BRICS
With recent economic statistics from Brazil, Russia, India, China and South Africa, The C in BRICS is a comparative
segment that contrasts China with the other leading developing economies.

28 China Business News Highlights

A roundup of the main business stories coming out of China during the second quarter, including the iron ore bench-
mark settlement and developments on Coal-to-Liquid cooperation with South Africa.

31 China’s International and Cross-Straits Relations

A summary of the main stories related to China’s rising stature in international affairs, including direct flights to Taiwan
and the first Japanese naval visit to China since World War Two.

34 Upcoming Events
News and schedules of upcoming fairs, exhibitions and seminars in China, with a focus on resources and industrial
sourcing.

36 Careers at THE BEIJING AXIS

THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in meeting our present
and future business challenges.

THE BEIJING AXIS News

38 Company news for the second quarter, including attendance of the National Mining Congress in Perth and donations to
the Red Cross’ Sichuan earthquake relief fund.

THE CHINA ANALYST is published and distributed by THE BEIJING AXIS Ltd. For more information on services, please
see page 39.
6
The Scramble for Australia
Just as Australian resources supported Japan’s rise in the 1960s and ‘70s, Australia is again playing
a crucial role alongside China’s impressive economic growth. We take a closer look at China’s Aus-
tralian mining interests as they move from trade to investment.
“Back in the 1420s, the expedition-
ary fleets of China's Ming Dynasty
reached Australian shores,” stated
President Hu Jintao in his opening
remarks to Australia’s Federal Par-
liament in 2003. President Hu’s re-
marks echo the enormous transfor-
mation that Australia is undergoing
from a Eurocentric country to one
where an Asian worldview and a
China agenda are pivotal.
It is a rapidly growing relationship,
one that Australia has certainly
benefited from in recent years. This
is a case of history repeating itself:
Japan’s industrialisation in the
1960s and 1970s was driven on the
back of Australian resources and it
was during this period that Japan
emerged onto the global scene,
hosting the Olympic Games in To-
kyo in 1964 and World Expo in
Osaka in 1970. Fast forward four
decades and China is in an almost
identical situation, with Australia the
key resource partner in China’s im-
pressive industrialisation.
Given Australia’s geographic prox-
imity to China and its ‘resource ex-
port basket’, it is little surprise that
China is now Australia’s largest
trading partner, having recently dis-
placed Japan from that position af-
ter 36 years. During April 2008,
Australia recorded a trade surplus
for the first time in 6 years largely on
the back of higher iron ore export
values. Moreover, Chinese invest-
ment in Australia’s mining sector
has been growing rapidly. This has
now brought Australia’s China
stance to the fore, and the debate
on whether China should be allowed
to buy into the sector occupies
minds in Canberra as well as those
of journalists and commentators,
researchers, and miners in Western
Australia and the rest of the vast
resource rich country. Importantly,
however, the phenomenon of Chi-
nese engagement in Australian re-
sources has clearly attracted atten-
tion in Tokyo, New Delhi, Moscow
and elsewhere. In some ways, the
China-Australia story is now being
seen in the context of China’s en-
gagement with Africa and other re-
source-rich countries and regions.
While some see Western Australia’s
recent boom as China-inspired, oth-
ers point out the dangers of allowing
China into a sector if it does not
serve the national interest. This de-
bate is sure to intensify as China’s
outward FDI and M&A continues to
hit Australian shores.
Killing Two Birds with One Stone
A 2005 report by the Minerals Coun-
cil of Australia highlighted that 52%
of Chinese global outward FDI was
destined for minerals and energy
ventures. While Australia-China
trade has been dominated by raw
material exports, until recently FDI in
this area has been a negligible part
China and Australia’s Complementary Mining Economies
Australia (position as a
Resource
global producer)*
Iron Ore
Coal
Alumina
Zinc
Lead
Gold
Nickel
Copper
*Minerals Council of Australia (2006-07) ** Minerals Council of Australia (2004)
of the equation. Since 2005, how-
ever, China’s global outgoing FDI
has seen a considerable spike and
this has had a direct bearing on
Australia’s resource sector. (See the
FDI & OFDI section on page 23 of
this report.)
As it is a particularly strategic in-
vestment destination, Australia’s
raw material smorgasbord gives
China the opportunity to kill the pro-
verbial two birds with one stone. Not
only does it offer a diversification of
China’s ballooning foreign exchange
reserves (around USD1.8 trillion),
but mining investment is also a
commodity price hedge against rap-
idly rising prices. Says Andy
Caruso, Managing Director of Aus-
tralasian Resources: “To me it is an
obvious strategic link up - we’ve got
the resources and they have the
capital.”
This translates into sharp Chinese
investment inflows into the Austra-
lian economy. According to Austra-
lian Treasurer Wayne Swan, while
China only accounted for 0.2% of
Australian foreign investment - with
a total amount invested of AUD3.4
China (position as a
global consumer)**
2 1
4 1
1 2
2 1
2 2
2 4
3 3
4 1
 7

billion by the end of 2006 - Chinese

investment could reach as much as
AUD30 billion by the end of fiscal
2008. This clearly reflects the cur-
rent environment and shows where
big-ticket deals are being put to-
gether.

Perfect Suitors?

Australia is the world’s leading pro-

ducer of bauxite and alumina, il-
menite, rutile and zircon, synthetic
rutile and tantalum. In addition, Aus-
tralia ranks second in gold, iron ore,
lead, uranium, diamonds (by
weight) and zinc; third in silver and
nickel; fourth in copper, black coal
and manganese; and is the fifth Ready to dig deep: Australia’s iron ore mining sector is of great interest to Chi-
largest producer of aluminium, cop- nese investors, supporting its status as the largest steel producing nation.
per and lignite.

But while China accounts for

roughly 7% of global GDP, it con- Given this China-Australia demand- Notable Chinese Mining Invest-
sumes over 16% of the world’s met- and-supply-map, it is not surprising ments
als. It is the largest consumer of that mineral exports account for
copper, tin, zinc, steel, iron ore and about 60% of Australia’s total ex- The bilateral engagement between
coal; second largest consumer of ports to China, while minerals and Australia and China is viewed in a
aluminium, petroleum and lead; energy exports represent 7 of Aus- very strategic light in Beijing and is
third largest consumer of nickel and tralia’s top 10 merchandise export already mid-process. China Inc. has
the fourth largest user of gold. items to China. invested in more Australian projects
and at greater volume over a longer
time period than in any other coun-
try. This extensive cooperation has
Mining Major Chinese Mining Investments in Aus- given a greater sense of depth to
tralia by level of completion: May 2008 mining relations between the two
Operational
countries, but the extent to which
Under Construction this has created a stable and mutu-
ally beneficial relationship remains
Feasibility Study a matter for debate. In order to ex-
Announcement / MOU plore this question further, we here
briefly examine three noteworthy
Processing Chinese miners that offer a unique
glimpse into the nature and chal-
Operational lenges surrounding Chinese invest-
ments in Australia.
Under Construction
CITIC Resources
Feasibility Study

Announcement / MOU CITIC Resources was China’s first

mover in Australia’s mining sector.
(For more detailed information on these projects, Its defining Australian mining in-
please contact THE BEIJING AXIS Beijing office) vestment was made over two dec-
8

Summary of Chinese investments in Australia's mining sector (Reuters 29 May 2008)

Chinese Investor Australian Company Resource Stake Details
Shenhua Group, CIC FMG/Harbinger Iron USD2 bn Media Reports
Yanzhou Coal Southland mine (Austar) Coal Purchased
Guangdong Yudean Group Narrabri Coal project Coal 7.5% (AUD67.5 mn) Purchased
CITIC Resources Macarthur Coal Coal 19.9% Purchased
Shougang Group Mount Gibson Iron 3.6% Purchased
Shougang Group Australasian Resources Iron 8.4% Purchased
Angang Gindalbie Metals Iron 12.8% Purchased
Baotou Iron and Steel Centrex Metals Iron 10.3% Purchased
CITIC Pacific Sino Iron project Iron 100% Purchased
MCC Group Cape Lambert Iron Ore Iron AUD400 mn Under discussion
Haoning Group Brockman Resources Iron Under discussion
Western Mining Co FerrAus Iron 10% (AUD15.5) Purchased
Hugo Natural Enterprises Apollo Minerals Iron Increase to 19.9% Under discussion
Sinosteel Corp Midwest Corp Iron USD1.3 bn Under discussion
Chinalco and Alcoa Inc Rio Tinto Diversified USD14.4 bn Purchased
Zhongjin Lingnan Nonfemet Herald Resources Zinc Under discussion

ades ago via a 22.5% interest in
Victoria’s Portland Aluminium
Smelter. This is recognized as be-
ing the first major overseas invest-
ment undertaken by a Chinese
company.
CITIC Resources has subsequently
deepened its exposure to Austra-
lia’s mining sector by taking numer-
ous equity stakes. These include a
7% interest in the Coppabella and
Moorvale coal mines, a 19.9% inter-
est in Macarthur Coal, a 5% interest
in minerals exploration company
Aztec Resources and a 7.5% inter-
est in a small uranium exploration
company. Another noteworthy as-
pect of CITIC’s involvement in Aus-
tralia was the formation of the Aus-
tralian Stock Exchange-listed CITIC
Australia that handles CITIC’s raw
material exports from Australia and
creates greater vertical integration
of CITIC’s operations.
CITIC Resources showed that Chi-
nese firms have the ability to enter,
grow and build scale, integrate and
become players that can attain di-
versified local critical mass over
time.
Rio Tinto
Chinalco’s highly publicized co-
investment of USD14 billion with Al-
coa in Rio Tinto was a direct affront
to BHP Billiton’s takeover plans and
showed a new level of Chinese in-
vestor savvy—and boldness. The
threat of BHP acquiring Rio Tinto
and tying up over 40% of the world’s
iron ore supply was perceived as a
direct challenge to China’s bargain-
ing power around one of its key stra-
tegic resources and provided it with
a strong investment catalyst. BHP
Billiton had already demonstrated its
strong position by lumping the Chi-
nese Iron and Steel Association with
a 71.5% year-on-year price increase
in 2004. In addition, they also de-
manded what was seen in Beijing as
an unprecedented surcharge of up to
USD10 per ton of iron ore, reasoning
that importing from Australian mines
would save on transport costs com-
pared to Brazilian iron ore imports.
The Rio Tinto investment was
China’s largest single overseas in-
vestment to date and also its first in
a major mining company. The deal
showed that not only would China
act to protect what it saw as its stra-
tegic mineral interests, but it could
also muster up large amounts of
capital to do so.
Above all, the Rio Tinto deal
showed us that Chinese firms can
do complex and sensitive deals and
that the world’s third biggest econ-
omy, having overtaken Germany in
the past two quarters, is punching
at a new weight. Indeed, the
stealth, speed and finesse of the
deal herald a new era in global
M&A. Looking back at the Noranda
and Unocal debacles, it is clear that
some lessons have been learned in
Beijing. The question remains
whether national governments,
regulators and boardrooms in the
rest of the world have adapted their
worldview to incorporate a balanced
perspective on China’s true poten-
tial as a big player over the short
term.
Midwest
At the centre of the current debate
is the unfolding Sinosteel-Midwest-
Murchison case experience. Sinos-
teel increased its stake in the Perth-

