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EURObiz

Journal of the European Union Chamber of Commerce in China

www.europeanchamber.com.cnJanuary/February 2012

2012:HAPPYNEW

YEAR?

THE WRATH OF GRAPESNingxia Wines

Take on Bordeaux

CHINA IN EUROPEAnalysing theInvestment Landscape

PLASTERED IN CHINAAn Entrepreneur's Guide

to Marketing

ECONOMIC POLICYIs the

Renminbi Undervalued?

THE EXECUTIVE INTERVIEWHan Li (Cherry)

Solvay S.A.

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COVER STORY

122012's DRAGON:HAPPY NEW YEAR?The Year of the Dragon could be, forChina, potentially tumultuous, onethat tests the countrys resolve in eco-nomic matters and perhaps in otherareas.

18ANALYSIS:IS THE RENMINBIUNDERVALUED?

With a U.S. presidential electionbringing the issue to the fore again,the renminbis appreciation againstthe euro and U.S. dollar will receivesignicant attention in 2012.

24THE WRATH OFGRAPES: NINGXIAWINES TAKE ON BORDEAUX

Not known for their quality until re-cently, some of Chinas winemakersare progressing and giving a scareto wineries in Europe.

TABLE OF CONTENTS

12 2418

BUSINESS FEATURES

08EUROPEAN CHAMBERLOBBYING REPORT

A summary of recent

lobbying activities.

26OVERSEASINVESTMENTThere is hope that increased Chineseinvestment, along with the purchaseof European debt, could be part ofan overall recovery plan.

30INDUSTRY FOCUSStability: the primary theme of

Chinas economy in 2012.

26MARKETINGDominic Johnson-Hill is an executive

in a t-shirt.

34SMEClick, click, click is the sound ofonline selling in China.

36IPRUsing China's Customs Service to

enforce intellectual property rights.

38HUMAN RESOURCESLessons from the crunch: top talent

needs opportunity and support.

40CONSTRUCTIONCleantech investing: back in full

swing after years out of favour.

43CITY FOCUSTianjin: gateway to northern China.

49LEGAL ISSUESRestrictions placed on internationallaw firms in China hurt China's

legal services market.

51HR CONFERENCE

Conference tackles limitations toboosting HR capabilities.

58THE EXECUTIVEINTERVIEWHan Li (Cherry)

Chief Representative

Solvay S.A.

REGULARS

07PRESIDENTSFOREWORD

48CALENDAR

52EVENTS GALLERY

54CHAMBER BOARD

56ADVISORY COUNCIL

On the coverChina's economic

direction in the Year ofth e Dra gon is rai singmore questions thananswers as 2012 begins.

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The Executive Interview EURObiz

EURObizJournal of the European Union Chamber of Commerce in China

www.europeanchamber.com.cn

BeijingBeijing Lufthansa Center,

Office C412,50 Liangmaqiao Road,

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China Shine Plaza,No.9 Linhe Xi Road,

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com.cnShenzhen -

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EURObiz is published bimonthly by

the European Union Chamber of

Commerce in China, and is distrib-

uted free to all Chamber members.

All material is copyright2011 by

the European Union Chamber of

Commerce in China. No part of

this publication may be reproduced

without the publishers prior

permission. While every effort has

been made to ensure accuracy, the

publisher is not responsible for any

errors. Views expressed are not

necessarily those of the European

Union Chamber of Commerce in

China.

Chief EditorSteven Schwankert

Art DirectorVincent Ding

Contributing WriterTony Brooks

Publications ManagerVicky Dong

Marketing &Communications Manager

Jessica Schroeder

For European ChamberMembership and

Advertising inEURObiz:

Member Relations &Sponsorship ManagerFernando Cutanda

Tel: +86 (10) 6462 2066ext. 31

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ext. 23byin@europeanchamber.

com.cn

JOIN THE EUROPEANBUSINESS CONVERSATION

IN CHINAAdvertise in EURObiz

Reach 24,000 senior Europeanand Chinese business

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with the only publicationdedicated to covering

European business in China.

To place your ad,please contact:

Fernando CutandaMember Relations & Sponsorship Manager

Tel: +86 (10) 6462 2066 ext. [email protected]

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Tel: +86 (10) 6462 2066 ext. [email protected]

European Chamber Chapters:

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China is not immune to global nancial crises.

The close to double-digit economic growth in 2011 in China was driven mainly by invest-ments and domestic consumption, boosted by stimulus funds and by further heavy lending.Net exports (exports minus imports) hardly contributed to the growth and are likely to befurther affected by sluggish European demand.

More thunder clouds are accumulating: For the month of November the ProcurementManagers Index for manufacturing went under 50, indicating a substantial slowdown inthe sector. Foreign Direct Investment (FDI) showed negative growth in the same month,reecting caution on investments and expansion, especially in the U.S. and EU. Real estateand big infrastructure investments have run out of steam, putting pressure on the construc-tion sector that with its supply chain will affect many of us. This might lead to more dif-cult implementation of further stimulus plans.

In view of all this, caution may be needed going forward but even at the forecasted 8%growth, China remains a great business opportunity. FDI might receive renewed attentionas all drivers will be needed to keep growth going and jobs created, regardless of the neces-sary methodology. More efciency will be required from state-owned enterprises and mo-

nopoly positions might be further questioned.

As China is increasingly competing in government- and public procurement marketsabroad, expectations are high for China to allow broader market access as part of its Gov-ernment Procurement Act negotiations within the World Trade Organization.

At the European Chamber we maintain our support of Chinese investments in Europe.We continue to believe that open markets and level playing elds create mutual benets.No doubt that a more stable economy in Europe would contribute to the maintenance ofthe Chinese economy in growth mode.

2012 will present new challenges and European companies in China will have to be theirbest to weather the storm. At the European Chamber we will support these efforts and weare condent that European Business has the strength it takes to continue its successful con -tribution to Chinas development.

I wish all of you a healthy and prosperous New Year.

China in 2012

Mr. Davide CucinoPresident of The European UnionChamber of Commerce in China

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EUROPEAN CHAMBERLOBBYING HIGHLIGHTS

Position Paper Presentation Meeting with the Commissioner of the State IntellectualProperty Office, Tian Lipu

Position Paper Presentation Meeting with the Vice Chairman of the Civil AviationAdministration of China, Xia Xinghua

Meeting with the Former China Banking Regulatory Commission Chairman,Liu Mingkang

Meeting with the Director General of the European Commission Directorate General forClimate Action, Jos Delbeke

On 28th October, a European Chamber delegationled by President Davide Cucino met with the ChineseState Intellectual Property Office (SIPO) CommissionerTian Lipu to present the Position Paper 2011/2012.Commissioner Tian stated that he highly values the strongrelationship that the European Chamber and SIPOhave developed and that he welcomes the opportunityto regularly exchange information. Joined by various

Director-Generals within his Office, both sides enteredinto discussions on key points raised by the Chairs of theEuropean Chambers IPR, Rail and Construction workinggroups, including a discussion on concerns regardingthe quality of patents being filed in China. At the endof the meeting, both sides agreed to engage further atthe working level to explore the European Chambersconcerns and recommendations in more detail.

On 1st November, a European Chamber delegation led byPresident Davide Cucino met with Vice Chairman of theCivil Aviation Administration of China, Mr. Xia Xinghua,to present the Position Paper. During the frank meeting,the two parties discussed issues including the exibility oftimeslots for cargo airlines in Chinas rst-tier city airportsas well as current nighttime restrictions. The opening oflower altitude airspace and the European Union Emissions

Trading Scheme were also discussed in detail during themeeting, which concluded with both sides acknowledgingthat although a lot of important developments have beenmade in the past year, the European Chamber should stillfollow up directly with the respective Director-Generals ofCAAC to discuss remaining issues in further detail.

On 17th November, President Davide Cucino met withMr. Liu Mingkang, the recently retired China BankingRegulatory Commission Chairman, in the European

Chambers ofce in Beijing. During the meeting, PresidentCucino expressed the European Chambers appreciationto Chairman Liu, who should be considered an old friend,for the support he gave and the numerous meetings heheld with the European Chamber during his tenure.

Chairman Liu and President Cucino discussed variousissues in a cordial atmosphere, mainly focusing on Chinascurrent economic predicament and how it will likely affect

the opening of the financial services sector in China.Chairman Liu, who is held in high esteem within bothChinese and foreign expert circles, ended the meetingby stating that he sincerely looks forward to futurecooperation with the European Chamber.

On 18th October, representatives from the EuropeanChambers Aerospace, Aviation and Carbon MarketWorking Groups met with Mr. Jos Delbeke, the Director-General of the European Commissions DG Climate

Action (DG CLIMA). The parties discussed the EUEmissions Trading Scheme (ETS) and its implications forvarious industries, in particular the aviation industry.

