The China Analyst

A knowledge tool by The Beijing Axis for executives with a China agenda

Now online at www.thebeijingaxis.com/tca

September 2011

Building a new era

China's business in the developing world

Features Resources for Infrastructure: China's Role in Africa's New Business Landscape China and Latin America: Untapped Sources of Added Value Rising Stars: Chinas Emerging Construction Machinery Manufacturers The New Scramble for Africa: Emerging Powers on the Emerging Continent

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Regulars
China Sourcing Strategy: A New Approach to Procurement China Capital: Inbound/Outbound FDI & Financial Markets Strategy: Mapping China in the Global Contracting Industry/CCC Regional Focus: CHINA-AFRICA Regional Focus: CHINA-AUSTRALIA Regional Focus: CHINA-LATIN AMERICA Regional Focus: CHINA-RUSSIA

Tanzania National Stadium Dar es Salaam, Tanzania Capacity: 60,000 people Completed in 2007

Modern Sports Stadium Ndola, Zambia Capacity: 40,000 people Construction to commence in 2011

EMBLEMS OF A NEW ERA

Sheraton Hotel & Towers Oran, Algeria The first Sheraton hotel in Algeria Completed in 2002

Dakar Grand Theatre Dakar, Senegal Covers two hectares; capacity of 1,800 people Completed in 2011

Notable Chinese Construction Projects in Africa

Lom Pangar Hydropower Project Cameroon Includes 30-megawatt power station Construction to commence soon

African Union Conference Centre Addis Ababa, Ethiopia Covers a floor area of 51,887 square metres Under construction

The China Analyst

The Beijing Axis

At the Highest Level

Reflecting on the momentous events happening in the world right now and in the last few turbulent years, it is clear that the world is changing significantly. China is a big part of this change; in fact, its emergence has become instrumental to a new era that is affecting every region of the world, yet none more so than the developing world. China is bringing unprecedented change to Latin America and Africa, and a changing business landscape brings new opportunities.

In the last edition of The China Analyst, we looked at the changing business landscape within China, focusing on certain key industries and outlining the opportunities that can still be found for foreign companies. In this edition, we shift our focus to China's impact on the wider world, and especially on the regions where China's presence and influence have been strongest, namely the developing world. Africa and Latin America have experienced the most significant impact of China's newfound engagement with the developing world, an impact which the cover of this magazine has boldly dubbed 'a new era'. China's expanding reach is having a profound impact on Africa. Here, China's brand of state-led capitalism is serving to breach a heritage of risk aversion by foreign investors, and in doing so, contribute to economic growth in many parts of the continent. As our first lead feature illustrates, by means of an essential exchange of resources for infrastructure, China is playing a crucial role in a new construction boom on the continent. With a rapidly growing trade and investment relationship in recent years, China's business with Latin America has to a large extent been characterised by an exchange of resources for manufactured goods. Yet as our second lead feature envisions, the relationship is now set to enter a new phase of higher value added investment and trade, with wide implications for Latin America. China is not the only new player in these developing regions, however. In our fourth lead feature we outline the trade and investment activities in Africa of the other BRICS nations, revealing how the likes of India and Brazil are in their own ways contributing to the shaping of Africa's new business landscape. With the business that these emerging nations, and especially China, are doing in the developing world, the landscape in regions such as Africa and Latin America is changing, and opportunities for businesses are doing likewise. This edition of The China Analyst is also about these changes and opportunities, and about how China's business in the developing world is indeed building a new era.

Of course this edition also features all the usual sections on China's trade and investment, procurement, and regional business. And I am also pleased to announce the launching of a new website dedicated to The China Analyst, at www.thebeijingaxis.com/tca, where the contents of this and previous editions can be found in an interactive online format. I trust our readers will enjoy this edition of The China Analyst, and as always we welcome your feedback. Kobus van der Wath Founder & Group Managing Director, The Beijing Axis kobus@thebeijingaxis.com

The China Analyst - September 2011

Published by The Beijing Axis 3806 Central Plaza 18 Harbour Road Wanchai Hong Kong, PRC Tel: +86 (0)10 6440 2106 Fax: +86 (0)10 6440 2672 www.thebeijingaxis.com Executive Editor Editor Editorial Board Kobus van der Wath kobus@thebeijingaxis.com Barry van Wyk barryvanwyk@thebeijingaxis.com Lilian Luca luca@thebeijingaxis.com Cheryl Tang cheryl@thebeijingaxis.com Javier Cuat javiercunat@thebeijingaxis.com Dirk Kotze dirk@thebeijingaxis.com
To view the contents of previous editions of The China Analyst, see Previous Editions on page 55. To subscribe free of charge to The China Analyst, please visit www.thebeijingaxis.com or www.thebeijingaxis.com/tca. For advertising opportunities, please contact Haiwei Huang at haiweihuang@thebeijingaxis.com.

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Table of Contents September 2011

6 FEATURES Resources for Infrastructure: China's Role in Africa's New Business Landscape Chinese companies active in Africa are reshaping the continents business landscape, yet at its core the relationship rests on one simple although vital exchange. FEATURES China and Latin America: Untapped Sources of Added Value Trade and investment between China and Latin America have increased ten-fold in the last decade, yet the two regions are now set to enter a new higher value added stage of their relationship. FEATURES Rising Stars: Chinas Emerging Construction Machinery Manufacturers China's three largest construction machinery manufacturers, XCMG, Sany and Zoomlion, have been successful in emerging markets and are aiming to catch up with global leaders in the industry. How did they do it? FEATURES The New Scramble for Africa: Emerging Powers on the Emerging Continent Led by China, the BRICS nations are at the forefront of a new scramble for projects and deals in Africa. Yet apart from China, how are the other four BRICS doing in this new scramble on the continent? MACROECONOMY Macroeconomic Monitor: Chinese Inflation - One of the Biggest Fears of 2011 With inflation having reached 6.5% in July 2011, this edition looks at the Chinese governments monetary and fiscal policy options to fight a scourge for which China's central planners have a legendary fear. NEWS China Business News Highlights Recent headline business stories in China, leading with the business deals following foreign trips by Chinas leaders, China's power shortage in H1 2011, and China's latest construction marvels. TRADE China Trade Roundup A review of Chinas trade performance in Jan-Aug 2011, and an overview of China's trade in services. PROCUREMENT China Sourcing Strategy: A New Approach to Procurement China procurement is changing, and procurement managers need to adapt to a new opportunity landscape. INVESTMENT China Capital: Inbound/Outbound FDI & Financial Markets Analysis on the latest on FDI in China and OFDI by Chinese firms, and a review of China's OFDI approval processes. STRATEGY Mapping China in the Global Contracting Industry In this edition we illustrate the presence of China's contractors in different markets of the world. STRATEGY CCC: China Inc.'s Leading EPC Contractor A closer look at the corporate strategy of arguably China's most internationalised contractor. REGIONS Regional Overview: BRIICS A macro overview of the leading developing economies: Brazil, Russia, India, Indonesia, China and South Africa. REGIONS Regional Focus CHINA-AFRICA China-Africa trade and investment analysis, and the series 'Chinese Contractors in Africa', featuring CCECC. REGIONS Regional Focus CHINA-AUSTRALIA China-Australia trade and investment analysis, and the series 'Australia State Watch', featuring Victoria. REGIONS Regional Focus CHINA-LATIN AMERICA China-Latin America trade and investment analysis, and an interview with the Mexican Ambassador to China, Jorge Guajardo. REGIONS Regional Focus CHINA-RUSSIA China-Russia trade and investment analysis, including the series 'China-Russia Resources Watch'. The Beijing Axis News - March-September 2011 The latest The Beijing Axis Group news. EVENTS Upcoming Events A selection of upcoming China and global events focusing on the mining and engineering sectors. About The Beijing Axis Company profile and contact information.

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Features

Resources for Infrastructure: China's Role in Africas New Business Landscape

Chinese companies active in Africa are reshaping the continents business landscape as part of a complex partnership that has reignited and vastly expanded ties from a previous era. Chinas ways of doing business in Africa today is different from all those of yesteryear, yet the broad engagement can be understood through the prism of one vital exchange: Resources for infrastructure. By Barry van Wyk

n the 1970s, Chinas financing and construction of a 1,870 km-long railway giving landlocked Zambia access to the Tanzanian port of Dar es Salaam was a monument to Chinese engagement and solidarity with Africa in a previous era. In a flush of post-colonial exuberance, Africa was undergoing a construction boom. Drawing on colonial-era plans, various schools, hospitals and roads were being built in Ghana, for example, and in the Democratic Republic of Congo (then Zaire), the Inga hydroelectric project was completed in 1977 at a cost of USD 260 million, while a 1,100 mile power line to Katanga also saw the light of day.

customers inland are on average 50% higher than the costs of shipping costs in other low-income developing regions. Yet now a new China with vastly different priorities and strategic outlook is back in Africa, where it is instrumental in Africas new construction boom that is reshaping the business landscape on the continent. In contrast to its piecemeal interaction with African countries in previous decades, China is now comprehensively engaged with almost all of Africas 54 countries lending money, providing aid, trading, investing, and more than all else: building infrastructure and extracting resources. This over-simplified description of Chinas business in Africa goes to the heart of how Africas business landscape is changing under the influence of a new superpower hungry for natural resources and well-suited to provide Africa with something it is sorely in need of: infrastructure. Levels of engagement: Trade and investment The China that built the railway in Africa in the 1970s is a distant shadow of the China of today that routinely builds railways, roads, ports and other infrastructure in various parts of the world. In the 2000s, as the size of Chinas economy in quick succession surpassed that of Italy, France, the UK, and Germany, Chinas energy consumption expanded four times faster than expected to 16% of global demand in 2006. While Chinas GDP expanded at an annual rate of 10% over 20002008, its annual demand for industrial raw materials such as steel (16%), aluminium (20%), copper (13%) and nickel (23%) all grew even faster. In the ten years preceding 2008, Chinas consumption of crude oil nearly doubled, and during the same period its consumption of copper and iron ore tripled while that of aluminium quadrupled. Between 2000 and 2008, China accounted for two-thirds of the worlds entire growth in demand for steel and aluminium and virtually all growth in global demand for copper and nickel. This rapid growth in Chinas natural resource use contributed to a windfall in trade between China and Africa, a major supplier of raw materials. Bilateral trade stood at just over USD 10 billion in 2000, yet in 2010 it breached USD 125 billion, exceeding Africas trade with any other partner, the closest ones being the US with around USD 115 billion, France with around USD 66 billion, and the UK with around USD 31 billion (see chart on next page). This China-Africa trade pattern basically encompasses an exchange of a diverse range of Chinese manufactured goods for African raw materials.

Yet when the Katanga line was eventually completed in 1982 at a cost of USD 1 billion, it was four times over the original budget. Only 18% of Ingas hydroelectric capacity and 20% of the capacity of the new power lines were ever used, and the sharp fall in the price of cocoa in 1961 put paid to Kwame Nkrumahs construction projects in Ghana. Designed to carry five million metric tonnes of cargo annually, with a lack of new investment, mounting debt, poor management and maintenance, moreover, Zambias new railway never carried more than 300,000. From being a symbol of a new era of Africas development, this railway badly managed and insufficiently maintained became emblematic of Africas lost construction boom turned to protracted bust. Instead of a boom of new steel and concrete, Africa experienced decades of lost growth. In 2008, the World Bank1 estimted that access to the most basic services in Africa increased only modestly between the early 1990s and the early 2000s, and only slightly in the last decade. Electricity, for example, is still available to little more than 20% of Africas total population, and piped water to just 12%. Compounding the problem was the fact that Africa was largely left to its own devices in terms of infrastructure in the 1990s when both African and donor investment in infrastructure was scaled back relative to other priorities such as child immunisation and education, partly due to the mistaken belief that private investors would step up to fill the infrastructure financing gap. As a result, while Africas construction sector deteriorated, poor road, rail and harbour infrastructure added 30-40% to the costs of goods traded among African countries, and the costs of moving foreign imports to
1 See Access, Affordability and Alternatives: Modern Infrastructure Services in Africa', Africa Infrastructure Country Diagnostic. The International Bank for Reconstruction and Development, World Bank, Feb. 2008

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Africa's Major Trade Partners (USD bn, 2000-10)

China
150

Major Investors in Africa OFDI Flow (USD bn, 2003-09)

France

UK

US

France

120

2003 US 2004
90

2005 2006
60

UK 2007 2008

30

2009 China

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: UN Comtrade; The Beijing Axis Analysis

0 5 10 15 20 Source: OECD Statistical Database; China National Bureau of Stistics; The Beijing Axis Analysis

Along with the US and emerging economies such as Brazil and India, Chinas imports from Africa are as expected characterised by a disproportionate share of oil and minerals. Chinas trade with Africa has as a result been very lucrative for resource-rich African countries, and these African commodity suppliers have become crucial suppliers for China. South Africa is Chinas only African trade partner from which it imports substantial amounts of products that are not resources, while Chinas leading suppliers of oil (Angola), Manganese (South Africa), chromium (South Africa), cobalt (the DRC), and platinum (South Africa) are all African. China's annual flow of Outbound Foreign Direct Investment (OFDI) to Africa in recent years is still far in arrears of the US, France and the UK (see chart above, right). In 2009, Chinas OFDI stock in Africa reached USD 9.3 billion, still marginally behind that of Switzerland, the Netherlands and far behind the US, France and the UK (which has the most invested stock in Africa, namely USD 61.4 billion). Chinese investment in Africa reflects a similar predilection for resource-rich countries as is the case with trade, and in 2009 a full 76% of Chinese FDI in Africa was concentrated in resource-rich countries. In 2009, the main sectors for Chinese OFDI stock in Africa were mining (30%), manufacturing (22%), and construction (16%). Yet while Chinese levels of OFDI in Africa still lag far behind those of Western countries, China and other emerging partners are following new paths of investing in Africa. Europe and North America have typically relied on FDI and Official Development Assistance (ODA) in Africa, but emerging powers such as China are adopting a more holistic approach to broaden their economic relationship with Africa that combines trade and investment with development cooperation. Thus while developing partners such as China, India, South Korea and Brazil are not only engaging with African countries that Western countries have avoided in the past, they are also increasingly using alternative financing methods. China in particular uses the following financing methods in Africa2:
2 For more detail see African Economic Outlook 2011, ADB, OECD, UNDP, UNECA, 2011, p. 112.