based Midwest iron ore mining com-
pany to 28.37% and then to 43.6%
in June and eventually over 50% in
July as part of a takeover bid and is
now closing in. If Sinosteel suc-
ceeds in its bid, it would be the larg-
est metals acquisition by a Chinese
mining company thus far. It would
also be the first successful hostile
engagement.
The timing of this share purchase
followed closely on the heels of Chi-
nalco’s investment in Rio Tinto and
met with many reports that the Aus-
tralian Government was reassess-
ing high level Chinese investments
in its mining industry. While this was
quickly denied, Sinosteel’s bid high-
lighted a growing sentiment voiced
by a senator of Australia’s National
Party that if an Australian company
tried to become involved in a key
aspect of the Chinese economy, the
Chinese would block it.
This reflects a divide in views on the
most appropriate policy. Unsurpris-
ingly, this divide is also evident in
the split views between large and
small mining companies: large play-
ers are generally resistant to an
open door for Chinese investment,
while smaller firms see China’s
capital as attractive. Ultimately,
Canberra has to balance an array of
complex and sometimes conflicting
interests. These include Australia’s
wider international relations objec-
tives and diplomacy; its relations
with China as it becomes a force in
the world economy; its ties with
other Asian partners (i.e. Japan and
India); the scope of overall export
potential to China (and the risk of a
protectionist backlash); Australian
national and regional politics; and
the international competition to at-
tract Chinese investment. Not easy.
Looking into the Future
The emergence of China’s new
thirst for investment offers Australia
very tangible benefits, but unlike the
more hands-off raw material trading
relationship that characterized the
pre-2006 era, FDI brings with it
greater complexity and political bag-
gage, especially as China’s mining
sector still remains largely off-limits
for Australian companies seeking
reciprocal opportunities. In addition,
most high profile Chinese mining
investors are still backed by strong
government ownership or support.
This will maintain the topic of
China’s investment in Australia as a
contentious and controversial one.
However, as long as the commodity
boom continues, Australia has much
to gain from a sound bilateral en-
gagement. Any slowdown in the bo-
nanza will change the outcome as
shrinking margins bring ownership
issues and other challenges to the
fore. But for now, bulk cargo carriers
following the routes of Ming Dynasty
Admiral Zheng He’s armada are
writing a new chapter that is not ex-
pected to end anytime soon. Now is
the time to shape a long term rela-
tionship with China that maximizes
the current investment and trade
opportunity but that also serves the
long term national interest.
So, as long as Australian resources
continue to underpin Asian industri-
alisation, the integration with Chi-
nese mining companies continues to
have scope for a win-win situation.
With a Mandarin speaking Prime
Minister; the ongoing FTA negotia-
tions; a fresh new trade surplus; and
lively debate, the stage is set for
Australia to fare (at worst) still far
better than many other countries
seem to be doing in their China en-
gagement. At best, China could fully
and truly become a new strategic
partner, investor and market.
Kobus van der Wath
Group Managing Director
kobus@thebeijingaxis.com
9
Key China questions for
Australian mining board-
rooms:
Local landscape
What is Japan’s view of China’s
expansion in African and Austra-
lian resources? What is the view
from other large emerging mar-
kets like India and Russia? Will
they increase their Australian
interest on the back of Chinese
firms’ expansion activities? Will
the Australian government end
up encouraging such diversifica-
tion of investment sources? Is
there an opportunity here?
International growth
What is the scope for Australian
mining companies to cooperate
with Chinese players in 3rd coun-
tries. i.e. in PNG, Laos, Africa,
etc?
China entry
Would reciprocal co-investment
in Australia and China create the
groundwork for a successful
China entry strategy over the me-
dium term?
Supply
Is there an opportunity to reduce
capital cost of new projects or
operating costs via effective
China procurement? How to im-
plement an effective China sup-
ply chain?
Partnering
For how long will the top Chinese
firms remain unmarried? (For
example, Chinese banks have
been forging international strate-
gic and financial partnerships,
making it hard for foreign new-
comers to find top-end banking
partners.) Is time now also run-
ning out for miners to forge
meaningful partnerships? Does
that spell the need to act fast?
10
Sourcing High-Value Capital Products from China
The era of Chinese high-value industrial exports is approaching, but the world is weary of diving in
too soon. Yet the real winners will be the foreign firms that successfully navigate the pitfalls and pe-
culiarities, thereby developing experience and realizing cost advantage before it becomes the norm.
Conventional wisdom once held that
East Asian economies fly in forma-
tion: As Japan outgrew a certain
industry, it was passed on to the
Tiger economies of Hong Kong, Tai-
wan, Singapore and Korea. Once
these economies went upmarket,
lower-end industries were then
passed on to the likes of Indonesia,
Malaysia and Thailand.
China’s ‘Great Leap’ of the last
three decades has, however, shown
such thinking to be too conventional
and without much wisdom. Centrally
directed economic development has
seen China leapfrog its Asian
neighbours to play in such indus-
tries as semiconductors and large
passenger planes. And although
Chinese high-tech ability is still sub-
sidised by foreign technology trans-
fers (passenger planes) and govern-
ment backing (Lenovo, Huawei), a
competitive edge has developed in
several areas of high-value indus-
trial and equipment manufacturing.
One of the most interesting such
areas is that of high-value capital
goods (HVCG). Manufacturers of
everything from machine tools to
telecommunications equipment
have moved onto the global A-list,
and in the case of Huawei, a tele-
communications equipment maker
based in Shenzhen, its equipment
and service were considered good
enough to beat Siemens in a Ger-
man tender. Zhenhua Port Machin-
ery had a full two thirds of global
port crane orders in 2006, dominat-
ing in an area once belonging to the
likes of Liebherr and Samsung. Tian
Di Science and Technology is the
national leader in the design and
manufacturing of coal mining equip-
ment, while Hudong Heavy Machin-
ery is the biggest supplier of diesel
engines and related parts to the rap-
idly growing Chinese shipbuilding
industry.
Certainly, many of these companies
have found greatness on the coat
tails of local economic growth, and a
considerable amount of institutional
support. It is true that Chinese state
enterprises are at times prodded to
use local suppliers who may pro-
duce to an inferior quality, but this is
only one part of the story. Through
exposure to world class projects,
Chinese manufacturers have negoti-
ated a very steep learning curve, a
phenomenon that was no doubt as-
sisted by foreign companies who
were willing, thanks to the sheer
size of the Chinese opportunity, to
partner with local firms and some-
times forego intellectual property.
But Chinese suppliers have now
become globally competitive in re-
gard to quality, without having to
fully sacrifice the cost advantage
that they have always had.
Yet there still lies a long way ahead.
Foreign customers will naturally
want to engage Chinese HVCG
manufacturers in products with a
higher value, complexity and risk.
But the Made in China reputation is
still employed as a scare tactic by
European suppliers that charge any-
thing up to 100% higher for equip-
ment that Chinese manufacturers
can make without a flaw. And as
concerns about equipment quality
have been giving way, concerns
about service quality, especially with
regards to after sales service, will
surface. This is an area that cannot
be perfected by R&D and govern-
ment relationships, but only through
experience or by implementing for-
eign practices in organisations that
are often change-resistant.
It is exactly in this area that com-
petitive advantage will be gained by
foreign companies sourcing capital
goods from China. Companies that
have sourced from China usually
find that it is not an easy, smooth
ride. Negotiations are long and un-
predictable; user manuals have to
be translated from Chinese; training
may only be supplied through a
poor translator; or email etiquette
may be interpreted in an entirely
different way than usual. Neverthe-
less, when the machine arrives, it
works perfectly well. This ‘soft skills’
deficit of Chinese manufacturers will
be eliminated over time, but the real
winners over the next several years
will be foreign companies that can
‘beat the curve’ by filling the deficit
themselves, without expecting the
service delivered by traditional First
World suppliers.
This will be difficult, since it may
require an adjustment of old habits
and assumptions which will be as
challenging to foreign companies as
to Chinese ones. Still, through the
use of (reasonably priced) interme-
diate service providers or the pro-
active communication of service
requirements, significant progress
can be made in ‘pulling’ Chinese
suppliers into a more professional
pattern of behaviour, instead of
waiting for them to learn it them-
selves. At the same time, learning to
live with some of the service as-
pects peculiar to Chinese suppliers
would also go a long way in gaining
competitive advantage. This whole
 11

process is obviously fraught with
difficulties: the process of changing
aspects of two very dissimilar cor-
porate cultures contains risk and
ought to be approached with sensi-
tivity. Yet it is in the conquering of
these kinds of difficulties that the
competitive advantage lies.
But doesn’t this apply to all lev-
els of sourcing from China?
The sourcing of high value capital
goods from China is different from
the sourcing of lower value goods in
primarily five areas .
1. Firstly, the sheer scale makes
the potential rewards huge, but
so too the risks. In sourcing
HVCG, careers are often made or
ended, and indeed the growth
prospects of companies can be
influenced. This makes it a high-
stakes effort where success is
either 100% or zero.
2. Secondly, the value and im-
mediacy of HVCG purchases
eliminates the possibility of
‘testing the water’. In some ex-
ceptional cases, a company can
be engaged through buying
gradually more valuable machin-
ery, but this is rare. Thus, instead
of only evaluating a company’s
product, an assessment of the
company itself may be necessary
to determine whether it can com-
plete a product that takes two
years to manufacture.
3. This immediacy then leads to
another major difference, in that it
reduces or eliminates the option
of minimising risk through di-
versification.
4. All this happens against the
background of greater complex-
ity, requiring the parties not only
to do things right, but to also do
more things right, the success of
which are interrelated.
5. A final difference is the need
to manage change. When order-
ing a machine that is to be built
and delivered over a period of
two years, changes in the two
companies need to be managed,
a process that is complicated by
cultural differences, high staff
turnover (in China) and expan-
sion pressures on the Chinese
company.
In the schematic below, the phases
of building sourcing capabilities in
China are illustrated. From initial
sampling, one would move on to the
purchasing of components or low
value products, and then gradually
move on to the third phase, that of
developing a comprehensive China
sourcing solution. When sourcing
HVCG, however, the luxury of the
first two stages do not exist. The
successful sourcing of HVCG auto-

Capturing Value From Strategic Sourcing

Early stage Purchasing com- Developing com- Adopting inte- Capturing global
ponents or com- prehensive grated China advantage
plete products sourcing strategy

• Recognize • Focus on reducing • Sourcing plan • View China as • Exploit global syn-
China’s potential purchasing costs includes both a market and ergies in
- Parts a sourcing loca- - Cost structure
• May source some • Obtain valuable tion
- Products - Manufacturing
products on a trial understanding of strategy
basis the supply base - Talent / R&D • Leverage syner-
gies between ex- - Supply chain
• Have no formal • But gain little de- • Advantage gained port sourcing and
China initiatives fensible advan- from domestic produc- • Leverage best
tage - Supplier relation- tion global capabilities
• Not yet organized ships - Integrated capac- - Deploy high-cost
for sourcing in - Product develop- ity planning assets
China ment - Flexible produc-
- Proprietary tools tion
and processes
- Market intelli-
gence
Source: Adapted from the Boston Consulting Group
12

matically requires a comprehensive
sourcing solution at the outset, and
for this reason the lessons normally
learnt in the first two stages need to
be directly applied in the third stage.
In short, sourcing HVCG from China
presents more risk than sourcing
HVCG from First World suppliers.
But contrary to popular belief, the
risk and difficulties reside not in
product quality, but rather in ab-
stract processes such as relation-
ship management, the ability to in-
fluence, communication, protocol
and expectations.
Indeed, many Chinese companies
manufacture HVCG on a contract
basis for foreign companies, but are
unable to gain access to the end-
user interface due to limitations in
these service-related fields. While
Chinese industry has leapfrogged
the flying formation of the Tiger
economies, it has done so mainly in
terms of technology, not service
delivery. That will take another few
years, and until that day arrives,
real competitive advantage lies in
bridging this gap from the other
side.
Dirk Kotze
China General Manager
dirk@thebeijingaxis.com

Selected Chinese Machinery and Equipment Manufacturers

Name Activities and background Near-term world class export & service readiness 2005 2008 2010
ZTE Corp Telecommunications equipment maker with extensive business in developing markets. Top two in
China.