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Meeting with the Chief Economist of the European Commission Directorate Generalfor Trade, Dr. Lucian Cernat

Three Meetings with Vice Mayors in Two Weeks

Meeting with the Vice Mayor of Guangzhou, Chen Mingde

Meeting with the Vice Mayor of Beijing, Gou Zhongwen

Meeting with the Vice Mayor of Tianjin, Ren Xuefeng

On 29th November, the Chief Economist for DG Trade,Dr. Cernat joined a group of European Chamber repre-

sentatives led by President Emeritus Jacques de Boiss-

son, to discuss current developments in both Europe and

China and how the European Commission should best

engage with China on a host of economic and trade is-

sues. Following the meeting, Dr. Cernat opened the Euro-

pean Chambers Insight China event, on the topic of what

Chinas role should be in dealing with the global economic

crisis.

Reecting the importance of engaging with local ofcials,as well as the outreach of the various Chapters, the Euro-

pean Chamber was honoured to hold meetings between

30th November and 9th December with Vice Mayors inthree major Chinese cities where European industry has

established a strong presence.

On 30th November, President Davide Cucino and rep-resentatives of the Pearl River Delta (PRD) Chapter Lo-

cal Board met with His Honourable Chen Mingde, Vice

Mayor of the Guangzhou Municipal Peoples Govern-

ment to present the Position Paper 2011/2012. Duringthe meeting, the Chairman of the PRD Board, Holger

Kunz, gave an overview of European industry operations

in Guangzhou.

On 5th December, the European Chamber and the Bei-

jing Investment Promotion Bureau co-organised a dinner

and dialogue with the Honourable Gou Zhongwen, Vice

Mayor of Beijing. Miroslav Kolesar, European ChamberVice President, hosted the meeting and gave the opening

and closing remarks, while presentations were given by six

Chairs and Vice Chairs of Working Groups on industry-

specific topics related to Beijing municipal policy. From

the Beijing municipal government, additional speeches

were given by the District Governor of Mentougou as well

as by the Vice Mayor himself. Prior to the meeting, the

European Chamber had collected questions from member

companies that had been submitted in advance to the ViceMayors ofce. On the day of the dinner, the Vice Mayorsofce replied with written answers to 10 of the 19 ques-tions that had been submitted and these were distributed

to all participants during the dinner.

On 9th December, President Davide Cucino as well as theprevious and current Chairs of the Tianjin Chapter, Dr.

Eric Bouteiller and Mr. Gabriele Castaldi, met with the

Vice Mayor of Tianjin, the Honourable Mr. Ren Xue-

feng, and Deputy Directors from the Tianjin Commission

of Commerce and the Tianjin Foreign Affairs Office.

Both parties agreed to meet on a regular basis in order to

exchange views on Tianjins development and on how the

European Chamber can work together with the municipal

government to assist the development of Tianjin.

Lobbying Report EURObiz

European Chamber President Davide presented the Position Paper to CAAC Vice Chairman Xia Xinghua.

January/February 2012 EURObiz 9

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EURObiz Lobbying Report

Other Lobby Highlights

In the closing months of 2011, the European Chamberheld three Ministerial level meetings and 13 working-levelmeetings with the Chinese government. The Chamberalso submitted three comments on draft Chineseregulations as well as 12 lobby letters to the Chinesegovernment. In the same time period, the Chamber hasmet with European ofcials on 13 occasions.

In addition to the meeting with Guangzhou Vice MayorChen Mingde, the European Chamber PRD Chapterattended a meeting at the invitation of the GuangzhouForeign Affairs Ofce (GZ FAO) on 25th October. ThreePRD Board members, Mr. Nong Keqiang, Mr. BenoitStos and Mr. Jeremy Sargent led a delegation to meet withthe Deputy Director of the Guangzhou Foreign AffairsOffice, Mr. Zhu Xiaoyi to present the Position Paper.

During the meeting, the GZ FAO offered to strengthencooperation between the two organizations and to supportthe promotion of the Position Paper.

To promote an aligned message to the European UnionMember States, the European Chamber has held meetingswith various Ambassadors to present the Position Paperto Member State embassies. Since late September, theEuropean Chamber has met with their Excellencies theBelgian, Danish, Dutch, French, German, Hungarian,Portuguese, Slovak Republic, Slovenian, Spanish and U.K.Ambassadors.

On 4th November, representatives of the Standardisation& Conformity Assessment (SCA) Working Group, led bythe Chair of the Working Group, Dr. Xu Bin, met withMr. Mei Jianhua, Director-General of the Supervisionon Product Quality Department of AQSIQ, and severalother division directors. The purpose of the meeting wasto introduce the Director-General and his departmentto the work of the SCA Working Group, to establish afruitful channel for cooperation going forward and toclarify points regarding the AQSIQ Product QualitySample Inspection and Supervision Measures.

On 15th November, the Cosmetics Working Group

visited the Bei jing Food and Drug Administration togain additional insight into the Cosmetics Black ListManagement Rules that are currently being drafted. Inaddition, the BJ FDA gave an overview of their workingpriorities for 2012 and explored possibilities how theycould work more closely with the Chamber on cosmetics-related topics. This meeting occurred after an SFDA-organised Non-Functional Re-classification meeting inBeijing, to which the European Chamber was the onlyChamber of Commerce invited. Meanwhile, the ShanghaiFDA also requested a meeting with the CosmeticsWorking Group to discuss the draft Cosmetics LedgerManagement Rules, the third meeting between the twoparties on this topic.

Chairs of the Environment and Energy Working Groups

met with Mr. Yang Chunlin, the International CooperationDivision Chief of the Shanghai Environmental ProtectionBureau (SEPB), on Wednesday, 26th October. During themeeting, particular attention was given to implementationand enforcement of environmental laws, possibleincentives to speed the uptake of green technology, landredevelopment, energy efciency and carbon-trading.

On 21st November, the European Chamber sent a lobbyletter to both the State Administration of Taxation andthe Beijing Municipal Ofce of the State Administrationof Taxation on behalf of the Insurance Working Group.The Chamber asked for clarification on taxation issuesfor financial services representative offices and foreign

insurers in China. This issue was followed up on 5thDecember, when the Chair of the Working Group metwith the Director General of BJ-SAT before the dinnerheld between the European Chamber and the Beijing ViceMayor, Gou Zhongwen. During the meeting, the Chairof the Working Group expressed a concern on behalfof European insurance companies operating in Beijingregarding a perceived lack of coordination betweenregulators on recent taxation developments. Finally, as aresult of these meetings, another meeting was held on 8thDecember with Mr. Zhou Yueshen, Deputy Director ofthe International Taxation Administration Division.

European Chamber President

Davide meets with SIPO

Commissioner Tian Lipu. President Cucino met former CBRC Chairman Liu Mingkang.


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www.ansaldo-sts.com

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HappyNewYear?

2012s Dragon:

Child bearing-age couples all over China are trying to have their bundles of joy arrive dur-ing the Year of the Dragon, considered the best of the 12 Chinese zodiac symbols. Whileastrologically superior, the solar calendar that encompasses most of that period could be

a challenging one for China and the rest of the world, with the Chinese economy slowing,leadership changes in China and the U.S. and international trade and military friction else-where. In this EURObiz Special Report, Steven Schwankertexamines the dragons clawsfor 2012 and what it means for European Business in China.

The Year of the Dragon could be, forChina, potentially tumultuous, onethat tests the countrys resolve in eco-nomic matters and perhaps in otherareas.

Having successfully navigated the

global economic crisis so far, China

enters 2012 with observers worldwidewondering how much falling housingprices already a concern affectgrowth domestically, and what otherindustries it could inuence.

China also continues to feel pressure

from overseas, with fragility continu-

ing in Europe and the United Statesfailing to produce signicant recovery.The U.S. presidential election in No-vember also adds uncertainty to thatcurrently sluggish economy.

In October, China will undergo

a leadership change of its own,

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although the selection of current VicePresident Xi Jinping seems certain.At the same time, like any leader Xiwill seek to establish himself and hisown style of governance. What thatwill mean for European Business in

China remains to be seen.

This summer will also mark the rstOlympics since the Games were heldin Beijing in 2008. Although a repeatof Chinas 51 gold medals seemsalmost impossible, the world will bewatching to see if Chinese athletescan sustain their dominance whenthey dont the advantage of being thehome team.

Overall OutlookAlthough a slowdown did occur insome sectors during the initial phaseof the global economic crisis in late2008 and during 2009, that simplymeant a decrease in overall growth;at no time was China anywhere neara recession like what gripped parts ofEurope and the United States.

Chinas ofcial growth target for 2012was in early January revised from 8%down to 7%, in part to reflect Chi-nese anxiety over the debt situation in

Europe, and moves it intends to maketo keep the property market cool andination down. That would put Chi-nas own number below the estimateof the World Bank, which expected8.4% growth for the year, althoughthey too may revise their number inthe wake of Chinas reassessment.

At least in the first part of the year,things will get worse before they getbetter, if there is indeed a better toget. Activity data is likely to pointto continuing global weakness. Weexpect a European recession and re-newed weakness in the U.S., wroteLi Wei and Stephen Green, econo-mists with Standard Chartered Bank,in a research brief. That will weakenareas including foreign direct invest-ment (FDI) in China, along withdemand for Chinese goods in theirtraditional markets.

China is also now facing a potentialdebt crisis of its own, one it skillfullyavoided addressing when the rest of

the world was reeling three years ago.