Export credits to support national exporters. In 2009, China disbursed USD 29.6 billion in export credit globally Natural resources-backed lines of credit, or the Angola Mode, where Chinas Exim Bank uses natural resource exports or preferential access to them as collateral for infrastructure projects and as a means to repay loans Mixed credits, where financing packages combine concessional and market rate loans, such as a mixture of FDI and export credit3

Laying down a methodology: The Angola Mode As Chinas engagement with Africa has deepened during the last decade, its deals on the continent came to broadly fit a mould. As a country that recently emerged from civil war yet that is rich in natural resources and sorely in need of infrastructural renewal, Angola has become one of the biggest recipients of Chinese financing for infrastructure projects in Africa, one of Chinas largest trading partners on the continent, and a major source of its oil. In 2004 Angola signed a deal with China that would become emblematic of Chinas infrastructure for resources relationship with Africa. Angola received a USD 2 billion loan from a Chinese policy bank, China EximBank, for the development of infrastructure, including electricity generation, telecom expansion, railway rehabilitation and water. As part of the repayment terms for the loan, Angola agreed to supply China with 10,000 barrels of oil per day. In a pattern that would be repeated frequently afterwards, a Chinese construction/engineering company was awarded contracts for the infrastructure projects, while rights for extracting natural resources was afforded to a Chinese oil company.
3 Deborah Brautigam, author of The Dragons Gift, has put Chinas total purely concessional loans, zero-interest loans and grant commitments to Africa at USD 2.1 billion in 2009, while she estimated Chinas preferential export credit commitments to Africa for 2007-09 at around USD 2 billion and non-concessional finance at around USD 5 billion annually. In sum, all Chinas alternative financial flows to Africa reached an annual average commitment of USD 7.1 billion over 2007-09.

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Features

International Contract Revenue in Africa, China's and Rest of World's Share (USD mn, 2001-09)
2001 7.4% 92.6% 2002 9.9% 2003 11.8% 2004 14.7% 2005 21.4% 2006 28.4% 2007 2008 2009 0 26.9% 42.4% 36.6% 10,000 20,000 30,000 90.1% 88.2% 85.3% 78.6% 71.6% 73.1% 57.6% 63.4% 40,000 50,000 60,000 China Rest of World

Chinese contractors have become highly competitive bidders for publicly tendered infrastructure projects. A 2007 survey of 35 Chinese construction companies active in Africa found that around 50% of Chinese projects in Africa were actually won via an international bidding process. The extent of Chinese contractors success in Africa is illustrated in the fact that in 2001 Chinas share of contract revenue in Africa was a mere 7.4%, yet by 2009 this had climbed to 36.6% (see chart to the left), making it the dominant player, far ahead of Italy with 15% in second place and France with 10% in third. Africa is now Chinas largest market in terms of contract revenue with 41.1%, even more than Asia with 36%. Similar to Chinese trade and investment in Africa, the revenue of Chinese contractors is highly concentrated in a few resourcerich countries. In 2009, the leading six countries (Algeria, Angola, Sudan, Nigeria, Libya and Ethiopia), mostly oil and gas-related economies, accounted for USD 18.1 billion or 71% of Chinas total revenue (see chart opposite page). Chinese contractors in Africa have been most successful in civil infrastructure projects such as transport and construction. As stated above, around 50% of Chinese contractors in Africa seem to prefer international bids, yet around 40% were accounted for by grants, concessional loan projects and other mechanisms in which the Chinese government play a strong role. The case of Angola, where Chinese commercial, investment and contracting activity has been vigorous for almost a decade now, can be held up as an example of the progression of Chinese contracting over time. The establishment of Angolas first loan agreement with China Exim Bank in March 2004 facilitated the entry of Chinas large SOEs into Angola, and in the time since dozens of Chinese contractors have established operations there.4 Although Chinese contractors typically still focus more on the lower value added part of the construction value chain, their ability to undertake construction projects at cheaper prices have made them very competitive and, in the case of Angola, have broken the monopoly of Portuguese and Brazilian contractors. Due to the volume of their needs and the lack of quality products available for sourcing locally, Chinese contractors bring most of their workers and materials from China (although in Angola some Chinese companies have in the last few years begun to set up local factories to produce some industrial inputs). After a few years, mostly private Chinese companies also began entering Angola, largely to subcontract from the larger companies and to set up a procurement chain for providing equipment and materials from China. Windows of opportunity: Africas new business landscape China is engaging with Africa like no other country has ever done before, and in the fundamental exchange of Africas resources for Chinese-built infrastructure, China is making
4 For an assessment of the various estimates provided for the number of Chinese state-owned and private companies in Angola, see L Corkin, Chinese Construction Companies in Angola: A Local Linkages Perspective, p. 17.

Source: ENR; The Beijing Axis Analysis

Repaying loans for infrastructure development with natural resources is not a new concept. The first reported example of such a deal involving China in Africa was actually not 2004 in Angola, but 2001 in the DRC when China provided USD 280 million for dam construction and received loan payments in oil. After 2004, however, such deals became more widely used by China in Africa, and also expanded to other resources such as bauxite, chromium, and iron ore. It should be noted, however, that the Angola mode is not the only mode of engagement for Chinese companies in Africa, yet they are common in countries such as Angola, the DRC and Sudan who have only recently emerged from conflict and instability. The process of concluding Angola Mode deals is typically borne out of intergovernmental agreements that determine the purpose, amount, maturity and interest rate of the loan, followed by the signing of a loan agreement often concessional in nature between China Exim Bank and the borrower. The capital is then disbursed in tranches in terms of project completion, and paid directly to Chinese contractors in China, which are selected by Exim Bank and Chinas Ministry of Commerce and sanctioned by the beneficiary government. With such a methodology in place, the main Chinese actors in Africa are Lending agencies: Chinas policy banks, China Exim Bank and China Development Bank through the China-Africa Development (CAD) Fund Extractors and builders: Large state-owned enterprises and some private ones operating in the extractive and construction/engineering industries Other business people: Small to medium-sized Chinese businesses and individual entrepreneurs that may appear subsequently Getting their hands dirty: Chinese contractors in Africa Collectively, these actors are re-shaping Africas business landscape, yet none are doing so more obviously than Chinas construction and engineering contractors. Having originally relied solely on Chinese government-financed projects,

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a significant contribution to addressing a lasting structural bottleneck in Africa. The infrastructure for resources deals it concludes in Africa are unique in the way they lock African countries into using their resources for infrastructure revenue never actually comes in, obviating the need for taxation. China is transcending conventional patterns of engagement of straightforward FDI and ODI, and has instead fashioned an elaborate system where a strong government role and alternative financing methods can overcome risk, and the leveraging of Chinas own booming construction industry can see Chinese contractors building much-needed civil infrastructure as well as value-adding processing industries such as refineries and petro-chemical complexes in Africa. China is a strong player in Africa both in upstream activities such as exploration and extraction, as well as in downstream activities such as processing. China's demand for oil and minerals has created a new level of competition for Africas resources, and has contributed to higher prices, to the benefit of Africa. In countries such as the DRC and Angola where previous failed construction booms have formed part of protracted instability, China has undertaken projects where many other investors have regarded the risk as being too high. The sustainability and flexibility of Chinas contemporary engagement in Africa, moreover, should contribute significantly to Africas current construction boom not being as forlorn as the previous one, and that would make it a true new era for Africa. This is not to say that the impact of China in Africa is flawless, yet this should not be the expectation for something that is not an exercise in altruism. Chinese projects in Africa are in essence turnkey projects, in theory fulfilled by contractors who then sign off on the engagement, and hence the extent of the true lasting value add on the ground in Africa is sometimes brought into question by some observers, especially since China exports a significant share of its labour to Africa. Yet this could be changing, as we have seen, as Chinese companies seek to establish local manufacturing capabilities on the continent, in addition to establishing several special economic zones and other forms of skills transfer. The strong role played by government-to-government interaction in Chinese deals in Africa has in practice often meant that many of Africas mineral rights are sold in closed deals and not in public auctions. Yet the increasing number of Chinese extractive companies and construction/engineering contractors in Africa has opened up a vast new opportunity landscape for foreign companies on the continent, both in terms of potential partnership and new clientele. Thus in areas where Chinese companies are still comparatively less adept, such as consulting and industrial design, many opportunities for partnerships are now open to foreign firms. Chinese firms in Africa still lack a deep understanding of local business as well as cultural and regulatory issues, and here again foreign companies with experience in Africa can profit. Foreign companies could also explore joint bids with Chinese companies for construction projects. As Chinese firms spend

Leading Countries for Chinese Contractor Revenue in Africa and Number of Chinese Contractors in Country (USD mn, 2009)
6,000 22

5,000

17

4,000

3,000

17 2,000

14

12

15 1,000 8 6 7 9

1 0

4 DRC Botswana

Algeria Angola Sudan Nigeria

Libya Ethiopia Congo(B) Egypt

Source: China Statistical Yearbook 2010; The Beijing Axis Analysis

more time in Africa they will become more aware of their own shortcomings and more receptive to the value offered by foreign companies with the right knowledge and experience. For such foreign companies, the challenge will be to utilise these opportunities in the right industries, at the right time. Chinas increased business in Africa has also created demand for services essential to doing in business in Africa, providing new opportunities for banks, law firms, and various other service providers. These are but a few examples of how Chinas infrastructure for resources engagement is creating new business opportunities for foreign firms in Africa. Yet perhaps the best opportunity of all is the fact that Africa itself is changing. As Chinas activities in Africa increases, Africa is gradually transforming itself from a perennial backwater to a new source of growth with diversifying economies, expanding consumer markets, and working infrastructure making Africa open for business like never before. Barry van Wyk, Senior Consultant barryvanwyk@thebeijingaxis.com

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Features

China and Latin America: Untapped Sources of Added Value

Bilateral trade between China and Latin America has increased ten-fold in the last decade, preparing the way for a massive wave of Chinese investment in the region in 2010. While both bilateral trade and investment are expected to increase further in the coming years, questions remain on how balanced and sustainable the relationship will be. This article argues that both regions are set to enter a new stage of their relationship that will be characterised by increasing Chinese investments in more value added industries and eventually higher value added exports from Latin America. By Javier Cuat

nly ten years ago, upon Chinas entry into the World Trade Organisation (WTO), China was the worlds seventh-largest economy, growing at 7.3% y-o-y and accounting for just over a tenth of global economic growth. In 2010, with a global financial crisis still persistent in the United States (US) and Europe, China became the worlds secondlargest economy, growing at 9.6% (H1 2011) and contributing one-third to total world GDP growth. The emergence of China as a global economic power has greatly benefited the global economy. In Chinas phenomenal rise, one thing is clear: as China grows, other countries benefit. As Chinas exported-oriented economy keeps churning out increasingly higher value added goods, other countries can now purchase previously unattainable products at competitive prices. Yet this trend has also to varying degrees presented the regions and countries within Chinas trade, investment and geopolitical radar with a number of challenges. Antidumping and protectionist measures in the US and Europe, labour and community issues in Africa, and territorial disputes in Asia are just some examples. Latin America (LatAm), with its own particularities, is no exception. The relationship When China entered the WTO, annual trade between China and LatAm amounted to USD 14.4 billion, with LatAm accounting for 2.7% of Chinas total imports and 2.9% of its total exports; and China accounting for 2.3 % of LatAms total China's Trade with LatAm and the Caribbean (USD bn, 2001-10)
100

imports and 2% of its total exports (see charts below). Ten years later, trade between China and LatAm amounted to USD 179.3 billion, a tenfold increase, with LatAm accounting for 6.5% of Chinas total imports and 5.6% of its total exports; and China accounting for 12.3% of LatAms total imports and 12.9% of LatAms total exports. Overall, China is not only more important to LatAm today than ten years ago and vice versa, but the two regions are progressively becoming more dependent on each other as important sources of growth compared to other regions, exemplified by the free trade agreements China has signed in recent years with Chile, Peru and Costa Rica. This trend became more evident during the most recent financial crisis, during which Chinas stimulus package and unrelenting demand for commodities helped LatAms exports to China counterbalance a decrease in demand from the US and Europe. For its part China found the perfect partner to serve its own demand, diversifying its sources of fuel and metals needed to power and build its economy during the financial crisis and into the future. According to the Economic Commission for LatAm and the Caribbean (ECLAC), China today ranks among LatAms top trading partners, particularly in countries such as Brazil, Chile, Peru and Argentina, where China accounts for 15%, 24%, 16% and 9%, respectively, of each countrys total exports. What's more, China is now the largest importer of goods and services from Brazil and Chile, and the second-largest from Peru, Argentina and Cuba. However, these exports remain China's Trade with LatAm and the Caribbean (%, 2001-10)
14%

China as % of LatAm Exports China as % of LatAm Imports

Exports
80

12%

LatAm as % of China Exports

Imports
60

10% 8% 6% 4%

LatAm as % of China Imports

40

20
2%

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: UN Comtrade; The Beijing Axis Analysis

Source: UN Comtrade; The Beijing Axis Analysis

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concentrated in raw materials such as copper, iron ore, and soybeans, which account for nearly 60% of total exports. Similarly, Chinas exports to LatAm are mainly electronic items, autoparts, equipment and machinery, and textiles. Indeed, the trade relationship between China and LatAm is essentially built on the exchange of natural resources for manufactured goods or low value for high value added products. While this makes a lot of sense from the countries' factor endowment and comparative advantage point of view, it also presents great challenges for LatAm manufacturers who have seen Chinese exports progressively replace their market shares at home, in other LatAm markets, and especially in the US. Regarding investment, China's FDI stock in LatAm breached USD 41 billion at the end of 2009, accounting for up to 18% of total Chinese FDI stock in the world. LatAm's investment stock in China, on the other hand, dwarfs that number, hitting USD 112.6 billion in 2008, or roughly 14% of the total foreign capital absorbed by China. A closer look into the GDP figures for both regions illustrates that current levels of Chinese FDI in LatAm and the Caribbean are comparatively low. In addition, they are mostly concentrated in tax havens such as the Cayman Islands and British Virgin Islands, which accounted for 96.7% of all Chinese FDI into LatAm between 2003 and 2009. Excluding the two tax havens, LatAm only received about USD 126 million in Chinese FDI, or less than 1% of the annual total. Overall, there is Chinese under-investment in all sectors but especially in higher value added industries. 2010 - Breakthrough In 2010, with an estimated investment of USD 15.25 billion, China's investment in LatAm was more than twice the amount it invested in the region in the period 200609, namely USD 7 billion. China's 9% share of FDI in the region now makes it the third-largest foreign investor in LatAm, trailing only the US and the Netherlands, which accounted for 17% and 13%, respectively (see chart below). By country, the main destinations for Chinese FDI were Brazil, Argentina and Peru, all of which have established strong trade links with China. Brazil, Chinas BRICS counterpart in the region, was by far the biggest benefactor of this investment wave, with USD 9.6 billion in Chinese FDI in 2010. Origin of FDI in LatAm and the Caribbean* (%, 2006-10)
USD 864.17 bn 100% 8% 80% 30% 10% 28% USD 112.63 bn Latin America Others Caribbean Financial Centres Netherlands China UK