Huawei Telecommunications equipment maker with extensive business in developing markets. Top two in
China.
Shanghai Four main business segments: power equipment (one of big three in China), electromechanical equip-
Electric ment, transportation equipment, environmental systems. Largest listed machinery enterprise in China.
Suntech Power Solar energy company that designs, develops, manufactures and markets a variety of photovoltaic
(PV) cells and modules. Largest in China.
CIMC Principally engaged in the manufacture and sale of containers, road transport vehicles and airport
bridges. Global leader.
Zhenhua Port Manufacturer of container cranes and large steel structures. Major products include quayside container
Machinery cranes, rubber-tired and rail-mounted gantry cranes. Global leader.
SANY Heavy Largest producer of concrete pumps in China and top five globally. Expanding into a wide range of
Industry construction machinery.
Weichai Power Largest heavy-duty diesel engine manufacturer in China, supplying mainly to domestic truck and con-
struction machinery manufacturers.
CIMH One of top three wheel loader makers in China and looking to expand into excavators.

Hudong Heavy Largest producer of diesel engines and diesel engine parts for the shipbuilding industry in China; pro-
Machinery duces low and medium-speed diesel engines.
Anhui Heli Largest producer of forklifts in China, including engine-powered forklift trucks and battery-powered
forklift trucks, as well as related parts and components.
Tebian Electric Principally engaged in the manufacture and sale of transformers, cables and wires for power transmis-
Apparatus sion; also produces high-voltage electronic aluminium foil and assembles key control components for
solar energy equipment.
Tian Di Principally engaged in the design, production and sale of coal preparation equipment and mining
Science & equipment, the construction of underground engineering projects, as well as the design and construc-
Technology tion of mines and mine production systems.

Shenyang One of top two machine tool makers in China. The company offers its products under five categories,
Machine Tool including computer numeric control (CNC) machines, conventional machines, special machines, set
products and other products, such as function parts and CNC systems. Aggressively buying busi-
nesses overseas.

Fujian Longxi Largest producer of special bearings in the world, including spherical plain bearings, tapered roller
Bearing bearings, argentum (AG) bearings, deep groove ball bearings. Also produces auto parts such as auto-
motive steering systems, shock absorbers and mufflers.
Source: THE BEIJING AXIS case experience and analysis
14

China Sourcing Strategy

China Sourcing: WHY? WHAT and HOW? - Towards a Basic Framework of Analysis. In this edition
we put forward a simplified framework for approaching China sourcing. We briefly elaborate the
Why? and What? Then we ponder the How?

China’s status as the leading global The WHY is impacted in mainly four The HOW question remains the
sourcing hub is now undisputed. areas: China advantage; interna- most problematic. Even after 10
Yet, many firms still find it difficult to tional forces, industry changes and years of China being a major sourc-
extract enough value from their trends; and factors internal to the ing hub, firms with significant ex-
China sourcing ventures. Below we firm. A good amount of emphasis perience still find it difficult to get
briefly highlight key issues that im- should be placed on the WHY and this right. On the next page we high-
pact the question ‘WHY source from WHAT. Desk research, consultants light the typical causes of the HOW-
China?’ as well as the question of and good logic can often sufficiently related problems; and a high-level
‘WHAT to source from China?’ address these two questions. framework for thinking about HOW.

Why Source from China?

China
Growth
International industry and trends Key International r elation s
Firm level Political stab ilit y Sound macro econom y Size
Socio-political environment
Stabilit y
Cost pressur es
Competitors are doing it Capital expenditure & tooling

I alr ead y sour ce internationall y Internal to m y firm Low setup co sts Incentives

Can I identif y the W HAT? Amortised co st in full-cost pri ce

Can I identif y the HOW ? RMB exchange rate

Traditional supplier countries Export incentives i. e. subsidies

rendered un competitive Reduced co st of borro wing
New competitive tr ends WHY Source
My tr aditional supplier went to China Supportive policy environment Active export promotion
from China?
China’s domestic p layer s have Gener al r egulations i.e. cu stoms
reach ed the bar in m y products
Broader industri al b ase
Anti-dumping restri ctions r emoved
Scale and scop e
Better diversified econom y
Tie up top Chinese suppliers before Scope in technolog y produ cts
they partner with comp etition Serviced i.e. engin eer ing & IT
Competitive Strateg y
Provide a Chinese alternative to cl ients Abundant labour
before Chinese ent er m y mar ket dir ectl y Low l abour co sts
Many engineers and scientists
Better infrastructure i.e. r ail, ports, etc
Toy scare not representative
Improved logistics Ongoing qualit y improvem ents
Many service providers More world class supplier s

What to Source from China?

Does China h ave an advantage for m e?
Ask the right questions
Does China h ave the qual it y?
China’s tradition al exports
WHAT to Source What about the logistics impli cations?
Emerging exports
Most likely cluster s from China?
Labour intensive goods W ill I manufacture in Chin a or wor k
with existing Chinese supplier s
Some r aw m ateri als / Rapid upward move in technolog y
intermediat e goods absorption / diffusion How complex is m y product?
Is it a commodit y or stand ardised item(s)?
Many new Chin ese suppliers leapfrog
incumbents with better technolog y Are design and engin eer ing involved?
Key Developm ents Many Chinese can no w m anufacture what Can I force m y suppliers to move to China?
only leading MNCs used to be able to do

OEM suppliers d evelop their o wn brand

Stricter qualit y standard s and b etter enforcement
Trade tensions in certain products i.e. textil es
Anti-dumping status Export subsid ies/reb ates
Regulator y ch anges Export taxes
Support or resistance
Environmental issues
 15

Typical China Sourcing Problems calate as the relationship gets of negating the problems mentioned
From experience we have identified older; above and formulating a winning
many HOW problems in China 2) IP transgressions by suppliers strategy. Concepts such as ‘true
sourcing. We highlight key ones: or other firms; supply chain cost’ and ‘total cost of
3) lengthening lead times; ownership’ remain illusive in the
● Internal buy-in from various divi- 4) troublesome logistics (i.e. cus- absence of a sourcing strategy that
sions to join the centralised China toms and shipping arrange- can be fully implemented.
procurement effort. This causes ments); and
fragmented attempts, slows or- 5) contract renegotiation etc. Implementation requires a good grip
ganisational learning and reduces Constructing a Framework on SCM organizational design;
synergies. Strong top manage- The key is to approach the HOW people, skills and teams; method-
ment support and good Global firstly from a strategic angle and ologies, processes and in-
CSM organization is crucial; then to move to an implementation source/outsource decisions; and
● Internal users of products often model that comprehensively and working with service providers. It
prefer developed country (i.e.
systematically addresses all the also requires solid holistic manage-
German) quality, and equate Chi-
relevant problem areas. We argue rial skills in the areas of project, risk
nese products with inferior qual-
that a thorough understanding of and relationships. The conceptual
ity. Internal education and re-
education is needed; China, goals/objectives, global in- map below highlights these inter-
● Project management during de- dustry dynamics and the firm itself dependencies.
sign/engineering and fabrication. are necessary to help drive deci-
Languages, practices and differ- sion-making about the approach to In the next edition we will look at
ent priorities can cause havoc. In China sourcing that will be followed. Organization. We explore the opti-
China sourcing the emphasis of mal structure for multinational SCM
Project Management needs to fall Not everyone needs to become a / Procurement / Sourcing teams that
on Relationship Management; ‘Sinofile’, but it is necessary to un- are active in China.
● Some common other problems derstand China’s cultural nuances,
that are often sited are the follow- practices and economic landscape. Kobus van der Wath
ing: That itself implies advantage and Group Managing Director
1) quality declines or prices es- can greatly enhance the probability kobus@thebeijingaxis.com

How to Source from China?

Views of contracts Anal ysis

Culture in business Sourcing Supplier id , filtering, selection
Risk m anagem ent b y Histor y Negotiation
Impact of langu age
relationship Culture Ordering, liai son
Concept of time China SCM
Organization Commercial & contr acts
Politics & po wer Understanding China
Economic tr ansformation Technical/ engineering support QA, Expediting
Logistics
Cost (TCO)
Deliver y cycles Languages skill s
Obj ectives Implementation
Production/selling in Chin a People Cultural astuteness
International p erspective
Low volume h igh value vs
high volume lo w value Context of my Benchmar king processes against best practi ce
industr y
HOW to Source
Many suppli ers or a f ew from China? Risk m anagem ent philosoph y
Does the product travel well? Methodology Project manag ement
China read iness Relationships man agem ent
HQ & top managem ent support Firm factors Strateg y Processes in-house vs outsourced processes
Global SCM organ isation Consultants
Increm ental entr y vs Gr eat L eap into China QA specialists
Managing service
providers Logistics
Agents/Tr ade
Finance/b anks
Fl y-in-fly-out
Contract/lawyer s, et c.
Rep. Office Channel to source—
own sourcing office? Learning
WFOE/FICE Failure
Approach Improvements
JV, etc. Results
Pull out?
Finished products vs components Accelerate and scale
Success
Capital goods vs operating expenditures only Add complex produ cts

Value to be placed at ri sk Revisit ‘approach’ - potential ly ti er up

16

China Sourcing Blog Highlights

Change is in the air with China sourcing, and CSB has been tracking the ominous transportation
and ‘hidden’ costs that have been inflating risk, making this time a critical inflection point in the his-
tory of China sourcing. Yet ultimately, risk is the only thing that cannot be outsourced.