In early January, state media reportedthat 2.5 trillion yuan in loans to localgovernments by Chinese banks willcome due in 2012, with 10.7 trillionyuan worth of aggregate debt owedby local governments as of the end of

2010. Debt ratings house Moodys In-vestors Service estimates that 8-12%of those loans could be non-per-forming. Premier Wen Jiabao statedin early January that the debts weregenerally safe and controllable.

Europe andthe U.S. arethe current

poster chil-dren for nan-cial problems,but Chinasballooning(and signi-cantly under-reported) localgovernmentdebts willlikely becomea front-pagestorywrote American strategic analysts An-drew S. Erickson and Gabe Collins intheir China predictions for 2012.

While policy makers still have suf-cient maneuvering room to try tocoast through October 2012, theproblem remains of building infra-structure that likely wont generatethe cash ows needed to service thedebts that nanced those projects.Expect non-performing loans to onceagain become an albatross for Chi-nese banks, they wrote.

From the very start of the year, theChinese government began manag-ing expectations that growth wouldbe slower, especially in terms of trade.With the European Union as its larg-est trading partner, uncertainty there

would be of little benet to China.

A slowdown in Europe will add toeconomic strains in China and willpromote the trend already evidentunder the latest Five-Year Plan forChina to rebalance its economy inthe direction of domestic expansion,said David Marsh, chairman of con-sultancy SCCO International andauthor of The Euro: The Politics of the

New Global Currency.

Chinas efforts to strengthen thebanking system, correct the propertybubble and to maintain domesticconfidence ahead of the leader-ship change later in 2012 will takeprecedence. The possibility that therenminbi will weaken, or at least willremain volatile, will have a dampen-ing effect on international condencebut will ensure that Chinese exportsremain competitive, he said.

Jack Perkowski, an American entre-preneur and author of both the book

Managing The Dragonand the blog bythe same name [www.managingthe-dragon.com], sees the glass as morethan half-full, predicting China willnot only shrug off any economicblues, but will see GDP growth of8.5%.

Unlike any other country in theworld, the Chinese government hasalmost full control of the monetary,fiscal and administrative levers thatcontrol its economy, and the govern-ment pulls on those levers based onpurely economic, not political, con-siderations. As evidenced by the wayin which China rapidly shifted frommonetary and fiscal tightening tomonetary and fiscal ease in October2008 and successfully navigated theglobal nancial crisis, the governmenthas a good track record of manipu-lating those controls, Perkowski said.

Moreover, China is becoming lessdependent on export markets as itsdomestic economy continues to grow.

Net exports accounted for 18% of

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14.2% GDP growth, but in the firsthalf of 2011, they contributed anegative 0.7% of 9.6% growth, headded.

Real EstateWhereas the economic worry watch-word in 2011 was ination, in 2012,all eyes are on the property market.It was the governments tightening ofmonetary policy that began to reignin that inflation and cool real estatein China, but with a visible drop offin prices, homeowners and outsideobservers have started to becomenervous a significant drop withtransaction volume dropping as muchas 40% year on year, according toDeutsche Bank could exacerbatethe situation.

However, such concern is not uni-versal. The Peoples Bank of China(PBOC) Chinas central bank has begun to loosen somewhatcompared to 2011, but in a mannerdesigned to prevent the re-ignition ofination.

Monetary policy is being loosened,but only very gradually; there is noappetite for a repeat of 2008-09. The

conservatives still appear to be in theascendant, believing the economyneeds further deleveraging. We expectfurther loosening as the economycontinues to slow in Q1 and Q2,wrote Li and Green of St andardChartered Bank, in a research brief.

While a drop in residential propertyvalues may be disadvantageous forexisting homeowners, an overall re-duction in the urban real estate mar-ket could be a boon for young, white-collar workers shut out prior to theprice increases of the last few years.Concern over a slowdown, coupledwith these lower prices, might alsoencourage an additional looseningof monetary policy that would facili-tate the loans necessary to enable areinvigoration in demand, driven byyoung professionals wishing to buytheir first home. Such moves wouldalso help maintain the governmentsfocus on social stability and reducethe perceptions of inequality, bothof which are important points of the

12th Five-Year Plan.

People are worried about a housingmarket collapse. This is not warrant-ed, said Prof. Yu Yongding of theChinese Academy of Social Sciencesand a former adviser to the PBOC,

told a forum at the New York StockExchange in early January.

Real demand for housing is still verystrong, he said, noting that whereasthe required downpayment for newhome sales required 40% of the pur-chase price, that level has now beenraised to 60%, reducing risk to lend-ers.

Just as inf lat ion was effective lybrought under control in 2011,Perkowski believes that the same willbe true of real estate this year.

Today, the conventional wisdom isthat China has a property bubbleand that the bursting of this bubblewill bring down the entire economy.Based on my on-the-ground view,property will not be the economicmillstone around Chinas neck thatmany predict. By the end of 2012,no one will be talking about it, justlike no one now talks about Chinabreaking up or its banks going bust,

he said, referring to mid-1990s specu-lation that Chinese non-performingloans would bankrupt Chinas state-run nancial institutions.

InflationPBOC adviser and Tsinghua Univer-sity economics professor Li Daokuiexpects average inflation in 2012 tobe 2.8%, which would be a welcomerelief from 2011 levels. Although re-duced to 4% from 5.5% during 2011,inflation could still be an issue, onethat consumers feel more keenly thanother economic factors. ConsumerPrice Index (CPI) inflation shouldfall to 3% by Q2, according to aDeutsche Bank research note.

In a research brief titled China - Ayear of not worrying about ination,Li and Green wrote, We expect CPIinflation to average 2.0% and 3.6%,respectively, in 2012 and 2013. Wethink of inflation as a three-year cy-cle; 2012 will be the bottom. The

pair are expecting five cuts in the

required reserve ratio (RRR) during2012. Deutsche Bank foresees twoto three cuts in the first six to ninemonths of the year.

The RMB, the euro and EU-China

Economic Relations The U.S. presi-dential election (discussed below) willkeep the valuation of the RMB in thespotlight throughout the year, as can-didates including President Obamause China as a scapegoat for Ameri-can economic ills. China will likelycontinue to brush off calls for furtheraction or a hastened revaluation, asno timetable has been set and Chinaconsistently reiterates that it will takeplace only when appropriate marketand other considerations are met.Still, China has taken steps towardsthat eventuality, including the estab-lishment last year of London as anoffshore clearinghouse for the RMB,the rst such centre outside of Asia.

Just as China is feeling the squeeze onits currency politically, the euro hascome under re due to the sovereigndebt crisis in many of its MemberStates. Although the December 2011Brussels Summit has stabilised thesituation for now, a possible recessionin Europe and growing unemploy-

ment in countries including Greeceand Spain, could require more radi-cal resolution.

David Marsh reiterated a point hefirst made at a European Chamberevent in May 2011.

The strains between the creditor anddebtor nations of the euro are likelyto get worse during 2012 as economicgrowth slows, which will accentuatethe recessions in debtor nations andmake the creditor even more nervousabout advancing the debtor statesmore funding, he said.

Very likely the euro will split up intodifferent groupings, with the corecountries around Germany forming astable monetary bloc and the weakerstates going back to their own curren-cies. I expect to see the rst signs ofthis during 2012 with Greece beingthe first country to split off with itsown currency, Marsh said.

M a r s h s u g g e s t ed c a u t i o n f o r

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businesses dependent on the euro fortrading.European businesses needed torethink their balance sheet and trad-ing exposure to different parts of theeuro region, given the possibility thatwe will see currency redenominationacross the euro area in the next fewyears. The dollar is likely to be rela-tively strong, so companies may wishto divert import sourcing into weakercurrency areas away from countrieslinked to the dollar, such as Asia.

A stable euro is of great interest and benet to China, especially as theofcial currency of its largest tradingpartner.

A substantial euro decline will notbe in Chinas interests, in view of

the continued (although decreasing)export dependence of the Chineseeconomy. It will take 10 years for theRMB to attain a substantial reservecurrency role commensurate withthat of the dollar and the euro. Butthe malaise aficting both the worldsmain reserve currencies increasespressure on the Chinese ofcals overtime to play a more assertive role inworld monetary arrangements, in-cluding promoting the internationaluse of the RMB, Marsh said.

In an interview with French maga-zine Le Figaro in October, Li Daokuisaid that Chinas assistance to Europecould total $100 billion, but that abetter understanding of its interestswould be a minimum requirement forthat help.

Perkowski also believed that some

kind of nancial support from Chinato Europe would be forthcoming, butthat it would not be easy money. Ina speech at the World Economic Fo-rum in Dalian last year, Premier WenJiabao called on European countriesto put their own houses in order be-fore asking China for a bail-out. But,he also publicly linked any possibleChinese investments with long-stand-ing political demands. A preview ofthings to come?

The European crisis provides a goodopportunity for China to curry favorand gain allies in Europe for its ownagenda at the United Nations, theWorld Trade Organization and otherglobal bodies. China will nd a cleverway to provide nancial support andkill two birds with one stone helpshore up its largest export market andadvance its own agenda globally, hesaid.