A survey by the China-Brazil Business Council (CBBC) revealed that 93% of Chinese investments in Brazil in 2010 were undertaken by state-owned companies, while 6% were undertaken by companies belonging to provinces, and 1% by private companies. The survey also found that Chinese investments in 2010 totalled USD 12.6 billion (slightly higher than ECLACs figures), 82% of which involved mergers and acquisitions. Sinopec made the largest investment when it acquired a 40% stake in the Brazilian operations of Repsol-YPF for USD 7.1 billion (see table on next page). Of China's total investment commitments in 2010, 95% were concentrated in the areas of oil and gas, agribusiness, mining, and ironworks. However, this trend appears to shifting in 2011, with announced Chinese investments in LatAm and the Caribbean thus far amounting to USD 7.13 billion (see chart below), with a stronger focus on higher value added industries. If the figures from 2010 and the announced figures of H1 2011 are any indication, they show that China is becoming increasingly entrenched throughout the region, possibly marking the start of a new phase of economic relations between China and LatAm which features stronger trade links that are accompanied by growing investment in not only natural resources, but also manufacturing, infrastructure and services. As examples, Huawei, ZTE and Lenovo are becoming prominent investors in the telecommunications and electronics sectors, and BYD, Chery and Geely are leading the charge in the auto industry. The fundamental challenges facing the China-LatAm relationship are two-fold. Firstly, how to increase and diversify Chinese FDI in the region beyond raw materials to more value added industries; and secondly how to improve trade by means of exporting more value added LatAm goods. Both challenges, as they unfold, will present substantial opportunities for both sides. Forever imbalanced? Unlikely Over the long term, the greatest opportunity but also challenge facing Chinese companies in LatAm is successful integration with the host economies. The model it is presently utilising in a number of countries, characterised by the acquisition of natural resource assets, the extraction and low value added exports back to China, and under-developed community relations, has both a limited political and business shelf China's LatAm FDI Destinations by Country* (%, 2010-Q3 2011)
USD 15.25 bn 100 Colombia 80 Costa Rica Mexico 60 Ecuador Peru 40 Argentina Brazil USD 7.13 bn

60%

40%

10% 5% 4% 2% 10% 5%

7% 13% 9% 4% 3% 4% 17%

Japan Spain Canada US

20

20% 25% 2006-2009 Source: ECLAC; The Beijing Axis Analysis 0%

2010

0 2010 Q1-Q3 2011 *Note: Data for 2010 is confirmed investments; data for 2011 is announced investments. Source: ECLAC; The Beijing Axis Analysis

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Major Announced Chinese Foreign Direct Investments in LatAm (2010-11)

Year Month Investor Honbridge Holdings Sany Heavy Industry East China Mineral Expl. & Develop. CNOOC State Grid WISCO State Grid Sinochem Tongling Nonferrous & China Railway Construction Chery Sinopec CR Zongshen Chongqing Grain Group Lenovo Huawei ZTE Chongqing Polycomp International Corp. XCMG Geely China CNR Corp Qingshan Mining TCL BOMCO ICBC Midea Group Status USD mn Partner/target Sul-Americana de Metals 2010 Jan 2010 Feb 2010 Mar 2010 2010 2010 2010 2010 2010 Mar Mar Apr May May Aug Concluded 400 Ongoing 200 Concluded 1,200 Concluded Ongoing Concluded Concluded Concluded Planning 3,100 1,050 4,700 1,720 3,070 3,000

highlighted deals denote those in non-resources sectors

Sector Metals

Subsector Iron ore Heavy machinery Iron ore Oil Copper Steel Power grid Oil Copper Auto Oil Motorcycle Soybeans PC Mobile phone, tablet PC Tablet PC Fiber glass Heavy machinery Auto Train Gold, silver & copper Mobile Petroleum equipment Banking Home appliances Niobium

Country Brazil Brazil Brazil Argentina Chile Brazil Brazil Brazil Ecuador Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Uruguay Brazil Mexico Argentina Brazil Argentina Argentina, Brazil, Chile Brazil

Build a manufacturing plant Manufacturing Itaminas Metals Bridas Quadra Mining A JV steel mill Cobra, Elecnor and Isolux Peregrino Field A copper mine n/a Repsol/YPF Kasinski n/a Positivo Build a plant Build a plant Owens Corning Plant n/a Nordex TTrans JDC Mining Co Radio Victoria Fueguina BRCP, Asperbras Standard Bank Argentina Carrier Corporation of UTC Group CBMM Energy Metals Metals Power Energy Metals Transport Energy Transport Agriculture Electronics Telecom Telecom Material Manufacturing Transport Transport Metals Telecom Energy Finance Manufacturing Metals

2010 Sep 2010 Oct 2011 Jan 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 Mar Apr Apr Apr May May May Jun Jun Jun Jul Aug Aug

Ongoing 400 Ongoing 7,190 Concluded 80 Concluded Ongoing Ongoing Concluded Concluded Concluded Concluded Ongoing Ongoing Ongoing Concluded Ongoing Ongoing Ongoing 2,400 900 363 200 60 200 10 127 3 21 n/a 600 223 1,950 7,137

2011 Sep

Taiyuan Steel, CITIC Group and Baosteel Total for Q1-Q3 2011

Source: China Global Investment Tracker, Heritage Foundation, Carta da China No 56 June 2010, China-Brazil Business Council; Observatario Iberoamericano de Asia - Pacifico and press releases. Note highlighted deals denote those in non-resources sectors.

life. While benefits of both existing and proposed Chinese investments are real, trade tensions from the LatAm side are emerging and creating contradictions for both parties. We saw a good example of this at the beginning of 2011, when the Brazilian Finance Minister called for a revaluation of the renminbi following a massive USD 15 billion flow of Chinese investments into Brazil during 2010. More importantly, LatAm now more than ever represents an opportunity for Chinese manufacturers to enlarge their global footprints and market shares, especially in markets where their international competitors have a significant presence. Aware of Chinas price advantages, constantly improving technology standards and overall positive macroeconomic outlook for the LatAm region (recently revised by the World Bank to 4.6% growth for 2010), Chinese manufacturing companies are realising that an export-oriented development strategy towards LatAm without a footprint is a deadend game. Various factors, i.e. consolidated market shares at home, the need to better understand their customers in the region, and strong balance sheets built on export revenue with low production costs, have laid the foundation for capital investments to grow and deepen in the years to come. In February 2010, Sany Heavy Industry, one of Chinas largest

construction equipment manufacturers, decided to put down roots in the region by investing USD 200 million in a manufacturing plant in the Brazilian state of Sao Paulo. One year later, XCMG, its closest Chinese competitor, followed in its footsteps. We have seen similar examples in the automobile industry in Mexico, where Chinese automakers Zhongxing, Geely and Changan, through a partnership with Mexicos Autopark, have all announced plans to establish auto-making facilities. Chinas ZTE has started manufacturing smartphones in Argentina together with local white goods manufacturer BGH and has also announced it will start producing tablet computers in Brazil. The list goes on in a number of highvalue-added industries (see table above). Leading Chinese companies are looking at a number of LatAm countries as key launchpads from which to market their products not only in other LatAm markets but also in North American markets. According to ECLAC, 90% of China's confirmed investment in LatAm has targeted the extraction of natural resources. Looking into Chinas upgraded endowment factors over the years, the scale, nature and international ambitions of its domestic champions together with recent Chinese OFDI figures in the region, one can expect an increasing number of Chinese manufacturing companies to invest in high value added industries in the region. While investments in oil,

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gas and mineral resources will remain at the top of Beijings agenda, less value added Chinese investments in LatAm going forward would not make much sense from a global supply chain point of view. If trade relations continue to unfold as they have in the last decade, Chinese manufacturers and infrastructure developers will need to integrate LatAm in their supply chains in the long run as much as LatAm is willing to. So expect this trend to intensify. Over the long term, the greatest opportunity but also challenge facing LatAm companies seeking to compete in China is to diversify their exports towards more value added products. While a significant number of LatAms manufactured exports compete with products China itself produces, one should not forget that China is the worlds second-largest importer of manufactured goods. So from a sectoral and product perspective, the challenge is not that there is no market for LatAm's manufactured goods in China, but rather identifying what the specific products with the greatest potential are and how to market them effectively. The Chinese market is more complex than any other market of comparable size, and therefore requires an on-the-ground, customised and dedicated strategic approach. Even though China is a large market for a number of products, entering the Chinese market is not an easy task and profits are usually the result of a long-term investment in understanding the Chinese culture, the specifics of your market and network building. Just as one cannot ignore that the emergence of Chinese manufacturing companies is disrupting domestic competition in a number of industries in LatAm, and increasingly in more capital and technological-intensive products, one cannot ignore that the Chinese marketplace represents a tremendous opportunity for international companies. China ranks among the world's largest consumers and importers of power generating equipment, aircraft and parts, computers and industrial machinery, agricultural products, consumer and luxury goods among a large spectrum of sectors and products. Brazilian aircraft company Embraer, along with Mexican bread maker Bimbo, are just two examples of successful LatAm ventures in the Chinese market. Embraer, which opened its first office in Beijing in 2000, continued with the construction of a spare parts distribution centre at Beijing International Airport, and the signing of a joint venture with Aviation Industry Corporation of China in 2003. Embraer has delivered more than 70 aircraft in China and has already achieved a 52% share of Chinas market for aircraft with up to 120 seats in 2009. With two plants in China, Bimbo is a pioneer in marketing packaged baked goods in China, especially in Beijing and Tianjin, and is expanding to other cities. Despite such precedents, LatAms business presence in China is still mainly dominated by the so-called multilatinas, with a strong component coming from the natural resources sector, while LatAm's small and medium-sized enterprises lag behind their counterparts in terms of presence and market penetration. As LatAm becomes increasingly integrated with China, bringing the regions small and medium-sized enterprises to the Chinese market not only represents a major competitive

challenge but probably one of the best opportunities for the regions export diversification ambitions. Cross-border opportunities for LatAm's exporters do not only exist in the natural resources side of Chinese demand but also in food, beverages, agribusiness, leather and fabrics, plastics, chemicals, pharmaceuticals, machinery and electronics, among other sectors. While market entry strategies may vary greatly - from organic to inorganic growth, from JV partnerships to wholly foreign owned enterprises, from export development to assembling and/or manufacturing, from partnering with a local distributor(s) to developing one's own distribution channels one thing is clear: ignoring the Chinese consumption market is neither possible nor wise if one aims to remain competitive over the long term. Final word If 2010 meant anything for China-LatAm trade and investment relationship, it was change. We are leaving behind a stage in the relationship characterised by booming bilateral trade, few investments and strong unbalances, and entering a new stage characterised by the utilisation of new sources of added value. This stage will not only be characterised by trade but also by increasing Chinese investments in more value added industries and eventually higher value added exports from LatAm. If this happens, and we think it will, the exchange of natural resources for manufactured goods will prove to be not the trend itself but the catalyst and continuation of a bigger trend. Both regions are set to take steps towards a more balanced, sustainable, value added and mutually beneficial relationship. While Chinese OFDI figures for 2010 and H1 2011 provide some hints, it is still uncertain which countries, sectors and companies will be the protagonists in the coming decade. How do LatAm companies look at China and how do Chinese companies look at LatAm? While the challenges involved in business transactions are complex, a change in perception will be key as old perceptions have on many occasions been as unbalanced as the trade and investment relationship. China should not be perceived as a neo-colonial power as much as LatAm is no ones backyard. The first, and most probably the biggest, barriers that LatAm companies face when engaging with China are not that different than what the Chinese face when engaging with LatAm. These are culture, language, protocol, and lack of information, and they impact how we understand the opportunities and challenges. Working out the information deficits and bringing the market realities to the corporate landscape in China and LatAm will further assist and facilitate mutually beneficial and more value added trade and investment. Government bodies, industry associations, chambers of commerce, corporate players and service providers must work in that direction. The rules are changing but the game is just beginning. Javier Cuat, General Manager: Beijing Axis Strategy javiercunat@thebeijingaxis.com

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Rising Stars: Chinas Emerging Construction Machinery Manufacturers

Buoyed by increasing demand, especially in emerging markets, China's construction machinery players have been actively enhancing their international reach and catching up with their foreign counterparts. Chinas three leading companies in this sector are XCMG, Sany, and Zoomlion, and this article outlines the different strategies adopted by these rising stars and their global expansion plans. By Ankit Khaitan

tarting from a mere USD 1 billion worth of sales in 1999, Chinas construction machinery industry saw a decade of high growth with sales reaching USD 60 billion in 2010. This phenomenal growth in demand was fuelled by rapid growth in both the developed coastal areas of China and more recently, inland areas. In developed areas, the genesis of growth was local governments expansion of small cities, while in inland China it was a growing market for infrastructure and housing. Currently, for every 1% increase in the urbanisation rate, 13 million people move from rural areas to cities, but this number still lags far behind that of developed countries and the global average. The Chinese government has set a clear target of achieving an urbanisation rate of 60% by 2020, indicating that China still has a long way to go in this regard.

Global Market Share of Construction Machinery Industry in Terms of Sales Volume (2002 vs. 2009)
China 100 16% 29% 80 10% 4% 60 28% 13% North America Europe Japan Others

40 28% 20 18% 0

22%

Another key demand driver for construction machinery is the strong growth in fixed asset investments spurred mostly by downstream segments, including infrastructure and property investments. For instance, social housing, though comparatively smaller investments, is significant in construction project volume and substantially increases the need for equipment. Additionally, demand from foreign markets has also grown, allowing Chinas construction machinery exports to experience rapid growth in recent years. Together, these factors have bolstered the development of the construction machinery industry in China, making it the worlds fastestgrowing and third-largest market and catapulting the three largest players onto the world stage. Beginnings According to a report by Off-Highway Research (a consultancy specialising in the research and analysis of international construction), Chinas share of the global construction machinery market jumped from 18% in 2002 to 32% in 2009 in terms of sales volume (see chart above, right). Chinas three leading pioneers in this regard are Sany Heavy Industry, Zoomlion and XCMG, which have emerged as the three dominant manufacturers that together account for about 30% of the market in China, larger than the top three foreign companies active in China (see chart on next page). Indeed, these three are now ranked in the top ten in terms of sales revenue globally. Out of these, Sany and XCMG only started operating in the early 1990s but quickly transformed themselves from being single product machinery companies to ones that boast

32%

2002

2009

Source: CCMA; Off-Highway Research

comprehensive production lines. In contrast, Zoomlion is Chinas second-largest, and the worlds tenth-largest, construction machinery manufacturer. It emerged out of Changsha Construction Machinery Research Institute, a leading state-owned research institution focusing on construction machinery, effectively affording it a strong competitive advantage. Consolidation and government support Though the industry in China is highly fragmented with over 900 companies vying for market share, a majority of them only manufacture components or engage in sub-assembly due to the hefty upfront financial investments that are required. In addition, intense competition between both domestic and foreign participants as well as rising demand for improved and advanced technology have forced small operators to either be acquired by more established players or simply exit the game. In fact, the large in-house companies have supplemented organic growth and scaled up rapidly through consolidation. In the past decade, Sany has acquired assets from its parent company to expand its capabilities while Zoomlion

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The China Analyst

Approximate Market Share of China's Construction Machinery Industry (2010)