Sponsored by THE BEIJING AXIS,

the China Sourcing Blog takes on a
multi-faceted, dynamic subject, and
carefully scans everything from the
mainstream financial media to the
more distant corners of the Internet
to get to the bottom of all the best
bits and pieces on China sourcing.
The following are some of the most
popular postings over the last three
months:

Posted: 1 July 2008

Costs and risk in global supply
chains are currently higher and
more complicated than ever, yet
under current indications of rising
energy and transportation costs,
analysts project a fundamental re-
orientation of supply chain and
sourcing strategies. Fast, cheap
and often out of control, complex
supply chains have induced risk-
mitigating fever as manufacturers
devise more aggressive strategies
to boost sales and cut costs.
Posted: 19 June 2008
Could China’s three decade-long
growth miracle finally be reaching a
climax? As slower economic growth
in 2008 could be the first indication
of an economic slowdown, the impli-
cations for sourcing are bound to be
significant as China slowly prices
itself out of low-cost country
sourcing. At the same time, how-
ever, 635 million Chinese people
have been lifted out of poverty since
1978.
Posted: 11 June 2008
An independent report by the EU
identified small players, among both
Chinese manufacturers and Euro-
pean importers, as the weak links in
the global supply chain, and be-
Stacked slightly lower at Shenzhen: Energy costs have hit shipping lines hard.
cause of these weak links outsourc-
ing has been moving to the top of
the globalization agenda. Yet de-
spite the elaborate nature of today’s
supply chains, the fact remains that
businesses retain ultimate respon-
sibility for the safety and reliability
of their products: risk remains the
only thing that can never be out-
sourced.
Posted: 30 May 2008
The rapidly rising cost of oil and
transportation is fast becoming
the biggest obstacle for China
sourcing, and may in fact be revers-
ing long-standing trends of global-
ization. As importers begin to feel
the pinch, Chinese exports have
shown signs of receding as ship-
ping lines adapt by raising shipping
costs and renegotiating contracts.
For many analysts these are omi-
nous signs of troubled times
ahead…
Posted: 27 May 2008
With time to reflect on the wave of
China product recalls of 2007, the
strategic impact of the quality con-
cerns seems have been more
stringent quality control meas-
ures that were applied to Chinese
suppliers. Yet these are still no
guarantee for success in China; the
best action to ensure a successful
sourcing program is still to visit the
Chinese factory - multiple times.
And finally…
The China sourcing debate is
never complete without considering
China’s struggle with intellectual
property, and in a posting on 18
May, CSB outlined China’s latest
concrete steps in an uphill struggle
against counterfeiters as IP protec-
tion gradually gains momentum.
CSB@chinasourcingblog.org
www.chinasourcingblog.org
 17

Macroeconomic Monitor
Is China’s Olympian economy slowing down at last? Although the growth rate has softened, further
policy action may be needed. Yet a slowing world economy has given Chinese authorities much
more to think about in their balancing act.

Overview Consumer Price Index (% change y-o-y , 2005-May 2008)

China's buoyant economy grew at 10

11.6 percent in the first quarter of
2008, surging ahead despite Bei-
jing’s efforts at restraint. The 11.6
percent was, however, down from
Q1-07 growth of 11.7 percent and
full year 2007 growth of 11.9 per-
cent. This slight slowdown is likely
to continue in Q2-08 and is a wel-
come pullback below 11 percent.
China's economic growth continues
to be driven by strong export growth
(albeit that y-o-y growth is down to
12 percent in Jan-May 2008 from
last year's y-o-y growth of 18 per-
cent for the full year); soaring in-
vestment in factories and other fixed
assets despite repeated increases
in interest rates this year; and mod-
erate broad-based private con-
sumption growth. Beijing wants to
maintain rapid growth to ease pov-
erty and maintain stability, yet is
concerned that runaway expansion
and overspending on real estate
and other assets could cause struc-
tural problems.
8
6
4
2 7.1% increase, biggest y-o-y since 1996
0
2005 2006 2007
Source: National Bureau of Statistics
A key factor for Beijing is the sharp
increase of CPI over the past 12
months. Higher food prices and en-
ergy costs have pushed the CPI over
8 percent for the first 4 months of
2008. It fell back to 7.7 percent in
May, but rising prices for oil and for
industrial input materials will keep
pressure on prices, even as the ef-
fect of higher food prices starts to fall
out of index calculations. Further oil
price increases (oil from USD100-
145pb and copper spiking to
USD8,000/t again) will certainly add
upward pressure, and thus the Chi-
nese government’s monetary policy
agenda will be dominated by inflation
for the foreseeable future.
Jan-08 Feb-08 Mar-08 Apr-08 May-08
Salient trends & points
● Beijing has to curb growth, but
does not want to do so just as the
world economy slows down
sharply—this has clear implica-
tions: Beijing will want to maintain
its gradualist approach to curbing
credit/liquidity and it will guard
against a too rapid RMB apprecia-
tion.
● Although the Sichuan earthquake
at first appeared devastating, the
severely affected zone is limited,
and situated far from China’s main
economic centres. As such, the
effect on GDP will be marginal.

China GDP Growth (% change y-o-y, 1978-2010F)

Latest overheating
16 concerns
Past periods of
14 overheating
7-10% GDP
12 growth ‘band’
8% GDP growth
10 ‘floor’

8
6
4
2
0
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0 7 0 8 F 0 9 F 10 F

Source: World Bank, China Statistical Abstract 2006, OECD Report, TBA Analysis
18

China Facts, Figures & Forecasts

The following is a selection of recently released data and forecasts that illustrate the main trends in
the growth and transformation of Chinese commerce and industry, with an emphasis on trade and
foreign investment.

China — Selected Economic Indicators

General statistics 2005 2006 2007 2008E 2009E
Population (mn) 1,308 1,314 1,321 1,329 1,336
Nominal GDP ($bn) 2,244 2,645 3,242 4,214 5,592
GDP per capita ($) 1,716 2,012 2,454 3,171 4,186
Real GDP growth (%) 10.4 11.1 11.9 10.5 9.8
Growth in real retail sales (%) 12.1 12.7 13 13.6 13.7
Growth in real fixed asset investment (%) 25.7 24 24.8 20.2 19
Fixed investment (% of GDP) 42 42.8 44.1 43.2 41.8
Prices, interest rates and exchange rates 2005 2006 2007 2008E 2009E
CPI inflation (%, December over December) 1.6 2.8 6.5 7.5 6.2
CPI inflation (% change in average index for the year) 1.8 1.5 4.8 7 7.2
Exchange rate (RMB per USD, end-year) 8.07 7.8 7.09 6.6 5.9
Exchange rate (RMB per USD, average) 8.19 7.97 7.61 6.95 6.25
Nominal wage growth (% year-on-year change, average) 14.6 14.4 16.5 20.3 25
3-month interbank rate (%, end-year) 3.6 2.8 4.4 5.2 5.8
Fiscal data 2005 2006 2007 2008E 2009E
General government fiscal balance (% of GDP) -1.2 -0.8 -0.5 -0.6 -0.6
General government primary fiscal balance (% of GDP) -0.3 0.1 0.3 0.1 0.1
General government expenditure (% of GDP) 18.5 19.2 19.9 20.4 21
Gross general government debt (% of GDP, end-year) 23 20.9 18.3 15.9 13.8
Money supply and credit 2005 2006 2007 2008E 2009E
Broad money supply (M2,% of GDP) 160.7 163.9 163.6 161.9 156
Broad money supply (M2,% year-on-year change) 17.6 16.9 16.7 17.5 15
Domestic credit (% of GDP) 105.9 106.9 106.1 104.1 99.4
Domestic credit (% year-on-year change) 9.3 15.7 16.1 16.5 14
Balance of payments 2005 2006 2007 2008E 2009E
Exports (goods and non-factor services, % of GDP) 37.3 40.1 41 34.3 28.6
Imports (goods and non-factor services, % of GDP) 31.7 32.2 32.2 31.8 28
Exports (goods and non-factor services, % increase in $value) 27.6 26.9 25.2 8.9 10.7
Imports (goods and non-factor services, % increase in $value) 17.4 19.8 22.2 28.5 16.9
Current account balance ($bn) 160.8 249.9 333.7 150 73.1
Current account (% of GDP) 7.2 9.4 10.3 3.6 1.3
Net FDI ($bn) 67.8 60.3 67.7 32 25
Scheduled external debt amortization ($bn) 18.1 20.9 24.1 27.3 30.5
Foreign debt and reserves 2005 2006 2007 2008E 2009E
Foreign debt ($bn, year end) 281 323 373 423 473
Public ($bn) 98.7 108.2 118.7 130.3 142.9
Private ($bn) 182.4 214.8 254.2 292.7 330.1
Foreign debt (% of GDP, end-year) 12.5 12.2 11.5 10 8.5
Foreign debt (% of exports of goods and services) 33.6 30.4 28.1 29.2 29.5
Central bank gross FX reserves ($bn) 819 1,066 1,528 1,773 1,918
Central bank gross non-gold FX reserves ($bn) 815 1,062 1,524 1,768 1,914
Source: Credit Suisse, Capital Goods Research Analysis, April 2008
 19

Statistics by Province

Provinces in red make up

half of China’s total GDP

Heilongjiang

Jilin
Xinjiang Beijing

Gansu Inner Mongolia Liaoning

Ningxia
Hebei Tianjin
Qinghai
Shanxi Shandong

Tibet Shaanxi Henan Jiangsu

Sichuan

Hubei Anhui Shanghai

Chongqing
Zhejiang
Jiangxi
Hunan
Wenchuan County, Sichuan, Guizhou
Fujian
epicentre of May 12 earthquake
Yunnan
Taiwan
Guangxi Guangdong

Hainan

Pop. Pop. % GRP* in % of Comparable Pop. Pop. % GRP* % of Comparable

in mn of Total USD bn GDP Size Economy in mn of Total in USD bn GDP Size Economy
Anhui 61 4.7 77 2.6 Morocco Jiangsu 76 5.9 278 9.4 Denmark
Beijing 16 1.2 101 3.3 Peru Jiangxi 43 3.3 60 2 Slovakia
Chongqing 28 2.2 45 1.5 Croatia Jilin 27 2.1 55 1.9 Slovakia
Fujian 36 2.8 98 3.3 Peru Liaoning 43 3.3 119 4 Philippines
Gansu 26 2 29 1 Sri Lanka Ningxia 6 0.5 9 0.3 Nepal
Guangdong 93 7.2 336 11.3 Austria Qinghai 5 0.4 8 0.3 Afghanistan
Guangxi 47 3.6 62 2.1 Vietnam Shaanxi 37 2.9 58 2 Slovakia
Shandong 93 7.2 283 9.6 South Africa
Guizhou 38 3 29 1 Sri Lanka
Shanghai 18 1.4 133 4.5 Singapore
Hainan 8 0.6 13 0.5 Ethiopia
Shanxi 34 2.6 61 2.1 Vietnam
Hebei 69 5.3 149 5 Chile
Sichuan 82 6.3 111 3.7 Egypt
Heilongjiang 38 2.9 79 2.7 Morocco Tianjin 11 0.9 56 1.9 Slovakia
Henan 94 7.3 160 5.4 Colombia Tibet 3 0.2 4 0.1 Niger
Hubei 57 4.4 97 3.3 Peru Xinjiang 21 1.6 39 1.3 Sudan
Hunan 63 4.9 97 3.3 New Zealand Yunnan 45 3.5 51 1.7 Libya
Inner Mongolia 24 1.9 61 2.1 Vietnam Zhejiang 50 3.9 202 6.8 Portugal
Source: TBA Analysis, Various 2006; *GRP: Gross Regional Product
20