Although Chinese Overseas DirectInvestment in Europe has increased

in recent years, falling short of $6billion in 2010, Europe has yet tosee anything approaching a Chi-nese buying spree among Europeancompanies.

Notable acquisitions have includedauto maker Geelys purchase ofVolvo and China Ocean ShippingCo.s (COSCO) buy of the Greekport of Piraeus, but there has yet tobe a major move by China-based,global giants, including Industrial andCommercial Bank of China (ICBC)or China Mobile CommunicationsCorp. (China Mobile) to acquire theircounterparts in Europe in somecases, to the chagrin of Europeanshareholders. Such deals would likelywin Chinese government approval,but acknowledgement of a lack of in-ternational management skills seems

to have put global expansion plans onhold, for now.

Leadership TransitionIn October, the leaders of the Chi-nese Communist Party will arrive inBeijing, as it does every five years,to discuss and determine the Partysdirection. At that time, Hu Jintaosdecade-long service as Chinas leader two terms of five years willcome to an end, and if all goes asplanned, Vice President Xi Jinping

Cover Story EURObiz

David Marsh: "Very likely the euro will split up into different groupings".


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will become Chinas new president.

Unlike the U.S. presidential election(discussed below), which can cre-ate both domestic and internationaluncertainty, along with moves by the

standing president made from pri-marily a political standpoint, Chinasleadership transitions generally havethe opposite effect, fostering a desireto maintain the status quo until thenew president takes ofce.

Once complete, Xi will graduallyseek to step out of his predecessorsshadow. Regardless of his particularviews, he will want to appear strongin his new position.

Xi will also have four years of the

12th Five-Year Plan ahead of him,prior to the 13th, of which he willbe a primary architect. The newleader must also continue to addressthe core issues of the 12th Five-YearPlan, raising household income andreducing income disparity, especiallybetween prosperous coastal provinceand less developed areas in the cen-tral and western areas of the country.Externally, China is likely to be moreintransigent than before, Ericksonand Collins wrote. Internally, Beijing

will resist making difficult decisionsabout economic reforms, particularlyreforms that might harm key state-owned enterprises and monopolistic/oligopolistic concerns connected withfamilies of political elites. Domesti-

cally and internationally, Chineseleaders will attempt to postpone dif-ficult policy decisions until after thetransition.

North KoreaThe December death of Dear Lead-er Kim Jong-il and the transition ofpower to his young son Kim Jong-un has left the world nervous abouta nuclear state that already behaveserratically. However, China movedswiftly to assert its continued supportfor North Korea and its new leader,and commemorating the elder Kimspassing with the China DailyheadlineA Friends Departure.

Although Chinas backing for NorthKorea irks the West, particularly theUnited States, it understands per-haps better than any other nationsave South Korea what a collapse ofthat state and potential refugee crisiswould mean.

The South China SeaTensions over sovereignty in theSouth China Sea has put pressureon Chinas relations with some of itsSoutheast Asian neighbours, namely

the Philippines and Vietnam, withChinese gunboats increasingly ap-pearing in areas claimed by China.The area became so inflamed in2011 that the United States becameinvolved, requesting calm but alsopledging support for the two smallernations. China states that almost allof the Sea is its sovereign maritimeterritory.

Southeast Asia isnt the only placewhere China is involved in seafaringfriction. The recent stabbing of a

South Korean coast guard ofcer by aChinese sherman has led to a strongreaction from the Korean side.With new leadership coming intooffice in October, China will likelymaintain its strong position, backedby a growing and increasingly potentnaval force.

The Chinese governments assertiveapproach regarding maritime issuesin the South and East China Seaswill likely generate additional friction

EURObiz Cover Story

China reiterated strong support for North Korea as Kim Jong-un (second

from right) assumed leadership after Kim Jong-il's death in December.


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with Japan, South Korea, Vietnam,and the Philippines. South Koreaplans to begin using military specialforces personnel armed with rearmson shing enforcement missions. Seri-ous confrontations involving Chinesefishermen are highly likely, wrote

Erickson and Collins, both of whomare employed by branches of the U.S.Navy.

U.S.-China RelationsAlthough at least secondary for Euro-pean Business operating in China, thestability or volatility of Chinas rela-tionship with the United States setsa tone for many foreign businessesoperating here.

Chinas relationship with the ObamaAdministration has never been partic-ularly warm. Constant U.S. pressureon China regarding valuation of theRMB has irked Chinese leadership,not to mention U.S. borrowing some of it from China, which ownsabout 6.6% of U.S. debt.

Its an election year in the U.S. andthe economy will be at the top of theagenda. The talk will be about jobs,and how China has taken all of them.China will be everyones scapegoat

for economic weakness in the United

States, Perkowski said.

Leading Republican presidentialcandidate Mitt Romney has beenparticularly critical of China in hiscampaign rhetoric. As part of his59-point economic program for the

United States, Romney promised thatone of his initial executive orders onhis first day as president would beto clamp down on the cheaters byslapping duties on Chinese imports ifBeijing doesnt move quickly to floatits currency, Perkowski added.

Obama could also face criticismfrom candidate Jon Huntsman, whoresigned as the U.S. ambassador toChina in order to run for president,enjoying a third-place finish in theNew Hampshire primary election.

The President will unlikely want to beseen as being conciliatory to China,at least on jobs and currency issues.That could lead to a further souringof relations, especially if the U.S.pressures North Korea or steps up itssupport for the Philippines and Viet-nam in the aforementioned conict,or regarding potentially inammatoryissues such as arms sales to Taiwan.

The Olympics

Neither an economic nor political is-sue, the London Olympics will serveas a potentially welcome distractionin late July and early August. Comingoff the success of being both the 2008Beijing Olympics host nation and itsmedal winner, China will be looking

to reassert its dominance in manyathletic areas, especially womenssports.

Two familiar faces will be missingfrom the Chinese team this time:basketball player/wine entrepreneur/university student/anti-shark finactivist Yao Ming, who retired fromthe sport last year, and multiple goldmedal-winning diver Guo Jingjing,who ended her competitive careerafter the 2008 Games. A new genera-tion of Chinese sports heroes couldemerge from the London event

The Olympics and Chinese suc-cess there would create a surge ofpride in China, and not just due toathletic prowess. The Beijing Olym-pics were the last major global eventprior to the onset of the global eco-nomic crisis, following the Games byabout three weeks. This years eventcould lead China to ponder how wellit has done, both in business and insport, relative to the rest of the world

in that same period of time.

Cover Story EURObiz

The U.S. presidential election campaign

could make China's relations with the

Obama Administration even rockier.


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Is the RenminbiUndervalued?

ANALYSIS:

There may be no hotter political potato this year than the value of Chinas currency. With a

U.S. presidential election bringing the issue to the fore, the renminbis appreciation againstthe euro and U.S. dollar will receive significant attention in 2012. In an excerpt from hiswhite paper of the same name, Dr. Sylvain Plasschaertlooks at the underpinnings of thedispute and the economic forces that drive the issue.

Alarmed by the persistent and largeU.S. trade decit and Chinas rapidly-swelling foreign exchange (forex)reserves, inuential policymakers areurging Chinese officials to allow asubstantial appreciation of the ren-minbi (RMB). However, the record

growth of Chinas exports stems

largely from joint ventures and af-filiates of multinational enterprises;exports attributed to China usuallycontain a large percentage of import-ed components with modest value-add attributed to China itself and indeed, the Chinese export portfolio

is in the process of being signicantly

upgraded. Neither are the giganticforex reserves primarily linked to themodest surpluses of exports over im-ports of China, but they are fed bythese large net inward direct invest-ments and, in recent years, by hotmoney that sneaks into China, not-

withstanding the non-convertibility of

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capital ows.

Thus, a moderate appreciation of theRMB would not balance the bilateraltrade flows nor remedy current ac-count imbalances. On the other hand,

the shift in Chinas growth strategy away from export maximisat iontowards strengthening consumptionin its vast interior is likely to gradu-ally bring about more balance, whileappreciating the RMB in the process.There are also recent signs of easingof Chinese restrictions on interna-tional nancial transactions.

A climax was reached in October2010, when 348 members of theU.S. House of Representatives, manybelonging to the House majorityDemocratic Party, voted in favour ofimposing a solid surcharge on importsfrom China. Equally, tough actionagainst Chinas exchange policy isadvocated by opinion leaders. Duringthe mid-term elections of November2010, candidates on both sides didnot hesitate to attribute the high un-employment level to the onslaught ofChinas exports.

Even in academic circles, views clashsometimes bitterly. Thus, Nobel Prize

laureate Paul Krugman repeatedlycalled for a protectionist stance, inorder to force China into acquiescingwith a substantial appreciation of theRMB. Two other Nobel laureates,Robert Mundell and Joseph Stiglitz(see EURObizs interview with Prof.Stiglitz in the May/June 2011 is-sue), have expressed opposite viewsto those of Krugman. The increas-ingly politicised dispute has inamedofficial circles in both countries,although, in the wake of the inter-national financial crisis, the bilateraltrade (and current account) imbal-ances that were very high in 2008have perceptibly abated.