Caterpillar Komatsu Kobelco Volvo Hitachi Sany Heavy XCMG XGMA Other Foreign Zoomlion Other Chinese

balanced between its two largest segments, concrete and crane machinery, contributing 43% and 34% to total revenue, respectively, in 2010 (see chart on next page). Sany leads the local market for truck mounted concrete pumps and full hydraulic rollers; its production of pump trucks is one of the best in the world. Compared to Zoomlion, it is less diverse and its most important segment, concrete, alone contributes more than 60% of its total sales revenue. Nonetheless, after Sany acquired the excavator and truck crane businesses from its parent, its level of business diversification started closing in on Zoomlions, with product categories expanding to include concrete machinery, road construction machinery, excavator, pile driving machinery, hoisting machinery and port machinery. XCMG is the worlds largest manufacturer of truck cranes, which account for most of its total revenue. The comprehensive line of products it offers includes construction mobile cranes, crawler cranes, wheel loaders, concrete boom pumps, piling rigs, aerial fire trucks, asphalt pavers and cold milling machines. Over the years, Chinese companies in various industries have successfully moved up the value chain by offering a wide range of products and the construction machinery industry is no different. Foreign companies have historically served the Chinese excavator market by leveraging their strong expertise and precision quality. Yet according to CCMA data, Chinese companies now control one-third of the global excavator market, up from 22% in 2006. Such strategic moves have undeniably boosted their overall competitiveness and allowed them to capture market share from their foreign competitors in China and in other emerging markets. Going global M&A and partnership The global presence of US-based Caterpillar and Japan's Komatsu has been strong for decades as they began expanding abroad early on when growth in their domestic markets slowed with urbanisation reaching a saturation point. Following a similar strategy, Zoomlion, Sany and XCMG have been encouraged to expand into foreign markets because of their solid positions in the Chinese market, worldclass products, sustainable low cost advantage and Chinas expansive infrastructure projects. Sany in particular has led domestic equipment manufacturers in overseas expansion. However, the three differ in their overseas expansion strategies. Zoomlion focuses on a direct M&A route to expand, integrating its costs and scaling its position in China while leveraging its targets distribution network and technical capacities. CIFA, a global manufacturer based in Italy, was a very strategic acquisition for Zoomlion that strengthened the latter's R&D capabilities and helped increase its global market share. In contrast, Sany has preferred to expand by building its own plants in foreign countries. For instance, Sany recently built research and development centres in Brazil (2010) and Germany (2009) as part of an ambitious international expansion plan. Also, it is the first Chinese construction machinery

10%

9% 7% 5% 4% 1% 11% 8% 11%

32%

3%
Source: CCMA

has targeted third parties to scale up its product offerings. For example, Zoomlion acquired Hunan Puyuan Construction Machinery's truck crane business and Zhongbiaos environmental and sanitation machinery business in 2003. This consolidation is being further encouraged by the government, who is actively promoting consolidation in the industry to avoid disorderly competition among local manufacturers. Furthermore, equipment manufacturing is one of the seven strategic emerging industries identified in the 12th Five Year Plan that the government will focus on so as to foster the development of a sound market environment; hence consolidation will be an ongoing trend in the industry going forward. Chinese construction machinery manufacturers are also afforded tax breaks and other incentives from local Chinese governments, enabling them to take a long term view of the market rather than just focusing on short term profits. It is worth noting that foreign enterprises have had little opportunity to compete against local competitors in this consolidation drive due to regulatory restrictions, and have been unable to acquire majority stakes in joint ventures with domestic firms. This has allowed local rivals to gather market share from foreign companies and at the same time narrow the capability and quality gap by integrating independent enterprises abilities via strategic acquisitions. Moreover, foreign enterprises have simply not been able to increase production fast enough to meet rising demand, diluting their market shares. Different specialisations The product portfolios of Chinas three largest industry players mostly overlap, yet there is diversity in their product offerings and this unique characteristic defines some of the dynamics in the industry. Zoomlion has the world's most diverse range of products including concrete machinery, tower cranes, road and earthmoving machinery, environmental sanitation machinery, and bulk material transportation equipment. Despite such a diversified portfolio, revenue sources are

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XCMG, Sany, Zoomlion Revenue Mix Comparison (%, H1 2010)

Concrete Machinery Crane Machinery Road and Piling Machinery 100 7% 12% 80 12% 10% 60 12% 37% Excavators Environmental Machinery Others 6% 20% 9% 4% 3% 3% Mechanical Scrapers Compaction

and enter the top five global construction machinery companies. For its part, Sany plans to scale up rapidly to achieve these numbers as soon as 2012. To accomplish this, Sany is building plants in overseas markets with great potential such as Indonesia, North African countries and South Africa, a strategic step that will open new channels to market its products. Zoomlion is following similar tactics and expanding quickly to acquire brands, technology and distribution channels, with a keen focus on emerging markets. Similarly, XCMG recently announced the acquisition of two European suppliers, marking its first international acquisitions aimed at boosting its value chain and extending its technological capabilities in key component production. Chinas three leading construction machinery manufacturers seem well placed to achieve these goals, yet each of them still have much potential to improve their technology. To be sure, to enhance their competitive position, Chinese machinery manufacturers are constantly upgrading their technological capabilities and focusing on technical innovation, but they still have some ground to cover before they start taking on the world leaders. That said, these firms have demonstrated a remarkable ability to incorporate technology and quickly adapt. As a case in point, Sany invented the first 66-metre truck-mounted concrete pump in the world. Chinese construction machinery manufacturers are set to become some of the largest beneficiaries of the infrastructure boom in emerging markets where competitive prices are key, and with improving technology and evolving international expansion plans, the likes of XCMG, Sany and Zoomlion are gearing up for bigger challenges. Ankit Khaitan, Consultant ankitkhaitan@thebeijingaxis.com

40

69% 52% 44%

20

XCMG

Sany

Zoomlion

Source: CCMA; Bloomberg

player to set up factories in India and the US, where it recently opened a USD 60 million assembly plant which in August 2011 started assembling trucks mounted with concretepumping equipment. XCMG, China's largest construction machinery maker, has opted to cooperate with foreign capital and foster close partnerships with overseas dealers. The group has already established close cooperation with nearly 100 dealers who help sell its products all over the world, but most notably in emerging markets such as Indonesia, Brazil and Russia. Among these key differences, there is one commonality that exists in the internationalisation strategy of all three of Chinas major machinery manufacturers - they have been aggressively marketing their product overseas though new distributing channels with a core focus on emerging markets, namely Brazil, Russia, India and Africa. Emerging markets are sweet spots for these companies because it is difficult to access developed US and European markets where dominant and established players, such as Caterpillar, emphasise their value-added after sales services. Emerging markets, on the other hand, are more price sensitive, and prices of machinery equipment from Chinese manufactures are typically 15-20% below foreign competitors, providing buyers in emerging markets with a considerable overall cost saving. Another important reason is that, like China, these countries are experiencing a similar urbanisation process and are consequently investing a lot towards infrastructure improvement, providing Chinese enterprises a potential market to tap into. Reaching higher: The years ahead XCMG, Zoomlion and Sany have revealed their sales targets for the 12th Five Year Plan period (2011-15). XCMG and Zoomlion aim to achieve USD 20 billion each in sales by 2015

16 The Beijing Axis

CHINAAFRICA
BUSINESS FORUM 2011

SAVE THE DATE | 20 OCT

8.00 am - 7.00 pm Thursday, 20 October 2011 Gallagher Estate, South Africa

This one day Business Forum will bring together key business leaders, industry specialists, project managers and others to explore the exciting current dynamic of the China - Africa relationship.

For enquiries call +27 11 463 9184 or email Candice at candice@siyenza.za.com or fax your request to +27 11 463 8432.

Organiser: Siyenza Management (Pty) Ltd info@siyenza.com

Sponsor: The Beijing Axis Ltd www.thebeijingaxis.com

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The New Scramble For Africa: Emerging Powers on the Emerging Continent
The BRICS of China, India, Brazil, Russia and South Africa and China in particular are at the forefront of a new scramble for projects and deals in Africa. Each one brings to the continent its own distinct business nous, yet collectively the BRICS are instrumental in transforming Africas business fortunes. Leaving aside Chinas dominant position in Africa, this article focuses on the activities of the other BRICS nations on the continent. By guest contributor Charlie Pistorius

he global balance of power is shifting into the hands of the rapidly industrialising emerging growth giants, especially the BRICS block of economies: Brazil, Russia, India, China and South Africa. The BRICs (excluding South Africa as the smallest strategic member) are today fuelling the global recovery with their huge demand requirements, high growth multiples and vast deployment of capital. Explosive population growth and rapid urbanisation in these economies have engendered a vital demand for food and energy security, and an urgent need for capital stock build-up, in particular transport, power, communication and housing infrastructure. In Africa the emerging BRICS have latched onto Chinas coattails in seeking commercial favour and opportunity, although each with their own individual modus operandi and business methodology. Yet they all have the same purpose, namely to secure a foothold in Africas vast and rich resource offerings. But the story is not merely one described by an exchange of outgoing raw materials in return for inbound capital, tools and cheap final products. As the floodgates for broader and more ingrained partnerships are opening, so too will Africas story change in its balance of trade and investment. The BRICS 'Way' The large BRICS economies (as well as other emerging players such as South Korea and Turkey), all have the same comparative advantage in their outward engagement: they are able to access large pools of finance and cash reserves (mostly through state incentives and subsidised support), and they also uphold a version of the Developmental State Model that encourages a statist approach to business - explicit in the case of China - that enables private enterprise and mercantile commerce, rather than perpetuating poor management approaches which translates into an unproductive utilisation of strategic assets. As a bloc, the BRICS' global outward FDI stock build-up increased substantially from USD 134 billion in 2000 to over USD 1,085 billion in 2010 only a small smattering of this was, however, destined for Africa (roughly 2.7%). Developed economies still provide the largest vested interest of capital stock in Africa roughly 40% originates from the European economies. Since 2000, the majority of BRICS outward investments in Africa has been in cross-border M&A. Considered purely by this measure, the number of BRICS engagements

BRICS Trade Profile (As a % of Country Total, 2009)

60 50 Africa 40 30 20 10 0 China India Brazil Russia SA BRICS Developed Economies Emerging Economies South, East & Southeast Asia Latin America

Source: UNCTAD Statistical Yearbook 2010

is impressive. Between 2000 to year-end 2009, India originated the majority of deals, 812 in all; China managed 450; Russian firms undertook 436 deals; South Africa at least 237; and Brazil 190. For the year 2010 up to the end of May 2011, China led the way by undertaking 195 new deals, followed by India with 183, Russia 102, Brazil 51, and South Africa 40, according to UNCTADs World Investment Report (2011). The trade relationship between the emerging economies and Africa is, however, the one that best defines the scale of their overall commitment and interest on the continent. Collective bilateral trade between the BRICS and Africa for instance ballooned from a mere USD 24.3 billion in 2000 to USD 193.4 billion in 2010 - though China's share of USD 123.3 billion alone makes up 64% of the total. Of Africas total trade volume with the world, the BRICS collectively account for an impressive 22%, which hardly measured 10% in 2000. Shockingly however, South Africas intra-Africa trade only measured 2.3% of Africas global total in 2009, dropping to 1.5% in 2010 (see chart on next page). Brazil: Not only Lusophone specialists To date Brazils multinational firms have mostly been involved in Africas construction and upstream exploration and energy production. The likes of Petrobras, which is one of the global oil and gas leaders with 2009 revenues of over USD 118 billion, has staked increasing claims in Africa, especially in Nigeria, Senegal and Angola, while also maintaining exploration activity in Mozambique and Tanzania. Brazilian

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Relative Share of Country/Blocs Bilateral Trade with Africa (As a % of Africas global total, 2000 vs. 2009)
60

50

state-aligned enterprises to acquire resource assets. As a country it consumed effectively the same barrels per day of oil as all of Africa did in 2009, just edging out Brazil. Russian firms retain a skilled advantage in the extractive industries, and it is therefore expected that their recalibrated African focus will be grounded in fixed investments and M&A activity, rather than trade. Invested stock in Africa will very likely more than triple from current levels roughly USD 5 billion. The enterprises that have shown most interest in Africas mineral resource sector to date has been the likes of Norilsk Nickel (the worlds largest nickel and palladium producer, as well as one of the largest in platinum and copper); Alrosa, which has diamond interests in Angola (where it is building a hydroelectric dam backed by a concession to explore for offshore oil and gas), Namibia (where it too is building an electric plant) and the DRC; UC RusAl (the world's largest aluminium producer) has revenue capacity in Angola, Guinea, Nigeria, South Africa and Botswana; and Severstal, which is preying heavily on West African gold deposits, already undertook a USD 2.5 billion iron ore mining project in Liberia. In the energy sector, Russias state-owned oil and gas major Gazprom (with 2009 revenues over USD 141 billion) and Lukoil (with revenues exceeding USD 86 billion), have both sought interests in Namibias gas fields, Tanzanias offshore blocks, and West African deep-water exploration and midstream activity (Gazprom for instance invested in a productionsharing agreement with Nigerian State Oil Company worth USD 2.5 billion). Renaissance Capital, a leading Russian investment and equity firm, entered Sub-Saharan Africa in 2006, and has since organised a number of Africas largest IPOs and owns 25% of Nigeria's Ecobank, with branches in 11 African countries. Renaissance also established a USD 1 billion pure Africa Fund and deployed USD 500 million into Africa thus far. To date it has offices in South Africa, Nigeria, Kenya, Zimbabwe, Zambia and Ghana, and now also offers their gambit of sophisticated financial services in Rwanda. India: Versatile player India is a vital partner in Africa, and shares close cultural links, especially in the eastern part of the continent. Indias trade basket with Africa is broad and rising rapidly. From close to USD 40 billion in 2010, bilateral trade in 2011 is expected to exceed the USD 50 billion mark and more than double by 2015. Duty free trade deals have been signed with 34 of Africas least developed countries. Liberalisation of Indias foreign exchange market has opened up the floodgates for direct investments abroad, deploying most of its capital into developed (rather than emerging) markets. Cumulatively, Indias invested stock in Africa is currently estimated to be over USD 15 billion, more than Chinas. Multinational companies such as the diversified industrial giant Tata, a leading player in the steel and automotive sector (among many), have made substantial acquisitions globally and in Africa. The enddestinations in Africa that takes the bulk of Indias interest are mostly in the COMESA1 block, as well as in Nigeria.
1 The Common Market for Eastern and Southern Africa, with 20 members on the continent.