China Trade Roundup

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

China Total Trade (May 07-Apr 08, USD bn) China Total Trade by Main Commodities (2006, USD bn)

Imports Exports 1000 Fuel & Mining

120
800 Agriculture
100
600
80
Manufacturing
60 400
40 200
20
0
0 Imports Exports
M J J A S O N D J F M A
Source: PRC Ministry of Commerce Source: China National Bureau of Statistics

China 10 Largest Trade Surpluses (May 07-Apr 08, USD bn) Total Trade (Imports & Exports) with Major Partners 2007

Hong Kong USD 159 bn United

United States USD 148 bn Japan
Netherlands Hong
UK Korea S.
UAE Taiwan
Spain Germany
Singapore Russia
Italy Malaysia
Vietnam Holland
Turkey Australia

0 50 100 150 200 0 50 100 150 200 250 300 350

Source: PRC Ministry of Commerce Source: PRC Ministry of Commerce

China’s Importance to the World: Trade with China as a Percentage of Country or Territory GDP (2007)

Key*:
30%

China
15%

0%

No Data Available
Source: TBA Analysis
*For reasons of presentation the colour scheme used on this map only varies between 0 and 30%, with all countries representing percentages larger than 30% shown in
black. These countries are: Benin (32%), Equatorial Guinea (30%), Liberia (84%), Mongolia (59%), Rep. of Congo (41%), Singapore (31%) and Togo (33%).
 21

Total China Imports (CIF) & Exports (FOB) 2000-2007 China’s Share of World Exports (2006)

35% Clothing
12,500
Imports Exports 30% Textiles
10,000 Office/Telecom
25% Machinery/Transport
7,500 20% Iron and Steel
Food
5,000 15% Chemicals

2,500 10% Fuel / Mining

Automotive
5% Products
0
0%
2000 2001 2002 2003 2004 2005 2006 2007
Source: China Statistical Yearbook 2007 Source: WTO Database

Total Value of Exports to China of Top 10 Exporters

2000 (USD133bn) 2007 (USD410bn)
Hong Kong
Hong Kong Thailand 5%
3%
Thailand 3% 7% Australia 5%
Australia 4% Russia 4%
Russia 4% Singapore 4% Japan
Singapore 4% Malaysia 6% 28%
Japan 31%
Malaysia 4%
Germany 8%
Germany 9%
S. Korea
USA 17% 17%
S. Korea 22%
USA 14%
Source: Asian Development Bank: Key Indicators 2007

Total Value of Top 10 Exporters from China

2000 (USD184bn) 2007 (USD774bn)

Japan 13%
Hong Kong
Hong Kong Japan 24%
24% 23% S. Korea
7%
Italy 2%
S. Korea Italy 3%
UK 3%
6%
Russia 1% UK 4%
Singapore 4% Russia 4%
USA USA 30%
Netherlands 4%
Germany 5% 28% Singapore

Source: Asian Development Bank: Key Indicators 2007

Netherlands 5% Germany 6%
22

Financial Markets
Tracking the dynamics of China’s Shanghai and Shenzhen Composite Index Indicators and Bench-
mark Interest Rates, Financial Markets also illustrates recent trends and transformations in China’s
exchange rate regime.

Shanghai
Share of & Shenzhen
BRI(C)S TotalComposite
Trade withIndex (3(Jan-Dec
China month) 07) RMB Exchange Rates (12 month trailing, Indexed)
Index: 1 March 2008 = 100% RMB/Foreign Currency

120 115
Shanghai Shenzhen 110 USD RUB ZAR AUD
100
105
80 100
95
60
90
40 85
80
20
75
0 70
March April May 1 July 2007 3 July 2008
Source: Shanghai Stock Exchange, Shenzhen Stock Exchange Source: Oanda Corporation

Benchmark Interest Rates (as of 20 June 2008) USD/RMB Exchange Rate (since peg loosened in 2005)

15% 4
12%
12% 19 July 2005: 14% appreciation
5 RMB ‘unpegged’ up to 2 July 2008
10% 7% 8% from US Dollar
7%
5% 6
4%
5%
2% 7
1% .5%
CAGR 4
0% 8
EU

UK

Brazil
US

Australia

China

Africa
Japan

South
India

9
2005 2005 2007 2008

Source: China State Administration of Foreign Exchange Source: PRC Ministry of Commerce

10 Largest Chinese Listed Firms (USD bn)

P e t ro C hina 530 Petrochemicals

Indus t ria l a nd C o m m e rc ia l B a nk o f C hina 206 Financial
S ino pe c 139 Petrochemicals
B a nk o f C hina 130 Financial
C hina S he nhua E ne rgy C o m pa ny 119 Utilities
C hina Lif e 97 Insurance
C hina M e rc ha nt B a nk 51 Financial
P ing A n Ins ura nc e 40 Insurance
B a nk o f C o m m unic a t io ns 39 Financial
C hina P a c if ic Ins ura nc e 39 Insurance

0 100 200 300 400 500 600

Source: Shanghai Stock Exchange
 23

FDI and OFDI

With FDI and OFDI increasing both in and from China, FDI & OFDI illustrates sources of FDI into
China and unpack Chinese outbound investments, as well as mergers & acquisitions involving Chi-
nese firms locally and abroad.

China remains an attractive destination for FDI

China’s Foreign Direct Investment reached USD42.78 2007 Top 10 Sources of FDI (USD bn)
billion from January to May this year. This latest figure Hong Kong
Br Virgin Islands
shows that China remains a favoured destination for in-
South Korea
vestment from overseas, especially among big multina- Japan
tional corporations, which see the market potential as an Singapore
important priority and recognize various opportunities for United States
FDI in multiple sectors in China, including services. FDI Cayman Island
Western Samoa
has, however, also contributed to China's excess liquidity Taiwan
and massive build-up in foreign exchange reserves, Mauritius
which, by the end of May, were the largest in the world
0 5 10 15 20 25 30
(USD1.75 trillion)
Source: Ministry of Commerce

China outbound investments are soaring

China's outbound Foreign Direct Investment received a China Outbound FDI (USD bn)
50
great deal of attention in 2007 because of the creation of 45
the PRC's sovereign wealth fund, the China Investment 40 32 USD bn Jan-May 2008

Corp. (CIC), and several other high-profile investments 35

30
and acquisitions. In May 2007, CIC announced the pur- 25 %
106
chase of a USD3 billion stake in Blackstone, and in De- 20 GR
CA
cember purchased a 9.9 percent stake of Morgan 15
Stanley, worth USD5 billion. China's outbound investment 10
5
totaled about USD30 billion in 2007, a figure that is still 0
less than half of the investment that flowed into China in Jan-May
2003 2004 2005 2006 2007 5/2008
2008
the same period.
Source: Ministry of Commerce

China M&A becoming a force

Mergers and acquisitions in China reached USD43.1 bil- China Outbound M&A (USD bn)
30
lion in the first quarter of 2008. Cross-border M&A
reached USD28.5 billion, four times the year-earlier value. 25
The manufacturing sector had USD21.8 billion in M&A 20
%
transactions, about half of the total, followed by the finan- 80
15 GR
cial and energy industries with USD7.2 billion and USD6 CA

billion, respectively. In February the Aluminum Corpora- 10

tion of China and US aluminum producer Alcoa bought a 5
12 percent stake in the British-listed company of iron ore
giant Rio Tinto for USD14.05 billion, the largest overseas 0
investment ever by a Chinese enterprise. 2003 2004 2005 2006 2007
Source: Ministry of Commerce
24

The C in BRICS
With recent economic statistics from Brazil, Russia, India, China and South Africa, The C in BRICS
is a comparative segment that ‘compares and contrasts’ China with the other leading developing
economies.

Imports of Goods and Services (% of GDP) Exports of Goods and Services (% of GDP)

South Africa South Africa

Russia Russia

Brazil Brazil

India India

2006 2006
China China
2005 2005
2000 2000
0 10 20 30 40 50 60 0 10 20 30 40 50 60
Source: World Bank Source: World Bank

Market Capitalization of Listed Companies (% of GDP) GDP (Current USD in Billions)

South Africa 3,000

China
2,500
Russia
2,000
Brazil
1,500
Brazil
India 1,000 Russia
2006 India
China 2005 500
2000 South
0 Africa
0 50 100 150 200 250 300 2000 2005 2006
Source: World Bank Source: World Bank

Fixed Line and Mobile Subscribers (per 100 people) Internet Users (per 100 people)

South Africa *
South Africa*

Russia
Russia*

Brazil
Brazil

India India *

2006 2006
China 2005 China
2000 2005
2000
0 10 20 30 40 50 60 0 5 10 15 20 25
*Year 2006 data not available *Year 2006 data not available
Source: World Bank Source: World Bank
28

China Business News Highlights

Second quarter Chinese business developments were underlined by rising resource costs. Iron ore
prices escalated by up to 97% as demand from China grew. Sinosteel took matters into its own
hands by attempting China’s largest global mining sector takeover.

Natural Resources
China’s largest steel maker, Baos-
teel, and Australian mining com-
pany Rio Tinto have negotiated an
iron ore price increase of up to
97% - the highest price increase in
over a decade and nearly double
that of 2007. The state-owned steel
group has since 2007 been the
global steel industry’s primary nego-
tiator with the world’s three largest
producers of iron ore. Chinese steel
makers have accepted price rises
for six consecutive years, driven up
by huge increases in demand. The
increase is also likely to destabilise
BHP Billiton’s efforts at taking over
Rio Tinto.
On 20 June retail prices for oil
and gasoline rose for the first time
since November 2007. Gasoline
went up by 16 percent, while diesel
rose by 18 percent, and electricity
tariffs rose by just less than 5 per-
cent. This was in response to stead-
ily rising crude oil prices - up by 45
percent from November last year.
The increase was made to ensure
stable supplies in the country, as
many local refineries had cut back
production to avoid making losses.
around 80,000 barrels per day of
fuel, amounting to 3.4 million tons
annually of diesel, naphtha, lique-
fied petroleum gas and jet fuel.
The Australian Securities and In-
vestments Commission (ASIC) and
the China Banking Regulatory
Commission have formalised an
agreement that will see Australia
become an approved investment
destination under the Chinese
Qualified Domestic Institutional In-
vestor (QDII) scheme. This essen-
tially means that approved Chinese
securities institutions may, on be-
half of their clients, invest in Austra-
lian-listed stocks and management
investment schemes registered by
ASIC. ASIC Chairman Tony
D’Aloisio believes the agreement is
evidence that Australia’s capital
markets are seen as highly favour-
able by China. Other countries al-
ready recognised under the QDII
scheme are Hong Kong, United
States, United Kingdom, Singapore
and Japan.
Sasol Global Fischer-Tropsch Activities
Aluminium Corporation of China
Ltd (Chinalco) - China’s top alumin-
ium producer - will team up with Ma-
laysia's MMC and Saudi Arabia's
Binladin for a joint aluminium pro-
ject in Saudi Arabia. The project,
estimated to carry a USD4.5 billion
price tag, includes an aluminium
smelter plant and an equipped
power plant to be located in Jazan
Economic City in Saudi Arabia. The
three sides also signed an agree-
ment that increases support levels
with the Saudi Arabia General In-
vestment Authority. The smelter will
have an annual production capacity
of 1 million tons. Chinalco will take a
40 percent stake in the plant as the
largest shareholder, and will also
provide the technology and alumina.
The Chinese government is ex-
pected to withhold pricing interven-
tion in terms of domestic steel
prices. The net increase in price,
that factors in shipment and energy
charges, is expected to rise up to
CNY1,000 per tonne. President Hu

A Sasol official stated on June 13

that the South African petrochemi-
cal giant and China's leading coal
producer, Shenhua Group, will
jointly produce fuel from coal in
China starting from around 2016.
Joint feasibility studies for two coal-
to-liquid projects showed smooth
progress and are expected to be
completed by the end of 2009. The
two projects, one in Shaanxi Prov-
ince and the other in Ningxia Prov-
ince, will each be able to produce
 29

Jintao did however say he is con-

sidering raising steel export taxes in
order to ensure sufficient domestic
supply.