In the same context, it is noteworthythat, whereas official InternationalMonetary Fund (IMF) statements ex-press the view that the RMB is some-what undervalued, the IMF ExecutiveBoard, in its conclusions on the 2010Article IV Consultation, frankly con-fessed dissension among its members.

Admittedly, the facts invoked by those

who indict any deliberate downwardmanipulation of the currency cannotbe denied. Indeed, the deficit of thebilateral trade accounts of the U.S.with China, (and to a smaller extent,its external current accounts), has

grown ominously in recent years.

In the 2007-2010 period, U.S. exportsto China did not amount to one-quarter of its imports. In 2009, tradewas still affected by the internationalrecession, and Chinese exports to theU.S. declined by 12%; the resultingU.S. deficit was still 3.2 times largerthan U.S. exports to China.

Over the same period, the EuropeanUnion Member States also under-went a substantial external deficit intheir bilateral relationship with China barely lower than that of the U.S.On the export front for the EU, Chi-na ranks fourth, behind the U.S.

Another strand in the debate relatesto the rapid build-up of the officialforex reserves by the Peoples Bank ofChina (PBOC), Chinas central bank,which have skyrocketed to more than$2.5 trillion as of October 2010, arenow the largest in the world.

An appreciation of the Chinese cur-rency vis--vis the U.S. dollar andother currencies, would imply theuntying of the peg of the RMB withthe U.S. dollar. This tie to the dol-lar was abandoned in July 2005 butwas renewed in September 2008 atthe outbreak of the international fi-nancial crisis; during that period, theRMB appreciated by 21% against theU.S. dollar, but depreciated againstthe euro. In July 2010, it was an-nounced that the RMB would againbe allowed to uctuate slightly againsta basket of currencies, and will nolonger be strictly tied to the dollar.According to Chinas critics, loosen-ing from the dollar and reflectingmore closely forex market conditionswould reduce the Chinese trade (andcurrent) account surplus and wouldalleviate the present disequilibria inthe international economy and pay-ments system. It is also often con-tended that China should reorientits alleged export and investment-ledgrowth strategy and strive to enhance

its presently comparatively low mac-

roeconomic consumption-to-GDPratio.

These claims are now strongly re-jected by the Chinese leadership, whomaintain that Chinas surplus is not

primarily related to the exchangerate; and that, even if undervalua-tion were proven, the recent massivereflationary injection of stimulusfunds that the Chinese leadership hasswiftly put in place at the unexpectedoutbreak of the global economic cri-sis, has delivered a potent boost to theresumption of growth in the worldeconomy.

A Closer Look At Chinas

Export StatisticsSince 1980, the Chinese economy hasstaged an impressive and exceptionalgrowth of around

10% per year, in real terms. Oneshould remember that this double-digit benchmark marks an average,both in its time and space dimensions.Per capita income now reaches closeto $3,000, which puts China alreadyin the ranks of the worlds lowermiddle-income countries.

Yet, although several industrial sectorsin China have reached a high degreeof sophistication witness the spaceflights and the announcement thata domestically-produced jumbo jet,with about 165 seats, is slated to enterservice in 2016 China still showsmany features of an (albeit rapidly)developing country. The huge ru-ral interior sector, where agriculturestill performs a pivotal role, attains amuch lower income level than that

of the urban populations, and moreparticularly those in the coastal areas.Although one should be remindedthat the de facto privatisation of thecultivation of the agricultural sector not of the ownership pattern -- inthe early 1980s has provided the ini-tial, and major, push along Chinasgrowth path.

Another principal engine of growthrelates to the spectacular expansionof Chinas export trade, starting fairlyearly in the 1980s, but exploding after

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China joined the WTO in 2002. In1980, Chinas exports totaled only$20 billion. At that time, interna-tional trade was arranged by a dozenstate companies. As was typical forSoviet-type economies, which ne-

gated the time-honoured principle ofthe international division of labour,economic intercourse with the outsideworld was minimised. In 2005, thevalue of exports reached $760 billion.

In 2008, the aggregate exports ofChina rose to $1.429 trillion, butdived in 2009 to $1.202 trillion, or16% less, on account of the globalfinancial crisis, which curtailed de-mand for China-made goods.

The worldwide recession took a heavytoll on Chinese exports, especiallythose to the U.S. and the EU. Thetrade surplus (exports minus imports)of China vis--vis the U.S. declinedin 2009 from $268 billion to $227 bil-lion.

Inward ForeignDirect Investment and theIssue of Relocation

This overwhelming performance ofChinas export trade must nonethe-less be considerably qualified byseveral highly relevant features ofChinas international trade. To start,a major part (around 60% of theexports out of China) is operated byforeign-invested enterprises (FIEs).This concept comprises both jointventures between Chinese and for-eign companies, and fully-owned af-liates of foreign enterprises as well.In other words, the label Made in

China is not synonymous with madeby Chinese rms proper. In this con-text, one must be reminded that rmsin Hong Kong and Macao are re-corded as FIEs, as they operate fromterritories that (although they belongpolitically to the Peoples Republic ofChina) are treated as separate eco-nomic territories.

At rst glance, the production facili-ties established by FIEs within theterritory of China may be viewedas substitutes or alternatives to the

exports that would otherwise origi-

nate in the home country. This oftenprompts the complaint that suchoutward foreign direct investment(FDI) entails relocation of produc-tion capacity from the home to thehost country. This is said to prevent

exports, and destroy a considerablenumber of jobs at home.

Trained economists can easily refutethe sophisms just aired. Hence, abrief digression on the relocation ofproductive capacities abroad appearsappropriate. Genuine relocation oc-curs when a firm stops producing athome, and starts the same productionabroad. The indictment that firmsin China are stealing, for example,production and jobs in Europe orthe United States, may then be valid.The trade balance of the home coun-try would be even more impairedwhenever the FDI is availed of toproduce goods that are re-exported tothe home country, which thus experi-ences a rise in its imports.

However, although counterfactualanalysis, i.e. what would have hap-pened to the rm, in the absence ofsuch relocation, is naturally fraughtwith a dose of guesswork and quitea number of cases have been docu-

mented where domestic firms bymoving their production to low-wage cost countries (such as China,or the Maquiladora frontier regionwith Mexico), or subcontracting theproduction to unaffiliated contractmanufacturers in the host country,would otherwise not have survived inan intensely competitive internationalenvironment.

When, however, the output by foreignmultinationals in China is destinedto serve the Chinese internal market,the indictment of harmful reloca-tion is not valid. As a matter of fact,any firm with a competitive productnaturally strives to expand its salesinto foreign markets. But often, thisprofitable expansion of sales cannotbe achieved from an export platformin the home country, whereas thesetup of a production facility in thecountry of destination presents itselfas the comparatively more efficientalternative. The motivations theretoare diverse, including prohibitive

transport costs or import duties or the

prior move by a major customer-rm,to which one supplies components.There may also be an urge to expandthe scale of production, which canthen be located closer to the market.

The accusation of unfair relocationis particularly unfounded, when themanufacturing of the goods in ques-tion has already been terminatedin the home country, as is the casefor footwear in the U.S. Ironically,in the case of ladies underwear, thecomplaints by American producersin 2003 against imports from Chinawere particularly hollow, as most oftheir production was already out-sourced to Honduras, within a U.S.-Honduras bilateral arrangement,which provided for duty-free re-entryof the processed goods into the U.S.

Relocation, in the strict sense, occursespecially within labour-intensive endor intermediate- products such asapparel, shoes and toys in whichChina played a prominent role inthe early six years of its opening tothe outside world. However, againstthe direct loss of jobs in the homecountry, one must consider, that pro-vided and to the extent that the lowerwage and production costs in China

percolate into lower sales prices (ata given quality) in the U.S. or otherhome countries, they add to thereal incomes of consumers (for finalgoods) or of further processors (whenintermediates are concerned); that(the home-country economies benetfrom downward pressure on the over-all price level and on inationary ten-dencies, with resulting positive effectson investments and growth; and thatthe lower costs advantage reaped bylocating production, or subcontract-ing in low wage jurisdictions, refersessentially to the manufacturing stage,typically only representing a low pro-portion of the value added during thetotal production chain, which extendsto the servicing of the nal customerat the retail stage, and also involvespre-manufacturing activities, such asdesign.

Yet, already in the early days ofChinas opening gambit, incomingFDI was mostly directed at nascentmarket outlets in China itself, instead

of being involved in cheaper produc-



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tion of export-bound goods. Today,with the rapid extension ahead of theenormous potentialities of the Chi-nese market ahead, this is even morethe case.

The Significant Role of

Hong Kong and OverseasChinese

It was already mentioned that, withrespect to trade, Hong Kong and(to a much lesser extent) Macao, areviewed as foreign territories by China.Both special administrative zonesrun their own customs and curren-cies; yet, there are dense and deepen-ing links between them and Chinaproper. Thus, Hong Kong is a major

(immediate) destination of Chineseexports, amounting to 13.8 % of thetotal export value in 2009, althoughmuch of this export ow only transitsthrough the former British colony onits way to other destinations.