40

2000 (Total: USD 246.4 billion) 2009 (Total: USD 673.3 billion)

30

20

10

0 EU BRICS Emer- China ging Partners US India South Brazil South Turkey Russia UAE IndoKorea Africa nesia

Source: Africa Economic Outlook 2011

companies hold a comparative advantage in Lusophone countries Angola and Mozambique. Mining giant Vale, the worlds second-largest diversified mining company, has an over USD 150 billion market capitalisation and wide footprint in Africa extracting coal and iron ore while exploring untapped copper, nickel, platinum and diamond deposits in the frontier economies of Mozambique, Angola, Guinea, Liberia and Zambia. Brazils African focus has shifted in line with other emerging giants, though it still trails far behind China. In the seven years to 2009, Brazil invested in 25 Greenfield projects. Vale, for instance, is planning to invest USD 15-20 billion in Africa over the next five years , and is leading the way forward for Brazilian interests in Africa. Petrobras has already deployed USD 2 billion into Africa, also putting aside a further USD 3 billion for deepwater exploration off Nigeria and Angola. Brazils own Odebrecht Mining Services is its preferred contractor for operations in Africa which in 2009 accounted for over USD 2.4 billion in revenues, or 10% of its total earnings. Brazil currently only sports a low level of bilateral trade, hovering close to the USD 20 billion mark in 2010. It is widely estimated that Brazils trade will be hiked up by more than 100% by 2015, reaching USD 45 billion. Its investment stock in Africa will also be upped from between USD 8-12 billion in 2010 (only an approximate 7% of its total global stock), rising gradually to USD 15 billion by 2015. Russia: Energy giant Russian firms with the largest foothold in Africa have been focused on energy and mineral resource acquisitions. Growing global energy concerns and profit-seeking motives have fueled Russias geo-strategic positioning in resources. Russia has leveraged its Cold War relations with Africa and pursued proactive government incentives to urge its champion

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Features

India in Africa is characterised by a diverse engagement, unlike Russia and Brazil, and perhaps even more than China. Indian interests in Africa have created a particular niche in telecoms, pharmaceuticals, hospitality, automotive and the banking sector. Unlike the other BRICS, and in stark contrast to Chinas engagement model, the Indian multinational enterprises that are most active in Africa are private sector ones, with the Indian government offering strategic support, yet not driving the engagement. In mining and energy, as well as the aforementioned sectors, Indian firms have signed large deals in more than 30 African countries from infrastructure and pharmaceutical projects in Senegal, to power, finance and automotive projects in Ghana, and automotive, energy and power infrastructure in Sudan, to the full spectrum of sectoral engagement in Kenya, South Africa, Nigeria, Zambia, Uganda, Tanzania, and in North Africa. Indias mineral companies have been proactive in Africa. Vendanta has signed multibillion dollar deals to invest in Liberias iron ore, also directing over USD 1 billion into Zambias Copperbelt, and hence retains a leading position in Africas zinc and cobalt production. Tata too has spent billions in Cote dIvoire, Guinea and Liberia acquiring iron ore, and in Angola it has explored diamond deposits. Other Indian enterprises are acquiring uranium from Namibia, while investments in Mozambique encompass coal, copper and iron ore. State-owned National Mineral Development Corp. (NMDC) has a market capitalisation of over USD 40 billion, and is eager to make inroads across Africas commodity sector. In the oil and gas space, Indias ONGC Videsh Ltd. has made a mark in Sudan where it opened the Khartoum-Port Sudan petroleum pipeline back in 2005; while another major, the Indian Oil Corp. (with nearly USD 63 billion in 2009 revenue), and Reliance Industry at half the size, has pegged the African market as an untapped frontier for exploration. In the power sector, National Thermal Power Corp. (NTPC), Indias largest power company, has secured over 3 million tonnes per annum of liquefied natural gas (LNG) in Nigeria in exchange for building power plants. In the telecoms space, a record-breaking USD 10.7 billion acquisition was made by Indias Bharti Airtel (Indias largest domestic telecoms firm) of Kuwaiti Zain Africa telecommunications operations, thereby becoming the worlds seventh-largest telecoms company, and giving it a wide pan-African footprint. Subsequent to the deal, Bharti said it would invest an additional USD 1 billion to expand its African operations in 2011. The objectives of India in Africa are, however, similar to Chinas: being highly diversified across all sectors of the African economy, and with a very long investment timeframe. Both countries are similarly seeking to secure energy resources and land for agribusiness and food production, and for India, Sub-Saharan Africa is seen as a new frontier market for its skilled workers, especially in the service sectors where India Inc. holds a global comparative advantage. South Africa: Gateway to the continent South Africa has a relative advantage in SSA in sharing a

Africa's Trade Coupling with BRICS (As % of Countrys Global Total, 1995 vs. 2005 vs. 2009)
15

12

1995 2005

2009

China

India

Brazil

Russia

SA

Source: UNCTAD Statistical Yearbook 2010

complimentary economic structure and geographic proximity which allows it to tap in to the multilateral trade agreements such as the Southern African Development Community (SADEC) or the Common Market for Eastern and Southern Africa (COMESA), while also playing an active role in the continents politics by retaining a major voting share in the African Development Bank, while in its capacity as African Union stalwart, it pushes initiatives such as the New Partnership for African Development (NEPAD). South Africas intra-Africa trade has fluctuated between USD 14 and 15 billion over the past few years, accounting for roughly 13% of its total trade with the continent in 2009, up from a 10% share in 2005 when its intra-African trade with Africa was USD 9.7 billion. Yet this number was down significantly to a decade low in 2010, to only 8.7% of South Africas global total - which is striking if one considers South Africas total trade grew 41% y-o-y in 2010 to reach new highs, though its intra-Africa share has dwindled. To put this in context, the other BRICS trade profile with Africa is led by India with 6.7% of its global bilateral trade in Africa, Brazil with 6.1%, Chinas 4.1% and Russias small 1.8%. South Africas total bilateral trade contributes roughly 40% of its entire GDP, far more than Brazils comparative 14%, Russias 30%, and Indias 27%, but still less than Chinas 50%. Roughly one-fifth of Africas active FDI stock sits in South Africa, and nearly 90% of all African portfolio flows go through the Johannesburg Stock Exchange making South Africa a hugely important financial intermediary and conduit, with the role of deepening growth in Africas equity capital and investment. South Africa is also the largest emerging market investor of FDI in Africa, accounting for roughly 17% of Africas internal investment stock, and over 70% of intraAfrica flows, with USD 2.6 billion per year (which is nearly double Chinas official FDI flows to Africa). The share of stock by South African enterprises has increased from a mere 5% of Africas total to about 22% currently. While SSAs total bilateral trade with China is four times the size of South Africas share, the latters relationship is deemed

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more complimentary in nature, with technologically-intensive products and managerial know-how its greatest exports into the continent. Yet South Africas import basket is no different than any other actor. It is dominated by mineral resources and energy-related products, mostly oil (76% of total imports). A number of SA Inc. players have been able to profit and establish a solid footprint in Africa. Local telecommunications leader MTN has arguably been one of the only companies from South Africa to break into the difficult Francophile African marketplace. In all, MTN has been able to tap into the continents half a billion-plus mobile subscriber base, aiding its USD 11 billion 2010 revenues with operations throughout 13 non-domestic African countries. Financial services group Standard Bank is the continents largest banking group by assets, with 2010 revenues of USD 16.6 billion via 17 African markets outside South Africa. Their non-domestic African exposure grew to almost 10% of its portfolio given the stronger growth potential compared to its own saturated home market. Multinational brewer SAB Miller has a strong presence in more than 10 African countries beer and beverage industries. Logistics major Imperial Holdings is facilitating capital deployment in huge projects in central, east and southern Africa and amassed nearly USD 6.8 billion of revenues in 2010. Leading South African construction and engineering company Aveng recorded almost USD 4.4 billion in revenues in 2010 with operations in over 15 African countries. On the mining front, South African majors Anglo American, AngloGold Ashanti and De Beers collectively operated mines in 11 African countries, while mid-cap companies such as African Rainbow Minerals (with a vastly diversified resource portfolio, mainly in South Africa) and copper and cobalt miner Metorex (recently acquired by Chinese miner Jinchuan for USD 1.32 billion) are both hungry to expand into Africa, and are already owners of lucrative assets in Namibia, Zambia and the DRC. Conclusion Africas new coupling with China and the emerging BRICS economies is the driving force of growth on the continent, and those African economies that align with the development of the emerging markets is set to meet great success. Africa itself is increasingly looking to adopt the Developmental State as a growth model, taking from each of the BRICS a tenet that suits their own needs. Yet notably this economic development model is not aligned to a Western mode of freemarket capitalism, instead one with both statist and socialist developmental pillars. It is perfectly evident that China and the rest of the BRICS are in Africa to stay, their vested time horizon is seriously long-term, in excess of a hundred years, their ability to stomach risky environments and projects has unleashed dormant or flailing assets, opening up new markets and opportunities. Their method of development assistance has circumvented the previous resource curse fears and shown African stakeholders the impact of (especially) Chinese capital and means - building essential infrastructure to become the continents most enabling actor of its socioeconomic development.

Africa's Trade Coupling with BRICS (Bilateral, USD bn)

150 1995 120 2000 2005 90 2009 2010 60

30

China

India

Brazil

Russia

SA

Source: UNCTAD Statistical Yearbook 2010

The BRICS countries, however, still lack a coherent engagement strategy in Africa, without which there is great risk in crowding out local investment and sector competition and exacerbating the resource curse that has plagued the continent for so long. The commodity super cycle and changing fortunes of the developing world means a greater dependence on food and resource security from Africa. The absence of a specific BRICS Way leaves bilateral self-interest of the respective parties in a far greater seat of power, and hence will not translate into clear win-win outcomes for Africans. Unless a synchronised BRICS Way is sought, Africa will again face a race to the bottom with inequitable distribution of wealth and opportunities. The BRICS stepped up involvement in Africa has, however, unleashed African competitiveness in the global commerce space, brought to the fore new models for Africas continued development, opened up the taps to source financing for projects, and has hence brought an invaluable pool of technical expertise and know-how with it. Practical cooperation with the BRICS partners is bound to address the fragmented lack of regional integration, and given the commodity price booms, a reciprocal spillover effect is set to offer Africans a new lease on life. China's engagement strategy in Africa has paradoxically ramped up interest from other emerging players, and traditional partners alike. Not faltering in the midst of the global financial crisis, Chinese capital and physical efforts in Africa is constantly being stepped. Whether others are threatened by China gaining increasing market share and favour in Africa, or merely waking up to Africas growing status as a resource and consumer destination.... the simple fact is that it is Africas time, and more competition and enabling commercial partnerships will leave Africans with greater hope, economic means of production, and a tangible grasp on prosperity. Charlie Pistorius, Emerging and Frontier Market Analyst
Charlie Pistorius is a research analyst with Frontier Advisory (Pty) Ltd.

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Macroeconomy

Macroeconomic Monitor: Chinese Inflation - One of the Biggest Fears of 2011

Inflation in China reached a peak of 6.5% in July, before dipping slightly to 6.2% in August - possibly heralding a receding of high inflation. Yet high inflation remains a key theme in 2011, and this edition looks at the Chinese governments monetary and fiscal policy options for fighting a scourge for which China's central planners have a legendary fear. By Dirk Kotze

ith around six months to go before the official appointment of Chinas next generation of leaders, stubbornly high inflation is high on the national agenda in 2011. Inflation has a somewhat mystified and overblown role in the Chinese body politic. It is an article of faith among many China watchers that inflation has, throughout Chinese history, been the cause of many a revolution or dynastic change, and that this is what causes the Communist Partys diligent attention to the issue. It is true that inflation is generally a scourge without which any government can do, but by the history of social upheavals around the world, Chinas current inflation is tame by comparison. More concerning is that, in a world of macroeconomic instability and uncertainty, the persistence of inflation ties the governments hands in employing other policy tools at a time when the latter are sorely needed. Problematic pork prices

China Consumer Price Index (Jan 2008Aug 2011)

120

110

100

90

80 J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A 08 09 10 11

Source: National Bureau of Statistics of China. Note: Previous year = 100.

In July, Chinas Consumer Price Index (CPI, the main inflation indicator), reached a high of 6.5% compared to the same time last year (see chart to the right), with the main culprit being rising food prices. Foodstuffs comprise around 30% of Chinas National Bureau of Statistics (NBS) CPI calculation (see chart on the following page), and the 14.8% rise in the selected basket of food items in July was of particular concern for Chinese policy makers. Firstly, food is a basic staple for survival, so whereas the poor can opt out of buying expensive movie tickets, they cannot opt out of buying food there is no escape from this type of inflation. Secondly, as the poor typically buy food with small mark-ups, inflation is passed on to the poorer consumer, while those retailers selling to the rich can generally absorb inflation. Food inflation thus amounts to a regressive tax on the entire population, a development that is all the more concerning in the context of widening income disparities. As with the inflationary spike that occurred in China in 2007, the biggest culprit in Julys CPI figures was again the price of pork, Chinas staple meat. According to the NBS, the July price was 56.7% higher than a year before, contributing by most estimates some 2 to 3 percentage points to CPI. Vegetable prices also saw a spike over the last year, but these were more seasonal, as summer floods severely hampered harvests across southern and eastern China. China also suffers from structural inflationary pressures, such as shrinking excess capacity, rising wages brought about by the emergence of the Lewisian Turning Point (the point at which excess cheap

labour from the countryside runs out) and rising electricity prices. Consumers rarely see inflation in terms of averages, but rather in a biased way through exorbitant and very visible increases in the prices of certain items. As such, consumers of pork (i.e. almost all Chinese people) may feel that the pork price represents all price rises, while the temporary spike in vegetable prices may be seen as everlasting, not only during floods. This is the source of widespread scepticism of the official inflation figures, and the problem of perception is the most serious political fallout of inflation. Taking recourse to interest rates For China's central planners, inflation presents a similarly restricting no way out scenario. China's policy makers had it good for a long time, able to tweak and cajole an obedient economy. In the tumult of the post-2008 world, however, there is considerably less certainty, and even less predictability. As a tool for stimulating the economy, the lowering of interest rates must for the time being be put on the backburner, a reality that dawns at a very inauspicious time, given the expiry of QE2 in the US, the drift in the Euro sovereign debt crisis, and not to mention the ending of Chinas own post-crisis stimulus efforts. Furthermore, the People's Bank of China has not only been restrained from lowering interest rates, but has actually raised them three times already in 2011, and could possibly raise them again before the end

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of the year. Reserve requirement ratios (RRR) have also been increased nine times since October 2010, without any effect in stalling rising CPI. Raising the reserve ratio for banks causes the latter to restrict lending by effectively shrinking their loanable funds. This restricts liquidity in the economy, but one of the major causes of inflation in China is the negative real interest rates that have existed since February 2010. It makes more sense to invest spare cash than to let it languish in low interest bank accounts, while persistently rising inflation increases negative real interest rates. This in turn causes more liquidity to enter the economy, thereby raising inflation and so completing a vicious circle. This problem can only be addressed by raising deposit rates through raising interest rates. Room to maneuvre The obvious question is how the Chinese government can maintain robust and stable economic growth with so little room to manoeuvre on monetary policy. Yet the situation is not so bleak after all, given that Beijing actually does have sufficient flexibility on fiscal policy. A good example of this is the building of 10 million subsidised housing units before the end of the year. Part of the planned building of 36 million units included in the 12th Five Year Plan (2011-2015), the USD 111 billion budgeted for these first 10 million units is certain to serve as a major guarantor of economic growth in Q3 2011 and beyond. A tax cut for middle-income earners, effective 1 September, is also likely to have a positive effect on domestic consumption. Existing rules on compulsory deposits for residential purchases (30% deposit for first home, 40% deposit for second and further homes) could be relaxed, given that the property bubble is showing signs of deflating. The value of homes sold in July was RMB 348.7 billion (USD 65.9 billion), compared with RMB 499.2 billion in June, a drop of 30% month-on-month. In fact, several other macroeconomic realities are also playing out in favour of China's policy makers. A recent drop in commodity prices will reduce imported inflation, while the ongoing appreciation of the renminbi will reduce inflationary pressure from the trade surplus. Nevertheless, adjustments of controlled prices are usually slow in China, and the National Development and Reform Commission (NDRC) recently scoffed at suggestions that it should lower fuel prices after a slump in oil prices. The suggested hike in interest rates to dampen inflation may also come rather late, as utterances by officials have hinted that the Chinese government aims to wait out the current unstable global macroeconomic situation. Worst threats without, not within At this point, the gravest threats to Chinas internal macroeconomic stability are external. The adoption of a flawed deal by US lawmakers to raise the debt ceiling in exchange for cuts in expenditure has made a third round of quantitative easing inevitable. The S&P credit downgrade that followed the deal will see global markets more reticent to invest in