China’s Zhenhua Port Machinery

(ZPMC) has won orders worth
USD2.03 billion in the first half of
the year, up 32% from a year ear-
lier. ZPMC is the world’s largest
maker of port cranes and related
systems, with a market share of
more than two thirds of the global
market.

China's Sinosteel remains op-

posed to the proposed merger
between Australian iron ore groups
Midwest Corp - of which Sinosteel
is the major stakeholder - and Mur-
chison Metals Ltd. Sinosteel has
built up a 43.6 percent stake in Mid-
west Corp after the surprising ac-
ceptance of its below market price
offer by Malaysian shareholders.
This is part of Sinosteel’s own
AUD1.36 billion (USD1.3 billion)
takeover bid. Sinosteel has ap-
pealed to Australia's Takeovers
Panel in an attempt to legally pre-
vent Murchison from carrying out a
reverse takeover. This is on the
grounds that Murchison and its
main shareholder, Harbinger Capi-
tal, were acting as associates in
that Harbinger's acquisition of Mid-
west shares breached the Foreign
Acquisitions and Takeovers Act
(FATA). Speculation that Sinosteel
may have conceded to a merger at
recent meetings in Beijing has been
refuted. The takeover saga is ex-
pected to be put to a shareholder
vote soon.
The China National Machinery
and Export Corporation (CMEC)
announced in early July that it had
reached agreement on the mineral
rights of the Belinga iron ore de-
posit with the Gabonese govern-
ment. A joint venture company will
run the Belinga Mine and its sup-
Happy Together: China Netcom and China Unicom joined hands in Hong Kong,
hoping to present a challenge to China Mobile’s hegemony.
porting infrastructure for 25 years,
and is expected to yield some 30
million tons annually. The explora-
tion and construction costs will be
more than USD790 million, includ-
ing the construction of 500km of
railways, dams and a deep water
port. This will be China’s largest
single resource investment in Africa
to date. The Belinga deposit is the
world’s largest undeveloped iron
ore resource. The Exim Bank of
China will finance the project.
Industry
China’s producer price index
(PPI) increased 8.2 percent year-
on-year in May - the fastest growth
in almost four years. The PPI
measures price changes at the so
called ‘factory-gate’ and is one of
the best indicators of future con-
sumer price inflation (CPI) move-
ments due to be passed on by pro-
ducers. The increasing PPI num-
bers could signal further rising CPI
figures for China in the months
ahead. China’s CPI was up 8.5
percent in April, following an 8.3
percent rise in March and an 8.7
percent increase in February.
On the back of strong demand for
passenger cars, China’s domestic
automobile sales are expected to
rise by 15 percent this year. 4.3
million cars have already been sold
in the first five months of this year,
a 17 percent increase over the
same period last year. However,
while automotive sales decreased
by 13 percent month-on-month in
May, the total number still repre-
sents an increase of over 20 per-
cent from the same date in May
2007. Despite the slowing growth
in business vehicle sales, demand
for passenger cars has remained
robust.
The newly released Fortune 500
30
list included 35 Chinese companies,
the most ever. The highest ranking
of these was oil giant Sinopec, who
joined 18 other state-owned firms
on the list, mostly energy, financial
and telecommunications compa-
nies. 26 companies hail from the
mainland, three from Hong Kong
and the remaining six from Taiwan.
Retail
Chinese retail sales of consumer
goods increased 22 percent in a
year-on-year comparison in April.
Total retail sales for the first quarter
were CNY3.3697 trillion. Real
growth in April (excluding the effects
of inflation) was only one percent-
age point - signalling greater price
stability.
ICT
Telecommunications giants
China Unicom and China Netcom
have announced a merger valued
at CNY439.17 billion. The Hong
Kong-listed companies have
reached a share swap agreement
whereby each Netcom share will be
exchanged for 1.508 Unicom
shares. Furthermore, China Tele-
com has agreed to buy the CDMA
(code division multiple access) ser-
vices of China Unicom for CNY100
billion (USD14.49 billion). The
merger is a sign of the growing
trend of unions in China between
fixed-line and mobile networks. The
overriding aim is to restructure and
increase competition in the China
telecommunications industry, break-
ing China Mobile’s de facto monop-
oly. All deals should be completed
by October this year. As soon as
restructuring is complete, the gov-
ernment has announced plans to
issue three 3G licenses, enabling
access to a range of additional mo-
bile services and applications.
Internet has surpassed print me-
dia to become the second most
popular information channel for the
Chinese audience following the
Olympic Games. A survey covering
China’s 10 largest cities found that
30 percent of respondents plan to
use the Internet to follow events,
while around 90 percent will watch
the games on television. According
to a recent BCG report, China’s
more than 210 million Internet users
spent an average of 570 million
hours online per day in 2007.
Finance
Chinese urban property prices
rose just over 10 percent year-on-
year in April – up from only 7.6 per-
cent in the previous year. In Beijing,
prices are up 16.1 percent from last
year. While the rise is considered
stable, there is an unwillingness to
buy property prior to the Olympic
Games in the expectation that prices
will moderate afterwards.
The World Bank has increased its
China’s 2008 inflation rate fore-
cast from 4.6 percent to 7 percent.
Projected GDP growth has been
raised from 9.6 percent to 9.8 per-
cent. Despite a slowdown in growth
in line with the global economic
slowdown, real growth has remained
robust. Although inflation is ex-
pected to drop by next year, its rapid
rise continues to be a challenge and
the World Bank has recommended
that China maintain its tight mone-
tary policy stance in response.
Banking sector shares dropped
on the Shanghai Stock Exchange,
reaching an 11 month low in mid
June. This follows the fifth increase
in the reserve ratio requirement this
year, resulting in a continuing reduc-
tion in banking funds available for
loans. The Industrial and Commer-
cial Bank of China Ltd (ICBC) - the
nation's largest bank and the world's
biggest by market value - dropped
8.4 percent, while China Construc-
tion Bank Ltd fell 7.8 percent and
Bank of China Ltd by 7.9 percent.
The Industrial and Commercial
Bank of China (ICBC) said first-
quarter profits rose by 77 percent,
due mostly to increased company
borrowing and income from wealth
management fees. Despite the Chi-
nese government’s attempt to slow
credit growth, ICBC has increased
corporate loans and services to
China's growing ranks of wealthy
citizens. ICBC has also made acqui-
sitions in Indonesia, Macao and
South Africa in the past year in a
move to triple the share of profit
stemming from overseas invest-
ments.
May 2008 saw the highest number
of mergers and acquisitions for a
month in China’s history. Despite
the total number of deals being un-
known, it has been revealed that of
the 33 mergers that involved capital,
a total of USD5.56 billion was in-
vested. Nearly 53 percent of this
took place in the manufacturing,
energy and mining sectors, with
these areas having experienced
M&A growth rates in excess of 60
percent for 3 consecutive months.
The newly established Chinese sov-
ereign wealth fund, the China In-
vestment Corporation (CIC), has
joined other similar funds in coming
to a general agreement on volun-
tary guidelines for greater trans-
parency and better governance
standards. The so-called ‘Generally
Accepted Principles and Practices’
was reached under an IMF-
sponsored umbrella referred to as
the ‘Working Group of Sovereign
Wealth Funds’. Sovereign wealth
funds broke onto the news front in
2007 when China announced it
would establish such a fund as part
of an effort to better apply its mas-
sive foreign exchange reserves.
 31

China’s International and Cross-Straits Relations

More favourable political weather has seen China’s relationships with its Asian neighbors show
marked improvement in recent times. Soft power and pragmatism are replacing some of the hard-
line rhetoric that has often dominated regional headlines in recent years.

Following the Kuomintang’s (KMT)

resounding win in Taiwan’s March
elections, there has been a re-
sumption of cross-straits talks
between Taiwan and mainland
China for the first time in almost ten
years. The chairman of Mainland
China’s Association for Relations
Across the Taiwan Straits, Chen
Yunlin, and the Taiwan-based
Straits Exchange Foundation chair-
man Chiang Pin-kun, met during
June to discuss economic, social
and cultural issues on the basis of
the ‘1992 Consensus’. Agreements
have included recent settlements
allowing mainland tourists to visit
Taiwan. As part of this resolution,
regular flights will be allowed be-
tween Beijing and Taiwan’s two
largest cities, Taipei and Kaohsiung,
starting from 4 July. These will be
the first scheduled flights be-
tween the two sides since 1949. Reaching across the Straits: President Hu Jintao met with Chiang Pin-kun,
chairman of Taiwan’s Straits Exchange Foundation, the island’s official body
China and Vietnam will complete dealing with cross-straits issues.
erecting markers along their com-
mon land border by the end of the
year, a visiting Vietnamese leader June 18 saw newly installed Chi- tation of the Cuban Communist
said on May 30. This deadline, set nese officials introduced to the Party. Although touted as a regular
in 1999, was reaffirmed in a meeting US congress. The meeting fol- visit to an old ideological ally, the
between China’s President Hu Jin- lowed two days of high-level Strate- visit was widely regarded as a
tao and Vietnam’s Communist Party gic Economic Dialogue (SED) talks high-level endorsement of the new
Secretary General Nong Duc Manh. between a number of Bush admini- leader of the Cuban Communist
According to a statement released stration Cabinet officials and their Party, Raul Castro.
after the talks between Hu and Chinese counterparts at the US
Manh, China and Vietnam will work Naval Academy in Annapolis, Mary- The foreign ministers of China,
towards signing new border regula- land. The Chinese delegation was Russia, India and Brazil (BRIC)
tion agreements. led by Wang Qishan, recently in- met in Russia in May for the first
stalled as China's Vice Premier. time outside the format of other
China will work with South Africa The SED agreements signed at the international organizations. Agree-
to enhance exchanges and coop- talks included an energy deal and a ing to further deepen future coop-
eration to push forward the bilateral bilateral investment treaty. eration, the countries discussed
strategic partnership, said Presi- and agreed on issues including
dent Hu Jintao after a meeting with He Guoqiang, a prominent Chinese food security, international law,
the leader of the African National Communist Party member, made challenges to global security and
Congress, Jacob Zuma, on June 12. an official visit to Cuba at the invi- world economic issues, as well as
32