Hong Kong represents by far thelargest geographical source of in-ward FDI into China. A recent tally(March 2010) mentions that, so far,310,738 Hong Kong enterprises haveaccounted for 42% of the overall FDIinto China.

It follows that much of the outwardtrade of China is carried out by en-trepreneurs and traders, who belongto the large overseas Chinese com-munity in East Asia. Thus, since theearly 1990s, the manufacturing oftoys has predominantly been relo-cated from Hong Kong to Shenzhen

or to other special economic zoneswhere wages were much lower andthat welcomed FDI with favourableincentive schemes.

More recently, and for essentially thesame motive of a cheaper labour sup-ply, the manufacturing of electricalappliances and electronic goods, par-ticularly in their final stages of pro-duction, has largely been relocatedfrom Taiwan to sites on the Chinesemainland. This happened even prior

to the recent political thaw in therelationship between the two regimeson both sides of the Taiwan Strait.

From the above it follows that, if EastAsia were considered as a single area,the export record of China wouldloom less impressive, as part of it re-sults from manufacturing productionthat has been relocated to China.

Upgrading the Level of TechnologyAnother noteworthy developmentis the continuous upgrading of the

product quality and of the degree ofsophistication of Chinas export as-sortment. In the initial years of theopening to the outside world, China,thanks to its abundant supply of un-skilled labour, drawn from the tens ofmillions of otherwise underemployedpeople in the rural interior, has fast

become a major manufacturer ofsimple, labour-intensive goods. ThePearl River Delta, stretching fromGuangzhou to Hong Kong, earnedthe label of the worlds industrialworkshop. Over the years, firms inChina have been able to muster theproduction of higher-valued goods,confronted with fierce competitionand often benefiting from the inflowof FDIs enhanced their productivity.

However, it must also be taken into

account that international trade statis-tics assign the geographic origin andthe total value of the nal product tothe country where the last substantialprocessing is performed. This is oftenthe case with rms in China (whetherin domestic Chinese or in foreignownership), to which the assemblyof the various parts and componentsis typically entrusted. This remark isclosely linked to the subsequent oneabout todays widespread geographi-cal fragmentation of the productionsequence.



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The Substantial Role ofProcessing Trade

The customs statistics of China dis-tinguish between processing trade,ordinary trade andgeneral trade.In processing trade, components andother intermediates are importedfrom abroad, prior to their furtherelaboration and nishing. Processingtrade accounts for more than half ofChinas overall exports, although itsrelative importance now appears tobe shrinking somewhat.

The fragmented manufacturingsequence has expanded rapidlyin recent years, as can be inferred

from successive annual issues of theUNCTADs Investment Reports. Thisis especially visible in the East Asianregion, where intra-regional tradeacts as a major stimulus to the rapideconomic integration in that partof the world, even before the FreeTrade Agreement between ASEANcountries and China became effectiveas of January 2010, creating an im-mense bloc of free internal trade.Processing trade partakes in thephenomenon of internationally frag-mented production, in which firms

from different countries are involvedin the manufacture of the end prod-uct which is then exported, say, fromChina -- even abstracting from theactivities involved in the further com-mercialisation of such final goodstowards the final customer. The

incorporation of intermediate in-puts, sourced from foreign countries,into the final product, significantlyincreases the import content of theexported products.

An iconic and perhaps extremeexample is that of Apples iPod. Re-searchers at the University of Cali-fornia at Berkeley claimed that outof the iPods $299 sale price in theU.S., $163 is captured by Americancompanies, $132 by part makers inother Asian countries and only $4 byChinese workers, who are employedat the final assembly stage (see EU-RObiz July/August 2011, How theiPhone distorts Chinas trade decit,pg. 40).

There are frequent complaints fromthe Chinese side that such fragmenta-tion results in a very modest value-add in the Chinese stages of the man-ufacturing process. Firms in Chinaquite often intervene in the nishingstage, especially when manual labour

can still be usefully applied. The

complaints relate mainly to contractmanufacturing, which involves onlythe manufacture, in line with speci-fications, ordered by their principal,of labour-intensive goods, or compo-nents.

These sectors have attracted numer-ous entrepreneurs from China orfrom elsewhere; they face erce com-petition and low-profit margins. Inrecent years, such profits have beenfurther eroded by the appreciation ofthe RMB between 2005-08 and by anupward push in wages, brought aboutby the Labour Law of June 2007,which provides appreciable benefitsto the labour force.

The recent global economic crisis,and the related interruption of largeorders from U.S. and European rmsand supermarkets, has resulted in theloss of 20 million jobs in the coastalareas.

As already intimated, the fragmenta-tion of the value chain in production,even if only at the manufacturingstage, over a number of countriesimplies that the value added duringthe production sequence is not fullyreaped by the country of the finaltransformation.



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There can be no doubt, nonetheless,that China is making great strides inassimilating technological knowledgeand steadfastly entertains high ambi-tions in that respect. Clearly, as rmsin China increasingly source compo-

nents and parts from within China,thereby substituting for imports, thelocal content of production in Chinais also bound to be enhanced.

ChinasImport Trade

Another important aspect in thedebate about the allegedly unfairencroachment of Chinese exportson the U.S. market also tends to be

overlooked, namely that the exportsout of China are largely offset by itsimports. Indeed, without earningconvertible foreign exchange by wayof its exports, no country would becapable of paying for its imports, al-though it may badly need the latter.

Since it embarked on its successfulstrategy of opening up the country,Chinas imports have in most yearsbeen somewhat, but not substantially,lower than the value of its exports. Aswill be recalled in a moment, it fol-lows that the phenomenal ballooningof Chinas official reserves has notbeen fed primarily by highly positivetrade balances.

Moreover, as is the case in mostcountries, the composition of Chinasimports differs greatly from that ofits exports. Raw materials and equip-ment stand out in the import tradestatistics whereas, as mentioned ear-lier, processing trade results in entrieson both sides of the trade balance,

especially as regards textiles and elec-tronics.

Chinas Multinationals onthe March

A brand new phenomenon is unfold-ing, namely the thrust abroad by agrowing number of Chinese enter-prises, mostly still under governmentcontrol, to varying degrees. A fewyears ago, the Chinese authorities

loosened some restrictions on capital

outflows. Chinese firms invest in Af-rican and Latin American sectors ofraw materials. In the manufacturingsector, Geely, although small evenby Chinese standards, took over theVolvo business from Ford. Lenovo ac-

quired the PC section of IBM. Otherfirms such as Haier, Huawei andBYD are on their way to becominghousehold names in the internationalmarketplace; in this way, they estab-lish commercial and even productionafliates abroad.

The outward expansion of Chineserms is likely to gather more momen-tum. The entry of Chinese compa-nies is explicitly encouraged by theChinese government. Moreover, Chi-nese rms are eager to gain access totop-notch technology, by way of thepurchase of patents or the take-overof foreign rms. The abundant forexreserves, partly set aside in sovereignfunds, provide a potent instrument tofinance Chinas outward FDIs. Thisrapidly growing ow of such outwardFDI flows is bound to counteractsomewhat the presently unbalancedbilateral trade and nancial accountsbetween China and the U.S. or theEU.

The U.S. trade balance with Chinais highly negative as is that of theEU-27. But, obviously, it makes nosense to myopically focus on bilateraltrade figures. Only the overall tradebalance vis--vis all other countriesmatters when looking at the position-ing of a countrys currency in theforex markets, or when assessing thecompetitiveness of its businesses inthe international marketplace.

Chinas overall stance is much morebalanced. Its surplus vis--vis thedeveloped economies, the U.S. andthe EU, is largely offset by a deficitagainst other countries, especiallythose from which it imports crude oiland other raw materials, or from EastAsian countries, which supply it withparts and components.

The ErroneousObsession with

Gross Exports

The main conclusion that emergesfrom these is that the almostexclusive concern, which, in mostcountries, political leaders and publicopinions attach to the maximisationof export earnings is much overdone,

as it is at odds with the present-dayworkings of the international econo-my. Almost everywhere, export lob-bies are able to secure the audienceof their government and to imprint amercantilist bent to trade policies.

Admittedly, a country would reap amaximum of economic benets, if it more precisely, if its enterprises would succeed in conquering marketshares abroad for goods, composedwholly of domestic parts and com-ponents. The value added in the pro-duction process would then accruefully to the home country. This wouldbe particularly advantageous in termsof jobs created, to which public opin-ions are more sensitive than in termsof other segments of the total valueof the exported products, which areless directly embodied in human be-ings.

Conclusion

As amply analysed here, the myopicview and borderline obsession withgross export values, are mistaken.Today, even large countries cannotbe fully self-sufficient; some naturalresources, such as crude oil or cotton,must be sourced from abroad. Be-sides, domestic rms are often not ina position to serve foreign markets byway of exports from its home base,but are led to install a base in thetargeted country. As an illustration,the Chinese Bureau of EconomicAnalysis has stated that, in 2007, thevalue of sales by foreign af filiatesof US firms in China is triple thevalue of U.S. exports. The frequentfragmentation of the manufacturingsequence over a number of countries,adds another break to the traditionalanalysis which tends to view trade asconsisting of the exchange of goods,fully value-added in a single country.