China CPI Weighting (%, Q1 2011)

Tobacco & Liquor 3.4% Fruit & Vegetables 4.7% Household 5.6% Meat & Poultry 7.0% Clothing 8.6% Other Food 16.0% Residence 17.4%

Healthcare 9.6% Transport & Communication 10.4%

Source: Nomura; The Beijing Axis Analysis

Leisure 14.0%

US debt, leaving the US Treasury no choice but to stimulate growth by buying its own bonds. This will, as in the case of QE1 and QE2, cause a rise in commodity prices, a surge of speculative capital inflow into China and increased inflationary pressure. At the same time, if a serious slowdown in the rest of the world should occur, the Chinese government now has significantly less leeway to stimulate itself out of a slump. Ironically, as the rest of the world looks toward China as a source of economic stability, the Chinese economy is arguably more vulnerable to the vagaries of economic policymaking in Europe and the US. In China, inflation and the reduced efficacy of interest rates and other monetary tools may be a source of frustration to policy makers, but their hands are by no means tied behind their backs. Yet a collapse in economic confidence in developed economies may cause the Chinese government to have to roll up its sleeves higher, and that is when Chinese inflation will become everyones problem. Luckily for China, the problem may be receding, as illustrated by the drop in inflation in August. The efforts of the government to slow the economy will likely see restrained growth in prices for the rest of 2011. Yet inflation has been a recurring problem over the last few decades in China, and the dip in August may yet be more of a temporary respite. Dirk Kotze, Director & General Manager: Africa dirk@thebeijingaxis.com

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News

China Business News Highlights

Inflation has remained a thorny issue in China, even amid intense monetary tightening measures. An uncertain global economic outlook due to the ongoing debt crisis in the Euro zone and the recent downgrade of the US debt rating, along with a large scale power crisis during the busy summer season are threatening to slow China's growth in the second half of 2011. However, looking to diversify its export destinations and build upon its status as the worlds second-largest economy, China has continued to increase its footprint around the world, with Premier Wen Jiabao signing USD 15 billion worth of deals in Germany in June along with an additional USD 4.3 billion worth in the UK. Headlines
Business and diplomacy In April, Spanish Prime Minister Jose Luis Rodriguez Zapatero visited China and announced that Spanish and Chinese enterprises had signed eight deals worth USD 1.44 billion. Agreements mainly cover the finance, wind energy, helicopter and valve manufacturing industries, with China also expressing it would continue to buy Spains government debt. On 28 June, trade deals worth USD 4.3 billion, including a USD 2.46 billion agreement on building a clean coal plant between China Energy Conservation and Environmental Protection Group and British Seamwell International Ltd, were signed by Premier Wen Jiaobao and British Prime Minister David Cameron. The two leaders signed 12 agreements in total and expressed their desire to double bilateral trade to USD 100 billion by 2015. Wen Jiaobao then went on to Germany, where he and German Chancellor Angela Markel signed deals worth more than USD 15 billion, with plans to double bilateral trade to USD 284 billion. President Hu Jintao had earlier paid a visit to Ukraine in which he and Ukrainian President Viktor Yanukovich signed USD 3.5 billion worth of deals covering the industrial, energy, infrastructure and agricultural sectors. Creeping inflation The most important indicator in Chinas economy remains the Consumer Price Index (CPI), which in July reached 6.5%, its highest rate in over three years. In July, China experienced its biggest monthly trade surplus since January 2009, fuelled by record exports of USD 175.1 billion. Given the large trade surplus China registered in July, China's currency, the renminbi, had continued to scale new highs against the US dollar, moving past 6.4 to the dollar in August for the first time in 17 years. China's currency will likely continue its appreciation into the second half of 2011. The Chinese currency has risen 6.8% against the US dollar since June 2010, when China ended the renminbi's de-facto peg to the dollar. Large-scale power shortages China has thus far managed to avoid a severe power crisis, as local governments have been proactive in passing restrictions to reduce strain on power grid systems due to a steep rise in power demand during the peak summer season, with China thus far witnessing an increase of 12-14% y-o-y. Earlier in the year, officials had stated that China was on the verge of its worst electricity shortages in years, a capacity gap of around 30-40 gigawatts, due to soaring coal prices and severe droughts which had significantly reduced China's hydropower capabilities, straining the countrys power grids. Power shortage fears and related power restrictions are some of the factors which have kept Chinas official Purchasing Managers Index (PMI) hovering around the 50 mark or on the verge of contraction. In July, the figure was 50.7. China's nouveau riche In the beginning of June, it was reported that China now boasts more than one million millionaires, moving China into third place among countries worldwide with the most millionaire households, trailing only Japan and the US. It was also reported in June that China is considering reducing import tariffs on luxury goods, which would further boost consumption among this fast growing segment. Chinas middle class ranks also continue to swell with China Mobile, the world's largest mobile carrier, reporting in April that its customer base had exceeded 600 million. In August, China also became the worlds largest PC market, surpassing the US, with 18.5 million units sold in China in Q2 2011, compared with 17.8 million units sold in the US, further signalling Chinese consumers relentless appetite for electronic products. New construction marvels In June, Beijing published a timetable for the construction of a new airport, with the inaugural flight expected to take off in October 2017. In July, China also opened the Jiaozhou Bay Bridge, the world's longest cross-sea bridge at 42 km, which links China's eastern port city of Qingdao to Huangdao island.

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Sector News
Energy In April, a Chinese official acknowledged that China is on the verge of overtaking the US to become the world's biggest consumer of energy. To keep up with demand, China's natural gas imports more than doubled to 6.3 billion cubic meters in Q1 2011 from a year earlier. China also plans to invest RMB 400 billion (USD 62.54 billion) in the construction of four hydroelectric dams to boost the share of non-fossil fuels in national energy consumption. Wind power is also a part of this strategy as China will boost its offshore wind power installed capacity to five gigawatts to form a complete technological and industrial chain. Chinese companies going global In April, Australian renewable energy company CBD Energy Ltd announced it had finalised a joint venture with China Datang Renewable Power Co., China's second-largest windpower producer by capacity, and solar equipment maker Baodin Tianwei Baobian Electric Co., to develop approximately USD 6.34 billion worth of wind and solar energy projects in Australia. The new entity, called AusChina Energy Group, seeks to take advantage of equipment and funding from the Chinese enterprises to lower overall project costs, which will enable their wind energy assets to reach grid price parity with coal-fired power within three years. In April, Shanghai Electric Group Co. announced it had won a USD 1.1 billion contract to expand a natural gas-fired power plant currently under construction in Zubaidiyeh, southeast of Baghdad. The company also announced in April that they had signed an agreement with KSK Energy of India to export 125 units of 2 MW wind turbines to India, which marks Shanghai Electrics first major international wind turbine sale. The company expects India to become its largest export market, absorbing half its exports including wind turbines and thermal power units. In July, China National Offshore Oil Corp. (CNOOC) agreed to acquire Opti Canada Inc. for USD 2.1 billion in cash and debt, which is expected to strengthen CNOOC's Canadian presence in the oil sands business and increase their reserves. In July, the Mongolian government announced it had awarded Shenhua Group Corp Ltd, Chinas largest mining company measured by output, with a 40% share in developing Mongolias Tavan Tolgoi coalfield, the worlds largest untapped source of coal. The open-pit mine will help China further diversify its energy resources and meet its growing demand for coking coal. It was reported in August that China's state-owned Bright Food Group agreed to buy a 75% stake in Australian branded food business Manassen Foods, giving it an enterprise value of USD 516 million. The deal marks Bright Foods largest overseas acquisition, as it looks to expand its dairy, sugar, wine, food industry and agriculture businesses overseas. The Industrial & Commercial Bank of China announced in August that it was buying an 80% stake in South Africa's Standard Bank Ltd.s Argentine unit. Also in August, Heilongjiang Beidahuang Nongken Group Co., Chinas biggest agricultural company, announced its plans to invest USD 1.5 billion to develop farms and expand a port in Argentinas southern region to help ensure food supplies for 20 years. FDI in China In August, Coca-Cola announced plans to invest an additional USD 4 billion in China over the next three years starting from 2012. The additional investment will be used to expand the company's product lines, infrastructure and distribution systems as well as invest in cold drinks equipment. In July, Nestle, the worlds largest food company, offered to buy 60% of Chinese candy and pastries group Hsu Fu Chi International for about USD 1.7 billion, a move aimed at helping it achieve its target of 45% of sales coming from emerging markets within 10 years. Retail Bailian Group, China's largest retailer, aims to expand its e-commerce platform and open more than 800 outlets across China over the next five years as it seeks to become a Fortune 500 company. Bailian expects to achieve annual revenue of RMB 180 billion (USD 28.14 billion) by 2015. It was reported in August that Apple is currently in talks with China Mobile, the worlds largest carrier by subscribers, to officially introduce the iPhone on the carriers home-grown TDSCDMA network. A mutually beneficial deal would help Apple meet upwardly mobile Chinese consumers growing demands for its products, while helping China Mobile attract more 3G subscribers. Although it seems unlikely that Apple will meet its target of opening 25 stores in the mainland by 2012, its four existing stores are the most heavily trafficked Apple stores in the world.

Higher still: The Consumer Price Index reached 6.5% in China in July 2011, the highest rate in over three years (Reuters)

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Trade

China Trade Roundup: China's Trade in Services

In this edition of China Trade Roundup we review the major trends of Chinas trade performance in the first eight months of 2011, and we also take a closer look at the major trends in China's trade in services.

China's Trade Profile in Jan-Aug 2011

China's Total Monthly Imports/Exports (USD bn, 2009-Aug 2011)
180 160 140 120 100 80 60 40 20 0 J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A 09 10 11 Exports Imports

Signs of a Gradual Receding of China's Export Advantage According to China's General Administration of Customs (GAC), in the first eight months of 2011, Chinas total foreign trade in terms of value topped USD 2.35 trillion, which was 25.4% higher year-on-year. Exports were up by 23.6% to USD 1,222.63 billion, while imports increased by 27.5% to USD 1,129.90 billion. China's trade surplus in the first eight months of 2011 decreased 10.8% y-o-y to USD 92.73 billion. In August, exports and imports collectively reached USD 328.87 billion, up 27.1% year-on-year. Imports were up by 30.2% year-on-year and hit a record monthly high of USD 155.56 billion in the same month, while exports reached USD 173.32 billion, up 24.5%. In August, China recorded a trade surplus of USD 17.75 billion, down from the USD 31.48 billion posted in July, illustrating that China is seeking more balanced trade. In the first eight months of 2011, China's ordinary trade reached USD 1,242.69 billion, up 32.1% y-o-y (see chart below). Exports reached USD 592.61 billion, up 30.5% yearon-year, higher than the 23.6% growth rate of total exports, while imports reached USD 650.02 billion, up 33.7% yearon-year, higher than the 27.5% growth rate of total imports. The trade deficit of ordinary trade reached USD 57.35 billion, up 81.3%. The second-largest segment involved the processing and assembling of imported materials, which totally reached USD 710.84 billion, up 15.8%.

Source: China Customs; The Beijing Axis Analysis

China's Monthly Trade y-o-y Growth Rates (%, 2009-Aug 2011) 90 Exports 80 70 Imports 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A 09 10 11
Source: China Customs; The Beijing Axis Analysis

China's Trade by Type (USD bn, Jan-Aug 2011)

Imports Exports Total Trade (USD mn) As % of Total 1,242.69 52.82% Ordinary trade 710.84 135.23 121.01 80.23 20.97 11.94 9.50 3.83 0.67 15.64 800 600 400 200 0 200 400 600
Source: China Customs; The Beijing Axis Analysis

30.22% 5.75% 5.14% 3.41% 0.89% 0.51% 0.40% 0.16% 0.03% 0.66%

Processing with imported materials Processing & assembling with materials provided abroad Entrepot trade by bonded area Customs warehousing trade Border trade Equipment or materials invested by foreign-invested enterprises Contracting projects Goods on lease Equipment imported for export processing zones Others

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China's Trade in Services

Rapid Growth, Great Potential China's services trade has experienced rapid growth since the early 1990s, increasing from just under USD 10 billion in 1990 to USD 286.7 billion in 2009 (see chart below, left). In 2009, China's services trade was the fourth-largest in the world, behind the US (USD 801 billion), Germany (USD 470 billion), and the UK (USD 400 billion). China's services trade grew almost uninterruptedly up to 2009, yet in this year the global financial crisis contributed to a y-o-y decline of 5.8%, the first y-o-y decline since 1998. In 2008, China had experienced y-o-y growth of 21.4% in its services trade. Despite growing rapidly for close to three decades, China's services trade in 2009 still constituted only 11.5% of China's total trade, the lowest of all the major economies and substantially below the world average of 20.4%. In contrast to the manufacturing sector, the service sector is characterised by high added value, a smaller environmental impact and a higher potential for job creation. Hence the 12th Five Year Plan of 2011-2015 placed direct emphasis on increasing the proportion of the services trade in China's total trade, with a projection for China's services trade to reach USD 600 billion in 2015. Trends The chart below illustrates that China has consistently been a net importer of services. A large proportion of China's service imports has been devoted to the transportation industry. In 2009, China had a negative trade balance of USD -29.51 billion for transportation services, followed by USD -10.64 billion for royalties & license fees services, USD -9.71 billion for insurance services, and USD -4.03 billion for travel (see chart below, right). The only industries in which China was a net exporter in 2009 were other business services (USD 5.92 billion), consulting (USD 5.21 billion), construction services (USD 3.60 billion), computer and information services (USD 3.28 billion), and advertising & media (USD 0.36 billion). China's Imports and Exports of Services (USD bn, 1999-2009)
Exports Imports 180 160 140 120 100 80 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: MOFCOM; The Beijing Axis Analysis

Total Chinese Labourers Employed Outside of Mainland China, Top Ten Countries/Regions at End-2009
Russia 21,457

9
S.Korea 37,220 Japan 162,556

Algeria Libya 49,631 24,155

UAE 34,067

5
Macao 49,999 Singapore 83,769

10 6
Saudi Arabia 20,944

Angola 31,072

Total Chinese labourers employed overseas, end-2009: 777,619 (Top ten countries above account for 66.2%)
Source: MOFCOM; The Beijing Axis Analysis. Note: Countries in North, Central and South America do not feature in the top ten.