stances on anti-terrorism, disarma-
ment and UN reform. UN Security
Council members Russia and China
emerged at the meeting as strong
proponents of a multipolar order in
international politics, balancing US
hegemony by attaching more impor-
tance to international organizations.
A Japanese navy ship, the
Sazanami, called at the Zhanjiang
military port in Guangdong Province
on June 24 for a five-day visit - the
first such port call by a Japanese
navy vessel to China since World
War Two. China staged an unusu-
ally large welcoming ceremony for
the destroyer, which in a similarly
remarkable gesture delivered emer-
gency supplies for victims of the Si-
chuan earthquake. The visit was
widely seen as a significant step
forward in the generally frosty rela-
tions between the two Asian giants.
In 2005 Beijing, Shanghai and other
major Chinese cities experienced
violent anti-Japan protests after the
then Japanese Prime Minister, Juni-
chiro Koizumi, visited the controver-
sial Yasukuni shrine in Tokyo where
several war criminals are interred.
The succession of Koizumi by
Shinzo Abe in 2007 seemed to her-
ald the start of better relations, but
the fact that Abe’s grandfather
served as the Japanese governor of
occupied Manchuria (Northeast
China) in World War Two placed
symbolic strain on the relationship.
A 4-year dispute over the East
China Sea Chunxiao gas field was
settled when China and Japan
agreed to cooperate in the explora-
tion and development of the field.
This move holds much potential for
progress on some of the numerous
maritime territorial disputes that

A Brief History of Cross-Strait Relations

1949 The Chinese civil war ends with the defeated Kuomintang (KMT) holed up on Taiwan, and the Commu-
nists controlling the mainland

1958 Mainland forces shell the Taiwan-held island of Jinmen, bringing the US to the brink of war with China

1960 President Dwight Eisenhower visits Taiwan as a show of support

1972 President Nixon visits China, laying the foundations for switching recognition to the People’s Republic
of China

1972 The Republic of China (Taiwan) is expelled from the UN and replaced by the communist People’s Re-
public of China

1979 The US officially switches recognition from the Republic of China to the People’s Republic of China

1979 The daily firing of shells between mainland China and Taiwan-held Jinmen island stops after 21 years

1987 Martial law is repealed in Taiwan, allowing Taiwanese residents to reunite with family members on the
mainland for the first time since 1949

1991 Taiwan holds its first democratic election, boosting its international standing

1992 The first semi-official talks between government bodies take place

1996 China tries to influence the 1996 Taiwan election by conducting missile exercises in the Taiwan Straits
and dropping bombs 25km from Taiwan’s biggest harbour

2000 The pro-independence DPP comes to power in Taiwan, leading to an 8 year hiatus in meaningful con-
tact between the two sides

2005 Opposition KMT leader Lien Chan visits China and formally makes peace with the Communist Party

2008 The KMT regains power in Taiwan in March, promising increased exchanges with China, including the
first scheduled direct flights between the mainland and Taiwan since 1949
 33

China has with other countries in

the region. The most contentious of
these are still the Spratly Islands, a
collection of barren islets and reefs
lying in the South China Sea, equi-
distant from Vietnam, Malaysia and
the Philippines. The area, claimed
by five countries, is thought to pos-
sibly contain significant deposits of
oil.

Despite global condemnation of the

situation in Zimbabwe, China reaf-
firmed its policy of non-interference
in the domestic affairs of other
countries. Foreign minister Yang
Jiechi confirmed that Beijing will
oppose UN sanctions against Ha-
rare, amidst efforts by US Secretary
of State Condoleezza Rice to con-
vince China otherwise. China’s
steadfast refusal to take sides in the
domestic squabbles of other coun-
tries has earned it extensive criti-
cism, especially with regards to con-
flicts such as Darfur. Nevertheless,
China considers this policy to be a
cornerstone of its successful en-
gagement of the third world in gen-
eral, and resource-rich regimes in
particular.
New visa regulations implemented
with an eye on security around the
Olympic Games have stirred contro-
versy amongst China’s foreign busi-
ness community, as well as
amongst potential visitors to the
Games. Hotel occupancy rates in
Beijing have plummeted signifi-
cantly to levels not seen since the
SARS crisis in 2003, while estab-
lished companies have experienced
difficulties in arranging new visas for
skilled foreign workers. Chinese
foreign ministry officials, however,
have claimed that the tightened visa
regime is in line with international
practice.
New Zealand and China signed a
Free Trade Agreement in April, the
first such agreement between China
New gunship diplomacy: Japanese naval personnel salute the crew of the Japa-
nese Navy’s ‘Sazanami’ destroyer as they embark for the Guangdong port of
Zhanjiang in the first such peacetime naval voyage to China.
and a First World country. China is
New Zealand’s fourth largest trad-
ing partner, and demand in China is
expected to grow for New Zea-
land’s agricultural and manufac-
tured products and services, par-
ticularly in areas where China is
already New Zealand’s largest in-
ternational customer such as milk
powder and wool.
China’s central role on the East
Asian diplomatic landscape was
affirmed in late June when North
Korea demolished a cooling tower
at its Yongbyon nuclear facility
north of the capital Pyongyang. The
move coincided with North Korea’s
handing over of information to
China on all operations at the plant
dating back to 1986. Although talks
were conducted within the frame-
work of the long-running six-party
talks, China was undoubtedly the
central player in convincing North
Korea to give up its nuclear pro-
gram. China has been North Ko-
rea’s most important ally and trad-
ing partner, yet since Pyongyang
tested a nuclear weapon in Octo-
ber 2006, China’s relationship with
North Korea is said to have been
reassessed to include both pres-
sure and incentives. China’s sup-
port for North Korea ensures a
friendly nation on its Northeastern
border, thereby serving as a land
buffer between Chinese territory
and 30,000 US soldiers based in
South Korea.
In early July French President
Nicolas Sarkozy joined US coun-
terpart George W. Bush in an-
nouncing that he would attend the
opening ceremony of the Beijing
Olympic Games. This followed
some doubt earlier in the year
when, after riots in Tibet, Sarkozy
left open the question of whether
he would attend the event. This
leaves German chancellor Angela
Merkel as the highest profile non-
attendee.
34

Upcoming Events
THE BEIJING AXIS can assist delegates who wish to attend fairs, exhibitions and conferences in
China. Services include research, interpretation, negotiation and travel logistics. For more informa-
tion: info@thebeijingaxis.com, or contact one of our offices.

Date Event Location

2 - 5 July 08 The Sixteenth Shanghai International Printing, Packaging, Paper Industry Exhibition Shanghai
3 - 5 July 08 CIW 2nd China International Water Exhibition Beijing
9 - 11 July 08 The 2008 China Shanghai Electric Industry Fair Shanghai
9 - 12 July 08 Eastpo Shanghai - International Machine Tool Fair Shanghai
22 - 24 July 08 Xinjiang International Coal, Minerals & Exploration technology & equipment expo Xinjiang
23 - 25 July 08 China International Logistics Fair 2008 Shanghai
28 - 31 July 08 China Industrial Equipment Fair Qingdao
28 - 31 July 08 China Machine Tools & Moulds Expo Qingdao
28 - 31 July 08 China Industrial Automation & Instruments Expo Qingdao
28 - 31 July 08 China Power Transmission & Control Technology Exhibition Qingdao
28 - 31 July 08 China Plastics & Rubber Industry Exhibition Qingdao
30 Jul - 2 Aug 08 The 3rd Asia Outdoor Trade Fair Nanjing
14 - 16 Aug 08 2008 China International Special Purpose Vehicle Exhibition Shanghai
19 - 22 Aug 08 19th China International Construction Material and Indoor Decoration Exhibition Shanghai
20 - 22 Aug 08 6th China International Auto Supplies Sourcing Fair Shanghai
21 - 23 Aug 08 The China (Shanghai) International Steel Trading Exhibition Shanghai
28 - 31 Aug 08 The 2nd International Gifts and House Wares Trade Fair Shanghai
8 - 11 Sept 08 CIFIC 2008 Xiamen
17 - 19 Sept 08 16th China International Paper and Pulp Industry Exhibition Shanghai
19 - 21 Sept 08 5th China International Finance Forum Shanghai
22 - 25 Sept 08 2008 International Sourcing Fair Shanghai
23 - 25 Sept 08 2008 China International Special Steel Industry Exhibition Shanghai
26 - 28 Sept 08 5th China International Steel Pipe Industry Expo Beijing
10 - 12 Oct 08 International Automobile manufacture, maintenance and equipment testing expo Shanghai
12 - 14 Oct 08 2008 China International Door Industry Expo Shanghai
14 - 20 Oct 08 2008 Guangzhou International Auto Parts Expo Guangzhou
15 - 17 Oct 08 China International Copper Industry Exhibition Shanghai
16 - 18 Oct 08 2008 China International Aluminium Industry Exhibition Qingdao
16 - 18 Oct 08 2008 China (Qingdao) International Copper Industry Exhibition Qingdao
 35

Alert: Mining Delegation to China (9-15 November 2008)

THE BEIJING AXIS will facilitate a high-impact mining sector fact-finding and business development
delegation to China during November 2008. Places are limited and senior executives from mining
and related companies must let us have their expressions of interest as soon as possible.