The full white paper is available as a freedownload from www.ecipe.org.



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Ningxia WinesTake on Bordeaux

The Wrath of Grapes:

Not known for their quality until recently, some of Chinas winemakers are progressing and giving a scare to wineries in Europe. EURObizs Steven Schwankertlooks at a Beijing

wine tasting that could have implications for winemakers worldwide.

The scene was reminiscent of Parisin 1976. The wines of France, gener-ally regarded as the best in the world,were once again challenged to a duelby an upstart, in this case, ve labelsfrom Bordeaux were asked to com-pete against ve wines from the little-known Ningxia Hui Autonomous Re-gion of northwestern China, which

despite its lack of notoriety has beenquickly emerging as one of Chinastop wine-growing areas.

Organised by Grape Wall of China[www.grapewal lofch ina .com],Chinas top English-language winewebsite, ve wines from Ningxia wereselected, along with five from Bor-deaux. The competition was designedto mirror the experience of Chinesewine consumers today: all wines werepriced between 220 and 490 RMBper bottle, and all were 2008 or 2009vintages.

In essence, we asked this question:If a consumer in China has 500 yuanin his or her pocket, which of the 10wines would the judges recommend,said Jim Boyce, Grape Wall of Chi-nas founder.

We originally discussed a China ver-sus France theme but I switched it toNingxia versus Bordeaux for severalreasons. Ningxia wines have done

well in domestic and international

competitions and have received goodscores from experts. Ningxia is con-sidered by many in the industry tobe making the best wine in China,Boyce said. In China, Bordeaux isthe most respected region for wineand continues to see growth in thiscountry. Also, there are ties betweenthe two regions. Several prominent

people involved in making winein Ningxia, including Li Demei atHelan Qing Xue and Emma Gao atSilver Heights, studied in Bordeaux.The style of many Ningxia wines isinuenced by Bordeaux, he said.

Boyce worked with Tony Wang ofChinese wine website TasteV andFrench sommelier Nicolas Carre tochoose the ve Bordeaux competitors.Rather than approach the wineriesindividually, Boyce chose to preservethe consumer experience and acquirethe bottles either from distributors, orin some cases, purchase directly fromstores.

For Ningxia, Wang and Boyce choseone wine from Helan Qing Xue (JiaBei Lan Cabernet Dry Red), two fromSilver Heights (Family Reserve andThe Summit) and two from GraceVineyard (Deep Blue and Chairman'sReserve). Grace Vineyard is based inShanxi but has a vineyard in Ningxiaand thus was included in the contest,

Boyce said.

From Bordeaux, we focused on bigbrands since Chinese consumers aremore likely to know them, Boycesaid. The ve Bordeaux were Baronsde Rothschild Collection Saga Me-doc 2009, Calvet Reserve De LEsteyMedoc 2009, Cordier Prestige Rouge2008, Kressmann Grande RserveSt-milion AOC 2008 and Mouton

Cadet Reserve Medoc 2009.

For wines from both regions, 2008and 2009 vintages were chosen fortheir general availability to the con-sumer.

The participating judges were, fromChina: Ma Huiqin, professor atChina University of Agriculture andwine marketing expert; Frankie Zhao,owner of Pro-Wine Consultancy;Fiona Sun, senior editor at the Chinaedition of Revue du Vin; Jin Yang,wine teacher who spent five yearsstudying in Bordeaux wine programs;and John Gai, of wine distributor andbar operator Palatte.

From France, the judges were NicolasCarre, sommelier and wine consult-ant; Jerome Sabate, long involvedas wine maker with Dragon Seal inBeijing; Nathalie Sibillet, oenolo-gist, journalist and teacher; ThomasBriollet, with seven years experi-ence in China wine distribution; and

Edouard Kressman, wine maker with

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experience in Bordeaux, Californiaand Argentina. When it was over,the scores were announced, and thecloth bags removed. Out of 10 wines,Ningxia labels had taken the top fourplaces. While perhaps not as defini-

tive as the 1976 Judgment of Paris,in which California wines defeatedtheir French rivals in blind taste tests,the outcome showed that Chinesewines have come a long way andthat Bordeaux itself may be in part tothank.

Each wine was judged by 10 pan-elists, five from China and five fromFrance. The wines were poured priorto the arrival of the judges, then eachbottle placed in a black cloth bag withonly a number to indicate its identity,known only to the organizers andsupervised by Philip Osenton of winedistributor Globus and former headsommelier at the Ritz London, andwitnessed by members of the media.Judges were given 40 minutes to trythe 10 individual wines, providingcomments and a score as they went.

Judges were asked to rate each winewith a quality score of one through10, and to describe their level of en-joyment of the wine, on a four-point

scale from love it to hate it.

When the scores were announcedand the cloth bags removed, Ningxiawas the little autonomous region thatcould.

For the quality rating, Ningxia winestook the top four slots: Grace Vine-yard Chairmans Reserve 2009; SilverHeights The Summit 2009; HelanQing Xue Jia Bei Lan Cabernet DryRed 2009; Grace Vineyard DeepBlue 2009.

As for enjoyment, Ningxia shut outBordeaux. With the combined scoreof love it and like it ratings,the most enjoyed wines were: SilverHeights The Summit 2009; HelanQing Xue Jia Bei Lan 2009; GraceVineyard Chairmans Reserve 2009;Silver Heights Family Reserve 2009;and Grace Vineyard Deep Blue 2009.

The contest showed that, at least inthe opinion of these judges, Ningxia

wines do well against these mass

Bordeaux brands in China in termsof quality and value. This is usefulinformation for consumers in general,many of whom might reflexively as-sume any Bordeaux wine is betterthan any Chinese wine, and who

might not be aware of wines madewith grapes from Ningxia, Boycesaid.

As a sommelier in China, I thinkit was a very fair event, said wineconsultant Carre. This event wasfor Chinese people, he emphasised,and that it was not intended to be anal showdown between Chinese andFrench wines.

Despite having been conducted inan open and objective manner, theevent drew criticism from Francethat it was not an apples-to-applescomparison. While the wines selectedfor tasting were in the same generalprice range, the French wines facedChinas 48 percent import tax. Thisis true, Boyce said, but he added thatconsumption and value-added taxeslevied on Chinese domestic wines re-duces the gap between the two to lessthan 20 percent, making it far less ofan issue.

[The Bordeaux selected] is certainlysimple wine if you are in France,Carre said. Both he and Boyce alsopointed out that such criticism wouldultimately reflect poorly not on theevent, but on those wines available inChina.

If people say that the Bordeaux wechose is not quality, well, that is whatis being exported to China, Carresaid.

This raises the issue of why suchwines, from some of the biggest [Bor-deaux] brands, are sold at 250 RMBper bottle and up in China, Boyceadded.

At the same time, Carre was quickto point out that there was little ifany threat to Bordeaux growers, andthat the biggest beneficiary was theChinese consumer. Bordeaux, viathe Conseil Interprofessionnel desVins de Provence (CIVP), has estab-lished the region as the premier wine-

growing area in the minds of Chinese

wine enthusiasts, via vigorous promo-tion, including strategic placement oflabels like Chateau Latte in Chineselms.

French wineries shouldnt be worried

that Chinese labels will be pushingthem off of tables in Europe. Itcould be fast to when we are seeinggood quality wine that is recognisedlocally. But even if the quality is goodand the volume increases by 100times, it will still be a challenge to sat-isfy the demand of the local market,Carre said.

The performance of the Ningxiawines could help push the dry regionin northwestern China into more of aleadership position among local win-emakers.

Looking at it from the perspective ofclimate, water resources, geographicallocation and policy-making together,Ningxia is currently offers the bestpackage, said Prof. Ma Huiqin ofChina University of Agriculture.

A growing wine industry could alsobe a boon to the lesser-developed re-gion.

Ningxia has a fragile environmentfor agriculture, natural resources arelimited, compared with other grapeand wine industries. Under appropri-ate conditions with wine and winetourism could be a good combina-tion. It would be of great signicanceto establish its well-known grape-producing areas, to increase farmers'income and promote ecological pro-tection and maintain the stability ofthe agricultural economy, Ma said.

The way forward for Ningxia wineswould be excellent quality, flagshipproducts, star winemakers, as wellas international standards of com-munication. The roadmap may alsoinclude benetting farmers and moreclosely involving them in the wine in-dustry, encourage competition, open-ing up policy conditions, training ofindustry personnel, and enhancingthe level of education and scientificresearch on wine, she said.


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Analysing theInvestment Landscape

China in Europe:

Amidst the current uncertainty in Europe lies the hope that increased Chinese investment,along with the purchase of European debt, could be part of an overall recovery plan. Al-though the Chinese government has balked at anything resembling a bail-out, the oppor-

tunity for private firms and state-owned enterprises to acquire or take significant stakesin European companies remains. Authors of a new report on the Chinese investment op-portunity in Europe, Daniel Van Den Bulcke and Dr. Haiyan Zhang talked with EURObizsSteven Schwankertabout what 2012 may hold for increased Chinese participation in Chi-nas mergers and acquisitions (M&A) markets.