While China has consistently had a negative trade balance for transportation services, 2009 was an anomaly for travel services as China had maintained a positive trade balance before 2009. Interestingly, China had a negative trade balance for construction services until 2001, after which China's exports increased substantially to eventually reach USD 5.97 billion in 2008 before receding again to USD 3.60 billion in 2009. Destinations of Chinese Services and Overseas Employment As the map above illustrates, four of the five leading countries for Chinese employment outside the mainland are other Asian countries and regions, namely Japan, Singapore, Macao and South Korea. Such employment includes workers seconded for contracted projects or for labour service. Three African countries that are also strong trade and investment partners of China also feature on the list, namely Algeria, Libya and Angola. In the Middle East, Saudi Arabia and the United Arab Emirates also feature in the top ten. China's Services Trade by Sector (USD bn, 2009)
Exports Imports 50 40 30 20 10 0
Transportation Computer & Information Services Royalties & License fees Travel Consulting Advertising, media Film, audiovisual Communication Other business services Insurance Construction Financial

Exports y-o-y growth rate, % (rhs) Imports y-o-y growth rate, % (rhs) 40 30 20 10 0 -10 -20

Imports y-o-y growth rate, % (rhs) Exports y-o-y growth rate, % (rhs) 40 25 10 -5 -20 -35 -50 -65 -80

Source: MOFCOM; The Beijing Axis Analysis

The Beijing Axis

27

The China Analyst

Procurement

China Sourcing Strategy: A New Approach to Procurement

China's procurement environment is changing under the weight of both old and new trends, and procurement managers worldwide must adapt to a new opportunity landscape. A different approach is now required that takes advantage of China's more sophisticated manufacturing base. By Lilian Luca

or the past 10-15 years, China has been the undisputed darling of purchasing managers worldwide. The goods Chinese suppliers export to the EU and US range from apparel and electronics to heavy machinery, all of which have grown steadily in the past decades to place China in the number one spot for overall exports volume. Exports of machinery and equipment to developed countries have particularly enjoyed rapid growth over the past ten years (see chart to the right). But since 2006-07, new issues such as an appreciating currency and increasing labour costs have started to impact both the real and perceived competitiveness of China as a source of manufactured goods. How should a procurement manager re-assess China in the light of these and other changes? How can they assure that competitive advantage is gained by investing in a China sourcing operation? How to benefit from the long-term trends and evolving landscape of Chinas manufacturing base? Old news: Labour and currency issues Labour cost increases and rapid rises in input prices, mostly for commodities and energy, were a significant problem for the Chinese manufacturing industry in the years preceding the global financial crisis. The crisis provided a brief respite, with declining exports and capacity utilisation releasing upward pressures on prices and wages. But since early 2010, the trend has resumed, with labour costs increasing by 14.3% in real terms in 2010, and PPI inflation reaching 5.5%. Not only is labour becoming more expensive, but there is also a shortage of experienced white collar workers, engineers and managers which are increasingly in high demand.

China's Machinery and Equipment Exports, Share in Developed Countries (USD bn, 2000, 2005, 2010)
2000 150 125 100 75 50 25 0 US Japan Germany Australia
In 2000, machinery and equipment imports from China only accounted for 4% of the US total machinery and equipment imports, while in 2010, this figure increased to 26%

2005

2010

Source: UN Comtrade; The Beijing Axis Analysis

restrictions such as export bans or export quotas, and also reducing VAT export rebates and in some cases placing export duties on certain commodity-type products, especially energy-intensive goods or low-value-added processed raw materials. On the other hand, newly emerging or existing sources of manufactured goods, such as Vietnam, Thailand, Malaysia, Indonesia, and the Philippines, have started to look comparatively better from a labour cost perspective. Governments across the region have started implementing some of the policies that brought success to Chinas leading export manufacturing industries, and are offering increasingly attractive investment incentives to manufacturers. Procurement managers across the globe are under pressure to evaluate these up and coming low-cost countries, and determine the best approach for avoiding increasing costs in China and taking advantage of these opportunities. Estimating the extent of change From our experience in China and our understanding of Chinas manufacturing strengths and weaknesses, none of the trends described above are surprising. They all fit into the mould of the long term income rise of Chinas population, as well as government policy goals of increasing the value added of local manufacturing, reducing the countrys energy and raw materials dependency, and shifting the growth engine of the economy away from export-oriented manufacturing towards a more balanced portfolio of investments, including boosting local consumption and the service

In addition, the Chinese government is allowing the gradual appreciation of the renminbi, with has risen by 21% against the US dollar over the past five years. With pressure from the US and other developed countries for China to further appreciate its currency, this trend is likely to continue for the foreseeable future. Other trends that are not new but continue to plague the Chinese manufacturing base are intellectual property protection; weakly defined and poorly implemented quality management processes; governance issues in supplier selection and management; and inconsistent product quality. New trends There are also more recent discernable trends which are negatively affecting the pricing and availability of Chinese exports. The government is increasingly implementing trade

28 The Beijing Axis

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The China Analyst

exports are forecasted by MEPS to fall by 37% this year, while seamless tube exports will only see a modest 8% growth. To better understand how to take advantage of this shifting China procurement equation, we need to re-assess the key elements of Chinas traditional manufacturing competitiveness. What began 30 years ago as a cheap labour outsourcing base for unsophisticated goods has changed dramatically to become a continent-scale country of widely varying costs, standards, capabilities and business environments. In terms of labour costs, cost to company per employee is increasing across China due to uneven supply, high demand, inflationary pressure, organised labour demands, and growing social spending requirements. But Western China still offers large pockets of very reasonable wages for skilled and semi-skilled labour, and foreign and local manufacturers in China are increasingly taking advantage of this. While it is true that wages are rising quickly in coastal regions, labour productivity gains due to investment and technical upgrades, especially in the machinery industry, have kept pace with the rise in labour costs (see chart to the right). Chinese exporters of manufactured goods are also taking advantage of the massive local market. The demand for new plants, equipment, infrastructure often one third to half of world demand has created significant economies of scale and of scope for most of China's manufacturing sub-industries. The competitiveness and innovation in the construction machinery sector, for example, have primarily been driven by the countrys infrastructure build-up over the past 15-20 years. The same effect has benefited the producers of steel commodities and structural steel, construction materials, trucks, barges, electrical equipment, power generation equipment, etc. The infrastructure build-up and procurement demand, initially fuelled by foreign-invested companies and with some assistance from government procurement policies, government-approved projects, and the availability and low cost of land and capital, have generated a highly competitive and increasingly sophisticated plethora of local producers that are now dominating the Chinese market and aiming for global expansion. The size and growth of Chinas manufactured goods market is in effect supporting a self-sustaining cycle of cut-throat competition that features innovation, capacity expansion and upgrading, and learning by doing. Suppliers and clusters of suppliers compete with each other but an engineering talent pool and the related innovation usually travels freely and contributes to Chinas overall manufacturing competitiveness. They take advantage of the more than 600,000 students who graduate with engineering degrees every year, excellent transport infrastructure, especially in coastal regions, and generally supportive government policies favouring Chinese high value added manufacturing. As industries across China consolidate and manufacturers grow and become more assertive in their quest for value-added production and profitability at home and abroad, firms sourcing from China must address the following question: How can we protect and consolidate our savings in sourcing capital goods from

Annual Average Wages and Labour Productivity* in China (USD, 2000-10)

Labour Productivity Average Wages 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
USD 4,270 CAGR 16.95% USD 5,823 CAGR 16.24%

Source: China National Bureau of Statistics. * Note: Labour productivity=GDP/No. of employees.

China through the establishment of a China procurement operation? At the same time, how can we move to the next level and take full advantage of an increasingly sophisticated manufacturing base? A new approach: Drawing in the supplier and sourcing goods of increasing complexity The structural changes in Chinas competitiveness across the sourcing spectrum will require procurement managers to shift some of their commodity spending from China to other LCCs, while increasing their orders of machinery, complex parts and high-value added consumables in China. In our view, the key to taking full advantage of a broader spectrum of cost and feature innovation present in the Chinese market is to move from a customer-supplier model of price-based sourcing with strictly dictated specifications and standards to a partnership-based approach where the supplier takes an active part in the overall project and in specifications design. This would entail a structured and patient exchange of ideas, a deeper understanding of Chinese manufacturing practices and standards, and above all, an open mind from both the customer and the supplier. Commercial practices would also require modifications. Contract management with Chinese suppliers generally relies less on contract enforcement and more on relationship management, so many of the standard contractual clauses traditionally used by international procurement teams are either not applicable or not enforceable in China, and thus create unnecessary burdens on suppliers and ultimately increase the total costs of the contract. Ultimately, a sophisticated foreign buyer of Chinese capital equipment will probably need to adopt a number of Chinese standards, practices and approaches all without compromising quality, environmental and labour protection standards, or good governance. Lilian Luca, MD: Beijing Axis Procurement luca@thebeijingaxis.com

The Beijing Axis

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Procurement

How to Procure from China #8 - Commercial Process, Contracting and Contract Management
The Beijing Axis Procurement Process Flow encapsulates the full extent of project engagement, from the point of first enquiry to the range of services in the solution process and benefits provided for the customer. In this edition we focus more closely on step 8 of the Beijing Axis Procurement Process Flow: Commercial Process, Contracting and Contract Management. The Process Flow and Service Delivery Platform of Beijing Axis Procurement
Overall Project Management Holistic Risk Management Strategic Relationship Management

Strategic Sourcing

Analysis Initial Scoping, Supplier Evaluation, Due Diligence & Final Selection Engagement Supplier Engagement, Site Inspections, Sample Testing, Contracting

Procurement Needs Analysis & China Procurement Competitive Analysis

h g h

Systematic Industry Search & Supplier Identification

h g h

Supplier Evaluation, Application of high-level filters

h g h

Supplier Pre-Qualification, Due Diligence & Final Selection

Commercial Process, Contracting and Contract Management

7
Tender Evaluation

6
Site Inspection, Sample Testing and Standards

5
Supplier Engagement, RFQ & Tendering (SOI, RFP)

Supply Chain Mgmt & Support

Process Transaction Monitoring, QA, Expediting, ThirdParty Mgmt & Logistics

9
Transaction Monitoring

Quality Management (QA/ QC), Expediting and Third-Party Management

10
Logistics Management

11

Coordination & Assistance On Site (Material Mgmt, Commissioning, etc.)

12

Beijing Axis Procurement Guidelines for Commercial Process, Contracting and Contract Management With the tendering process closed and the winning supplier identified, the process moves to the next step of negotiating and signing the supply agreement, and onwards to the contract management stage. Commercial process: Ideally, the supplier has received a draft of the commercial terms and conditions as part of the RFP and has either agreed or qualified most of the clauses in the tender documents. However, many Chinese suppliers will not have read the commercial terms carefully until they are awarded. At this stage Beijing Axis Procurement will not only assist the buyer in negotiating specific clauses that were unclear or not in agreement, but also read out the commercial terms with the suppliers to avoid misunderstanding. Examples can include: Finalising scope of supply including outsourced parts Supplier responsibilities regarding delivery point and performance undertakings of goods Insurance Penalties Payment terms Bank guarantees Warranty

Additional services during the commissioning stage

Contracting: At this stage Beijing Axis Procurement will assist the buyer and the supplier with drafting and modifying the English or bilingual contract. It is important to note that lengthy, wordy contracts will unnecessarily delay the signing process while adding little in terms of protecting the buyer, so we generally advise buyers on removing from standard terms and conditions items that are less relevant or not enforceable in a Chinese business context. For some large Chinese manufacturers, design and manufacturing departments might only follow what has been agreed in the contract instead of what has been said before the signing due to gaps in companies internal coordination. To avoid this risk, sufficient technical requirements should be included in the contract. Contract management: After the contract is signed, Beijing Axis Procurement will put in place a project management team assisted by required processes and an IT platform to monitor the manufacturing schedule and inspection and testing plan, coordinate and communicate with all involved parties, communicate and register all modifications to the contract, and notify the parties about any delays or non-conformances. Beijing Axis Procurement will also visit the suppliers regularly and submit progress reports frequently to the buyer. By Beijing Axis Procurement

30 The Beijing Axis

The China Analyst

Investment

China Capital: Inbound/Outbound FDI & Financial Markets

In H1 2011, FDI to China amounted to USD 60.9 bn, up by 18.4% year-on-year. This increase was mainly driven by investment from other Asian countries, which was up by 23.9%, while investment from the United States was down by 22.3%. Chinas outbound investment in this period reached USD 23.9 bn, registering 34% growth year-on-year. Significant investments occurred both in the Resources and Non-resources sectors. By Beijing Axis Capital Foreign Direct Investment in China
Summary In H1 2011, Foreign Direct Investment (FDI) in China amounted to USD 60.9 bn, up by 18.4% y-o-y In this period, wholly foreign-owned enterprises were the major vehicles of investment in China, accounting for around 80% both of the approved FDI cases and the total actually utilised capital In H1 2011, FDI in China primarily originated from other Asian countries/regions, accounting for more than 85% of the total investment. Hong Kong, as the main bridge for inbound investment to mainland China, is still the largest source of capital, contributing USD 40 bn or 65.7% of total FDI Besides Hong Kong, Taiwan continues to be a notable source of FDI to mainland China, contributing USD 3.79 bn. Other top investors to China in this period included Japan (USD 3.51 bn), Singapore (USD 3.20 bn), and the US (USD 1.68 bn) Notable FDI Deals in China in H1 2011 In January, China Timber Resources Group Ltd., a Hong Kong-based timber company, reportedly agreed to acquire a 66% stake in Zhunxing Heavy Haul Expressway Co. Ltd., a toll expressway operator based in Inner Mongolia Autonomous Region, for USD 455 mn In February, Softbank Corp., a Tokyo-based company engaged in telecommunications and e-commerce, acquired a 35% stake in Chinas SynaCast Corporation, or PPLive, a Shanghai-based online video media company Annual Inbound FDI in China (USD bn, 2003-H1 2011)
120 110 100 90 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 H1 2011

Monthly Inbound FDI in China and y-o-y Growth Rate (rhs) (USD bn, Jul 2010-Jun 2011)
15 40 35 12 30 25 20 6 15 10 3 5 0 0