Raise your China Mining
Knowledge and Profile
China Mining Sector Unpacked
Global Implications of China’s Rise
China Mining Procurement
Targeted 1-on-1 Meetings
Senior Level Engagement
Attend China Mining 2008 (11-13 Nov)
The Concept
● A China trip that is sector-specific
with focused sub-streams to allow
a deep-dive and assure relevance
Select from 3 Focused Sub-
Streams
1. China Domestic Mining Environ-
ment (Intelligence & Networks)
2. China Goes Global (Intelligence,
Partnering & Networks)
3. China Procurement (Intelligence,
Supplier search, Supplier visits,
Direct engagement, Reference
sites)
Programme Elements
Programme is currently under con-
struction; preliminary items include:
● Orientation in Johannesburg in Oc-
Who would find the trip valuable?
We target those executives with a
serious China agenda that want to
extract more than the usual value
from an expensive, time-consuming
trip to China. We aim for specific
business objectives to be achieved
as opposed to having just a general
China exposure. We will work
closely with individual delegates in
the lead-up to November to ensure
high-impact interactions. We target
mining companies but selected ser-
vice providers and the investment
community would also benefit:
Executives from mining compa-
●

● A well organized itinerary to opti- tober (Individual firm) nies that are selling into China
mise use of time: structured ele- Executives from investing or
● Workshop/Roundtables in Beijing ●
ments (the whole group); targeted fundraising mining companies
on arrival in China (All/Sub-
breakouts (for individual firms to
streams) Executives from service compa-
maintain relevance); and free time ●

(own appointments, and/or leisure) ● Opportunity to attend China Mining nies that are looking at entering
2008 (All) China or sourcing from China
● Timing coincides with China Min-
ing 2008 Conference & Exhibition ● One-on-one meetings with appro- ● Mining and engineering sector
in Beijing (11-13 Nov 08) —Asia’s priate targeted firms. [The Beijing procurement managers
most prominent Mining event Axis will scope individual needs, do ● Sector analysts, strategists and
research and engage appropriate fund managers
● Programme designed to fit around
targets.] (Individual firm)
the proceedings of China Mining Please note that the aim is to keep
and will allow delegates to add ● Supplier/site visits (Individual firm) all interactions at a senior level.
days (before and/or after the
● Mine site visit (optional), etc.
event) for side-trips to relevant ar- Contact in Beijing
eas for meetings & site visits Dirk Kotze—Tel: +86 10 6440 2347
CHINA MINING 2008 Conference &
dirk@thebeijingaxis.com
● Carefully targeted pre-arranged Exhibition Overview
meetings will be tailored to the China Mining is Asia’s premier mining Contact in Johannesburg
specific and focused needs of and exhibition event, hosted by Jackie Li—Tel: +27 11 201 2318
each individual firm/delegate China’s Ministry of Land and Re- jackieli@thebeijingaxis.com
based on research and screening sources. It will be held in Beijing from
● Experienced multi-lingual business 11-13 November 2008. Programme to be finalised in
July/August—expect more info on
consultants will accompany and The event is well attended by insiders www.thebeijingaxis.com.
support each delegate throughout and worthwhile to put on the calendar.
● Flexible travel arrangements For more information please visit: Note: The trip has an Africa-China
(make your own or let us assist) www.china-mining.com focus but delegates from other re-
gions are welcome to contact us.
36

Careers at THE BEIJING AXIS

THE BEIJING AXIS is looking for dynamic, creative, performance-driven individuals to assist us in
meeting our present and future business challenges. If you can make a contribution to THE BEI-
JING AXIS, even if you specialize in a field not listed below, please send your CV with a letter of
motivation and references to our Group Managing Director: kobus@thebeijingaxis.com.

LEAD CONSULTANT

Beijing; 1 position

● To lead consulting assignments

in the Strategy Division of THE
BEIJING AXIS;
● To be a thought leader—and
manage a team of consultants as
they perform research/analytics
and create top-level strategic
intelligence;
● MBA preferred with more than 8
years experience in consulting
and management;
● Strong focus preferred in the min-
ing industry, with experience in
any of the BRICS markets a sig-
nificant advantage;
● Native English written and verbal Let your career take off: THE BEIJING AXIS is in an entrepreneurial firm and
communication skills essential; welcomes applications from persons with a well grounded knowledge of their
● Mandarin language an advantage professional fields in a China context.

SOURCING ENGINEER CONSULTANT ANALYST

Beijing; 1 position Beijing and JHB; 2 positions Beijing and JHB; 2 positions

● Employed in the China Sourcing
Unit of THE BEIJING AXIS;
● Strong sourcing (or manufactur-
ing) project management skills
● Focus: Project manage sourcing
schedules (i.e. ensure that spe-
cialised capital equipment is
manufactured to required stan-
dards and delivered on time);
technical QA/QC knowledge; ex-
pediting experience and strong
supplier management skills
● A degree in engineering, prefera-
bly mechanical/mining-related
with a minimum of 10 years work
experience in appropriate field;
● Excellent English and Mandarin
written and spoken ability
● Employed in the Strategy Division
of THE BEIJING AXIS;
● Analytical and problem solving
skills;
● A degree in a business or techni-
cal discipline with a post-
graduate qualification;
● Minimum of 3 years work experi-
ence in an appropriate or related
field;
● Strong experience in the formu-
lating and execution of research
methodologies and analysis is
preferred;
● Excellent written and verbal com-
munication skills;
● Mandarin not essential, but re-
garded as an advantage
● Employed in the Strategy Division
of THE BEIJING AXIS;
● To assist in research and distill-
ing information and data into first
level analysis;
● A degree in a business or techni-
cal discipline, with a minimum of
two years work experience in a
similar field;
● Strong working knowledge of the
MS Office Suite and project man-
agement software tools. Analyti-
cal and problem solving skills and
an attention to detail are essen-
tial;
● Excellent written and verbal com-
munication skills
● Mandarin not essential
38
THE BEIJING AXIS News
Community
Following the tragic earthquake in
China’s Sichuan province on 12
May, THE BEIJING AXIS and its
staff made a modest donation to the
Chinese Red Cross to assist with
relief efforts.
THE BEIJING AXIS made a spon-
sorship contribution to the South
African Olympic kayaking team.
The canoe and kayaking events will
be held at the new Shunyi Olympic
Rowing-Canoeing Park.
Learning & Getting Around
Kobus van der Wath, Group MD,
was invited to Chair the Asia Non-
ferrous Metals Development Dia-
logue in Beijing on 17 to 19 April.
He also delivered a presentation on
the enablers of and constraints on
Chinese mining investments
abroad.
Kobus van der Wath and Corporate
Office Manager Mitch Cosani trav-
elled to Perth and Sydney in May.
Further to attending a number of
seminars and conferences, Kobus
was a panellist at the Association of
Mining and Exploration Companies’
(AMEC) National Mining Con-
gress in Perth on 22-23 May.
Kobus van der Wath was invited to
speak at the South African Insti-
tute of Electrical Engineers
(SAIEE) President’s Invitation Lec-
ture in Johannesburg on 29 May.
Kobus also delivered a presentation
on Chinese mining investments in
Africa at the Africa Mining Con-
gress 2008 held in Johannesburg
from 9 to 11 June.
Kobus van der Wath was asked to
present at the Africa M&A 2008
Conference in Johannesburg on 12
June. The presentation was entitled
‘China’s Global M&A Drive - A view
from Beijing.’
Edward Wang, Executive Director,
published an article in the China
International Business Daily on 13
June entitled ‘Chinese mining com-
panies - paying attention to soft skills
when investing overseas’.
On 14 July, Kobus van der Wath will
attend an event sponsored by the
South Africa-Singapore Business
Association, titled: ‘Asia’s Future:
The Impact of China, India and the
Middle East’.
In July, Kobus van der Wath will
travel to Australia for various en-
gagements. On 15-16 July, he will
present to the Aust-Asia Mining
Conference in Brisbane after which
he will chair the IQPC Mining Sup-
ply & Procurement Conference in
Perth on 22 and 23 July. On 28 July
he will deliver a guest lecture to the
MBA and EMBA class of the Austra-
lian Graduate School of Manage-
ment in Sydney, discussing the stra-
tegic implications of China’s rise for
Australian firms. On 29 July he will
speak at a one-day China confer-
ence on ‘Managing the Risks of
Manufacturing in China’ in Sydney.
THE BEIJING AXIS will be further
represented at events in Australia in
August and September:
● Diggers & Dealers in Kalgoorlie
(4-6 August),
● the Perth Mining Exhibition &
Conference (12-14 August),
● the Chartered Institute of Pur-
chasing Supply (CIPS) event in
Perth (21 August),
● the Africa Downunder Confer-
ence in Perth (4-5 September);
and
● The Mining & Exploration In-
vestment Conference in Sydney
(14-16 September).
Team Developments at THE
BEIJING AXIS
Kevin Zhou, previously GM of a
Beijing-based trading company,
joined the Sourcing Division in
July. Kevin will graduate in 2009
with an MSc in Finance from Bei-
jing Normal University.
In July three consultants joined
the Beijing office’s Strategy divi-
sion: Jim Hu graduated with an
MBA from Dongbei University of
Finance and Economics in 2005.
Barry van Wyk holds an MSc
from the London School of Eco-
nomics, graduating in 2005.
Javier Cunat obtained BA de-
grees in Administration & Busi-
ness Management and in Eco-
nomics from the University of
Valencia in Spain in 2005.
Mandy Zang joined the Beijing
office as an Analyst in April. She
recently graduated with a BA in
Economic Sciences from the
Changchun University of Tech-
nology.
Prima Han joined the Beijing
office as an Analyst in June. She
studied Management Information
Systems and graduated this year
from Renmin Uni. in Beijing.
In June the Beijing office hosted
two South African interns. Tobie
Taljaard and Brigid Kell, cur-
rently students at the University
of Cape Town, made a signifi-
cant contribution during their
stay. In July the Beijing office is
hosting an American intern, Ti-
ger Miller, who is currently a
student at UCLA. Given his
background in web design, he is
leading an initiative to create a
Spanish version of THE BEIJING
AXIS company website.
 39

About THE BEIJING AXIS

THE BEIJING AXIS is a cross-border business bridge to/from China in three principal areas: Strategy (Formulation &
Implementation); Sourcing (China Sourcing Unit & Supply Chain Management and Support); and Investment (Corporate
Finance Origination & Financial Advisory).
Since our establishment in 2002, we have successfully worked with many large MNC and Chinese blue chip clients
across many sectors and industries — but we also support many international and Chinese SMEs. We have success-
fully delivered projects across several sectors but our core focus is on the Chinese mining and resources sector; and
China’s burgeoning industrial and engineering industries.
Our solutions are always cross-border — supporting international firms in their efforts as they act in unfamiliar territory in
China; and/or supporting Chinese firms as they venture out and go global. Our solutions go beyond market research
and we emphasize 'actions and transactions'. Below more detail on our activity sphere.

Strategy Sourcing Investment

THE BEIJING AXIS Strategy
Division provides professional
business solutions, focused on
strategy formulation and imple-
mentation:
Strategy Formulation
● Market intelligence
● Market & industry research
● Market entry strategy
THE BEIJING AXIS China
Sourcing Unit (CSU) supports
sourcing and procurement initia-
tives to/from China based on a
systematic and analytical ap-
proach:
Strategic Sourcing Unit (CSU)
● Supply needs analysis
● Supplier identification, filter-
THE BEIJING AXIS Investment
Advisory Team provides advi-
sory services to firms that are
undertaking investments in
China, as well as Chinese firms
investing abroad. The focus falls
on origination activities:
Corporate Finance Origination
● Origination activities for Chi-

● Partnering strategy ing, due diligence & selection nese capital seeking cross-
● Business planning ● Negotiation border assets, equity, projects
● Commercial & contracts ● Origination activities for For-
Strategy Implementation
eign capital seeking Chinese
● Market entry assistance Supply Chain Management &
assets, equity and projects
● Business development Support
● Operational support ● Project management and Financial Advisory
● Negotiation transaction monitoring ● Acquisition target identifica-

● Agency and representation ● Managing 3rd parties tion, selection & due diligence
services ● QA/QC, expediting ● Fundraising

● Relationship management ● Logistics support ● Valuations

● Business delegations ● Risk management ● Opinions

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

Beijing Johannesburg Russia and Eastern Europe

Dirk Kotze Jackie Li Lilian Luca
Tel: +86 10 6440 2347 Tel: +27 11 201 2318 Tel: +86 10 6440 2106
dirk@thebeijingaxis.com jackieli@thebeijingaxis.com luca@thebeijingaxis.com