EURObiz (Eb): We hear a lot aboutChinese investment in Europe, buthow much is really happening now?It still seems like Chinese investorsare testing the waters.

Daniel Van Den Bulcke (DVDB):Indeed there is a lot of commotionabout investment in Europe by Chi-nese companies. Sometimes the com-ments in the media sound like those

that were put forward in the 1960s

about American investments and inthe 1980s about Japanese establish-ments in Europe. The concern aboutthe so-called Chinese invasion is tosome extent a reection of a certain

fear about the surge of the Chinese

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economy on the world stage and thefact that the mode of entry is oftenvia the take-over of exi sting fir msby large state-owned Chinese com-panies. Yet many of these initiativesare taken by small and medium-sized

private companies. Also the overallimportance of Chinese direct invest-ment (FDI) in Europe is still extreme-ly small. At the end of 2010, only 5%of the Chinese FDI stocks abroad arelocated in Europe.

Dr. Haiyan Zhang (HZ):While Iagree with this assessment it has tobe stressed that Chinese FDI in Eu-rope has been growing quite rapidlyduring the last few years. Europe hasbecome the fastest-growing destina-tion for Chinas FDI in the world

since 2008 and the Chinese OutwardForeign Direct Investment (OFDI)ows to Europe expanded more thantwice as rapidly in 2010 comparedto the previous year. In 2010 theseflows reached 10% of total Chineseglobal OFDI. However, as comparedto the global FDI to Europe, Chinasimportance is still very limited -- it ac-counted only for 0.21% of the globalFDI stock in Europe by the end of2010 and 2.2% in terms of FDI owsin 2010.

Eb:Different European entities haveimplied that now is a time for Chi-nese companies to go bargain hunt-ing. Is that the case?

DVDB: Europe certainly offers excel-lent opportunities to acquire Euro-pean companies either by buying outthe owners or participating in the eq-uity capital of European firms. Thefinancial crisis in Europe makes ac-cess to capital for certain companiesmore difficult and because of thesecomplications, second or third gen-eration managers of small and me-dium-sized companies (SMEs), lookpositively to an offer to be bought outby a Chinese rm. In case of a partialacquisition by the Chinese this mighteven provide them with better accessto the Chinese domestic market ifthey remain in the company as ma-jority or minority partners.

HYZ:Chinese firms are searchingfor technology and brands in Europe

to strengthen their competitive posi-

tion not only in China, but also inthe global market. The take-over ofCIFA in Italy, the world's third larg-est concrete machinery maker, allowsZoomlion to become the first groupin the production of concrete ma-

chinery in the world. While Chinesecompanies with cost leadership strate-gy in the machinery sectors try to ac-quire their European suppliers of keycomponents, Chinese manufacturersof mass consumer products, e.g. foodproducers, started to look for brandsin Europe to upgrade their productrange and safety standards. Chinesecompanies are also tapping into Eu-ropean knowledge clusters to carryout research and product designingactivities, especially in sectors, suchas the automotive industry, renewableenergy and machinery.

Eb:Why havent we seen more largeChinese players doing bigger deals?Whats holding them back?

DVDB: Larger Chinese companieshesitate in entering into mergers andacquisitions more often for severalreasons. First, they want to avoidgenerating political opposition to theacquisition, as we saw in the U.S. withrespect to the experience of CNOOC

Such a reaction is likely to be lessfierce in European countries wheresensitive companies might be tar-geted. Secondly, the failure of TCLto successfully integrate the Frenchcompany Thomson after it was takenover, has shown Chinese firms thatforeign ventures are not all that easyto manage and finally have even re-sulted in a withdrawal. Thirdly, eventhe Chinese government becameconcerned about certain intendedacquisitions as it was thought that theChinese company had insufficientinternational experience or was toosmall to digest the target firm, ashappened in the case of GMs Hum-mer and the Dresdner Bank.

HYZ:Let me add to that that theChinese companies are quick learn-ers and that they have drawn lessonsfrom their misadventures. Now theyattach much more importance tothe due diligence process and keepthe European management of theacquired rm in order to facilitate its

integration into the Chinese group.

Also, it looks as if they opt moreoften for smaller and less visible com-panies as take-over targets in orderto avoid possible opposition by Eu-ropean political representatives andcompetitors. Leading companies with

relatively long experiences in Europe,such as Huawei, China Shipping andCOSCO, started to localise or strong-ly rely on the local managementteam, while the number of Chineseexpats has been gradually reduced.In some cases (e.g. Huawai), thesecompanies act just like their Westerncounterparts to deal with public rela-tions or to lobby with respect to theirinterests in the EU.

Eb:In the past, weve seen the Chi-nese government lean on companiesthat were trying to expand or listoverseas, such as restrictions on manyof the Internet companies that weretrying to list in Hong Kong or in theU.S. Has that changed at all?

DVDB: There seem to be cases whereAmerican officials objected to theinsufficient transparency of Chineselisted companies. Meanwhile moreChinese firms are choosing to belisted on European stock exchangesin the UK and Germany. As privately

owned companies they do not getthe same easy access to bank loans ascompared to the state-owned firms.Therefore it is not all that surpris-ing that they look for other nancingchannels to expand in Europe.

HYZ:Listing in European stock ex-changes provides not only additionalnancial resources for Chinese SMEsto reach their expansion strategy inthe Chinese market, but also givescredibility and better image to thesecompanies which usually do not getsufficient recognition by the generalpublic or their business partners inChina. During the last few years,more than 70 Chinese SMEs havebeen listed in Frankfurt and Londonstock exchanges.Eb: Could you tell us more aboutyour own recent study about ChineseFDI in Europe?

DVDB: The study is entitled TheEuropean landscape of Chinese en-

terprises: An analysis of corporate

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and entrepreneurial firms and therole of the ethnic communities, andis written by Haiyan Zhang, Yang Shiand myself as a background reportfor The Antwerp Forum, which wasorganised by the Euro-China Center

of the Antwerp Management Schoolon 22-23 November, 2011.

HYZ:The report is mainly based onthe Amadeus pan European databaseand presents very detailed informa-tion about the ownership, corporategovernance, business operations andfinancial situation of 4,676 Chinesecompanies located in 28 Europeancountries. Based on this extensivefirm level database, this study at-tempts to describe and analyze thepresence of Chinese companies inEurope and to provide some insightsinto several important aspects of Chi-nese multinational enterprises, whichhave rarely been explored before asmost existing studies concentrate onthe larger outward Chinese investorsand their merger and acquisition ac-tivity, and as such present a somewhatbiased picture of Chinese investmentsabroad and in Europe.

DVDB: European-based Chinesecompanies can be divided into two

major groups according to the avail-able ownership information of theirshareholders. The rst group consistsof the so-called Chinese corporatesubsidiaries, i.e. 715 subsidiary com-panies set up by Chinese industrial orservice companies and nancial insti-tutions which are often state ownedenterprises (SOEs) with a relativelystrong competitive position in theirdomestic market as compared to pri-vate rms in terms of technology andfinancial resources. The second cat-egory is formed by no less than 3,793companies, which can be qualied asChinese individual or family enter-prises or entrepreneurial rms. Theyare mostly established by Chineseindividual persons or families, suchas migrant entrepreneurs and cross-border traders looking for opportuni-ties abroad. Yet, it is to be noted thata number of these individual andfamily companies have an importantbusiness and industrial background inChina. Some of these companies canbe considered as hidden champions

or global niche market players, be-

cause despite their low prole as indi-vidual owned company abroad, theyare large or strong private companiesin China.

HYZ:As already mentioned the so-

called surge of Chinese enterprises inEurope is quite recent, as the averageage of Chinese owned enterprises isonly about eight years. The growth ofChinese investment in Europe duringthe rst half of the 2000s can be at-tributed to the expansion of Chinesemigrant entrepreneurs in the Easternpart of Europe, especially in Russia,Hungary, Bulgaria and Romania.Although some Chinese corporateinvestors, especially shipping and in-ternational trading companies startedto invest in Europe in the early 1980s,most of the Chinese companies whichare older than 20 years resulted fromthe acquisition of and participationin existing European companies.

Chinese-owned en-terprises in Europeare widely dispersed,although there is astrong concentra-tion in only a few

countries. The topve host countries ofChinese companiesin Europe are Rus-sia, Germany, Hun-gary, Romania andthe United Kingdom.Together they takeup 92% of the totalnumber of Chineseowned enterprises inEurope.

This geographical concentration ofChinese enterprise is not only reect-ed at the country level, but also at thecity level. Nearly three quarters ofChinese companies are located in tencities and suburbs, namely Moscow,Budapest, Bucharest, Hamburg, Ds-seldorf, London, Sofia, Kln, Berlinand Saint-Petersburg. Chinese ownedenterprises are more likely to agglom-erate around capital cities in Eastern

Europe, while in Western Europe

they are concentrated in regionalhubs either with intensive industrialactivities or logistic capabilities.

DVDB:Many more facets are devel-oped in detail in the afore mentioned

report which should be of use toboth businessmen and policy makersas it allows them to discover a muchmore exte

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