Jul Aug Sep Oct Nov Dec Jan

Feb Mar Apr May Jun

Source: MOFCOM; The Beijing Axis Analysis

and the operator of a leading online TV service (PPTV), for USD 244 mn In February, Lyon-based SEB Group, the worlds largest manufacturer of countertop kitchen appliances, reportedly agreed to raise its stake in Zhejiang Supor Co., a Hangzhou-based manufacturer of cookware and small electric housewares, from 51.31% to 71.31%, for USD 526 mn In March, Rhodia SA, the French specialty chemical manufacturer, completed its acquisition of a chemical facility owned by Jiangsu province-based Suzhou HiPro Polymers Company for USD 489 mn FDI in China by Source Country/Region (H1 2011)
Nertherlands USD 0.35 bn France USD 0.42 bn Germany USD 0.68 bn UK USD 0.92 bn S. Korea USD 1.27 bn US USD 1.68 bn Singarpore USD 3.2 bn Japan USD USD 3.51 bn Taiwan, PRC USD 3.97 bn Others USD 5.08 bn

Hong Kong USD 40 bn

Source: MOFCOM; The Beijing Axis Analysis

Source: MOFCOM; The Beijing Axis Analysis

32 The Beijing Axis

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The China Analyst

Novartis AG, the Swiss healthcare giant, announced its acquisition of an 85% stake in privately-held Zhejiang Tianyuan Bio-Pharmaceutical Co. Ltd., a Zhejiang province-based vaccines company. Although final financial details were not disclosed, it was valued at more than USD 100 mn In April, Win Hanverky sold its major assets to Nike Inc.'s wholly-owned subsidiaries, Nike Global Services Pte. Limited and Umbro International Limited, for USD 214.5 mn In June, the Dutch electronics giant Royal Philips Electronics Inc. was reportedly in advanced talks with Shanghai POVOS Enterprise Co. Ltd. for acquiring the latter for USD 386 mn

China's Annual Outbound FDI and y-o-y Growth Rate (rhs) (USD bn, 2004-H1 2011)
60 150

50

120

40 90 30 60 20 30

Chinese Outbound Foreign Direct Investment

Summary In H1 2011, Chinas OFDI amounted to USD 23.9 bn, which was 34% higher y-o-y In H1 2011, Beijing Axis Capital followed 75 overseas investment activities by Chinese companies (including ongoing transactions and concluded deals of previously announced transactions) In terms of numbers of deals, Europe rose to become the most attractive region for Chinese investors with 24 deals. North America slipped to second place with 17 deals while it ranked first in H2 2010. China had 14 investments in other Asian countries, while the commonly perceived Chinese OFDI destinations, Africa and Australia, accounted for a much smaller portion with 5 and 9 investments, respectively In terms of deal size, Australia and Europe saw the two largest deals in both the Energy & Resources sector and Non-resources sector, excluding financial non-disclosed deals. There were also mega deals (more than USD 1 billion in terms of deal value) in Asia, Africa, and Latin America Non-resources deals accounted for nearly 61% in terms of the number of deals. Manufacturing, Agriculture, Technology were among the most important sectors Notable Chinese OFDI Deals in H1 2011 In January, China National Bluestar Group signed an agreement with Norway-based energy company Elkem AS to acquire Elkems silicon operation for USD 2 bn In February, China National Offshore Oil Corporation (CNOOC) agreed to buy 33.3% of an oil and gas project owned by US-based Chesapeake Energy Corporation for USD 570 mn In March, Bright Food, Chinas largest food company, made an offer of USD 2.3 bn to purchase 50% of Yoplait, a French food company In April, the Shanghai based Shanghai Pengxin Group Ltd. agreed to pay USD 158 mn to buy 16 dairy and dry stock farms in New Zealands North Island In May, Baiyin Non-ferrous Group, a mining subsidiary of Chinas CITIC Group, together with the China-Africa Development Fund (CADFund), agreed to acquire a 60% to 75% interest of Australia-based Company Gold One

10

0 2004 2005 2006 2007 2008 2009 2010 H1 2011

Source: MOFCOM; The Beijing Axis Analysis

International for USD 651 mn In May, China National Chemical Corporation (CNCC) concluded an agreement with MA Industries, an Israeli farm chemical company, to buy a 60% interest in MA for USD 1.44 bn In June, v Securities, Chinas biggest stockbroker and one of its leading investment banks, agreed to pay USD 374 mn to acquire a 19.9% stake in CLSA, a Hong Kong-based brokerage and investment group, and its European counterpart, Credit Agricole Cheuvreux

China Financial Markets

Chinas Stock Markets in H1 2011 Despite an initial drop at the beginning of the year, Chinas stock markets surged in Q1 2011. However, they have slumped significantly from mid-April to mid-September, although there was a short period of recovery from midJune to mid-July The Growth Enterprise Market declined to its lowest point ever, around 790, by the end of H1 2011, yet it recovered Shanghai Stock Exchange Index (Jan-Sep 2011)
3,000

2,750

2,500

2,250

2,000 4 14 1 15 1 15 1 15 3 16 1 15 Jan Feb Mar Apr May' Jun Source: Shanghai Stock Exchange 1 15 1 15 Jul Aug 1 13 Sep

The Beijing Axis

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The China Analyst

Investment

Shenzhen Stock Exchange Index (Jan-Sep 2011)

14,000

13,000

the approval of outbound investment to pass down more approval authority to local governments in order to better facilitate the approval process for overseas investments. Yet despite the relaxation of the approval authority, Chinese companies still need to go through the following procedures before implementing their outbound investments: China OFDI Approval Processes Approval of the State-Owned Assets Supervision and Administration Commission (SASAC): State-owned enterprises require approval from SASAC, while local SOEs require approval from provincial or municipal SASAC. Private companies are not subject to approval from SASAC Submission of a report to the State Administration of Foreign Exchange (SAFE) or its subsidiaries: Chinese companies need to report and explain the source of investment capital to SAFE for further approval Approval of National Development and Reform Commission (NDRC): Resources-related investment above USD 300 mn, or Non-resources related investment above USD 100 mn needs to be approved by the NDRC. Investments under the above mentioned values are to be approved by local governments Approval of Ministry of Commerce: Chinese companies are required to file their application to MOFCOM if the investment is valued above USD 100 mn or the investment flows to countries that have not established diplomatic relations with China Other institutes, including the Ministry of Industry and Information Technology, the Banking Regulatory Commission, the Insurance Regulatory Commission, and the Securities Regulatory Commission might also participate in the approval process. For example, the Securities Regulatory Commission monitors the corporate restructuring and new placement of listed companies SOEs vs. Private Investors It is notable that SOEs and private investors in China have different strategic considerations for overseas investments. Although SOEs continue to dominate outward investment by volume, private investors have emerged to take a notable share in terms of the large investments SOEs focus more on scale and long-term strategic considerations, and as a result they emphasise the overall evaluation of overseas investment opportunities However, recently the Chinese government has strengthened the risk-control of SOEs due to increasing cases of financial losses incurred in Chinas overseas investments On the other hand, due to more restricted access to financing, private investors regard short to medium term profit potential and cash flow as more important. In addition, private companies are always seen to cooperate with SOEs, which in the resources sector means off-take and further development of the asset While SOEs were the only vehicle of large-scale outbound investments in 2005, private investors have emerged to take a share in large-scale investments since then. In H1 2011, large-scale investments conducted by private investors accounted for 11% of the total large-scale investment volume

12,000

11,000

10,000

9,000

8,000 4 14 1 15 1 15 Jan Feb Mar 1 15 3 16 1 15 Apr May Jun 1 15 1 15 Jul Aug 1 13 Sep

Source: Shenzhen Stock Exchange

and fluctuated around 900 from July to mid-September Chinas main exchange, the Shanghai Stock Exchange, declined from 2,852 to 2,677 in January, followed by a 14% rise to 3,057 in the middle of April. However, since then, it has dropped to 2,491 as of mid-September, representing an 18.5% decline The Shenzhen Stock Exchange Index decreased from 12,714 at the beginning of the year to 11,466 by the end of January, a near 10% decline. It then climbed to 13,158 in March and stayed relatively flat until the middle of April, followed by a near 18% decrease to 10,775 by late June. July saw a rise to a high of 12,438 on the 11th, but by mid-September the Index had declined to 10,775 The Growth Enterprise Market Index decreased from 1,155 to 978 at the end of January and recovered to 1,117 in February. However, since then, it declined to 792 by late June, the lowest point since its launching in Shenzhen, representing a 31% slump. It then recovered to about 900 since July and has fluctuated around that level till mid-September 2011 Under the current market circumstances, there are few sectors outperforming the market. The Coal & Oil, Non-ferrous, and Ferrous sectors complied with the general market, surging in Q1 yet slumping since then Despite the generally bearish market this year, until midSeptember 2011, the Food & Beverage and End Fund sectors have experienced a steady period without strong fluctuations

China OFDI Approval Processes and the Emergence of Private Chinese Investors
In order to continue to raise its standing on the global stage in terms of economic development, the Chinese government has been encouraging domestic enterprises to expand overseas, especially in the sectors of Energy, Resources, Manufacturing, and High Technology. A visible current trend in China is for national authorities responsible for

34 The Beijing Axis

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The China Analyst

Selected Chinese Outbound Investment Activity, January-August 2011

# 1 2 3 4 5 6 Date Target / New Company Target Country Brazil, Argentina, Chile Argentina America Australia Canada Australia Acquirer / Investor (English Name) Midea Group ICBC Hainan Airlines Yanzhou Coal Mining Co CNOOC Hanlong Group Acquirer / Investor (Chinese Name) Industry Manufacturing Financial Leasing Resources: Coal Resources: Oil & Gas Resources: Iron Ore Value Stake Status Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing

Aug-11 Carrier Corporation of UTC Group Aug-11 Standard Bank's Argentina operations Aug-11 GE SeaCo. Aug-11 Syntech Resources Pty & Syntech Holdings II Pty Jul-11 Jul-11 OPTI Canada Sundance Resources

USD 223.3 mn 51.00% USD 600 mn USD 1 bn USD 203 mn USD 2.1 bn USD 1.3 bn n/a n/a n/a n/a 81.4% (already held 18.6%)

7 8 9

Jul-11 Jul-11 Jul-11

Panasonic Corp Tully Sugar Bannerman Resources Metorex INEOS Refinery I Ltd. & INEOS Refinery II Ltd.

Japan Australia Australia South Africa UK Malaysia Russia Hong Kong Netherlands South Africa Vietnam Greece British Virgin Islands Australia Netherlands Spain Australia Europe Russia Poland Israel Sierra Leone Canada Chad Australia Switzerland Canada Brazil

Haier Group COFCO Hanlong Group Jinchuan PetroChina Baosteel China Investment Corp. CITIC Securities Ausnutria Dairy Two mining companies CP Pokphand Fosun Nanjing Steel Baiyin Non-Ferrous & CADFund Pangda Automobile Trade Hainan Airlines Yanzhou Coal Mining Guoco Group Yonghui Group Guangxi Liugong Machinery CNCC Shandong Iron & Steel Baosteel China CAMC Engineering Sinopec Siberian Mining Evergreen Industries Group Red Dragon Company Chinas Sinohydro XCMC China ICBC Shanghai Pengxin Group CIC Fosun Bright Food Beijing Automotive Industry Ansteel and Stemcor Wuhan Steel MIE Holdings Tencent Technology CNOOC CHCEC CATIC Beijing Wanhua Industrial Group WISCO CNPG China National BlueStar China Post E-commerce Shenzhen New World

Manufacturing Food Resources: Uranium Resources: Copper Resources: Oil & Gas Manufacturing Financial Financial Agricultural Resources: Gold Agricultural Jewelry retail Resources: Iron ore Resources: Gold & uranium Automobile Hotel Resources: Coal IT Resources: Coal Machinery Farm Chemicals Resources: Iron ore Resources: Chrome & nickle Construction Resources: Oil & gas Resources: Coal Chemical Agriculture Energy Energy Financial Agriculture Power Resources: Zinc & nickel Food Automobile Steel Resources: Iron ore Resources: Oil & gas IT Resources: Oil & gas Construction Machinery Chemical Resources: Iron ore Medical Energy Textile Real estate

USD 128.3 mn 100.00% USD 147 mn USD 155 mn USD 1.32 bn USD 1.015 USD 1 bn USD 200 bn USD 374 mn n/a USD 100 mn n/a 99.00% 100.00% 100.00%

Ongoing Concluded Ongoing Ongoing

10 Jul-11 11 Jul-11

50.1% and Concluded 49.9% n/a 5.00% 19.90% 51.00% 65.00% 70.82% Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Concluded Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Ongoing Concluded Ongoing Ongoing Concluded Ongoing Ongoing Concluded Ongoing Ongoing Ongoing Concluded Ongoing Ongoing Ongoing Concluded Ongoing Concluded Ongoing Concluded Concluded

12 Jun-11 Malaysian Lion Group's Amsteel Mills 13 Jun-11 Sberbank 14 Jun-11 CLSA 15 Jun-11 Hyproca Dairy 16 Jun-11 Aurora Holdings Limited 17 May-11 CP Vietnam Livestock Corporation 18 May-11 Folli Follie 19 May-11 All Wealthy Capital Ltd 20 May-11 Gold One International 21 May-11 Spyker 22 May-11 NH Hotel 23 May-11 Whitehaven Coal 24 May-11 The Rank Group Plc 25 May-11 Divalane 26 May-11 Huta Stalowa Wola 27 May-11 MA Industries 28 May-11 Tonkolili Iron Ore Project 29 May-11 Noront Resources Ltd. 30 Apr-11 Chad International Airport 31 Apr-11 Origin ConocoPhilips LNG Projects 32 Apr-11 Trenaco SA 33 Apr-11 MagIndustries 34 Apr-11 An Industry Park of Agriculture

USD 123.2 mn 9.50% USD 50 mn USD 651 mn USD 92 mn USD 617 mn USD 3.7 bn USD 110 mn USD 90 mn USD 94 mn USD 1.43 bn USD 1.5 bn USD 30.7 mn USD 1 bn n/a USD 15 mn 10.00% 60-75% 24.00% 20.00% n/a 40.84% 60.00% n/a 60.00% 25.00% 9.90% n/a 15.00% 70.00%

USD 120.3 mn n/a USD 200 mn USD 50.5 mn USD 200 mn USD 140 mn USD 158 mn n/a USD 45 mn USD 2.3 bn USD 45 mn n/a USD 58 mn USD 170 mn USD 400 mn USD 570 mn n/a USD 60 mn USD 1.69 bn n/a n/a n/a 80.00% 100.00% 19.00% 12.00% 50.00% 100.00% 66.66% 25.00% 100.00% n/a 33.30% 19.90% 20.00% 58.00%

35 Apr-11 Patuca River Hydroelectric Power Plant Honduras 36 Apr-11 Reta Region Wind Power 37 Apr-11 Bank of East Asia's U.S. Unit 38 Apr-11 16 dairy and dry stock farms 39 Mar-11 AES-VCM Mong Duong Power Co. Ltd 40 Mar-11 Jinduicheng Xise Co. Ltd 41 Mar-11 Yoplait 42 Feb-11 WEIGL 43 Feb-11 USS Maching Center 44 Feb-11 Century Iron Mines Corp 45 Feb-11 Emir Oil LLC 46 Feb-11 Riot Games 47 Jan-11 Chesapeake Energy Corporation 48 Jan-11 Liquefied Natural Gas Ltd. Argentina US New Zealand Vietnam Canada France Sweden UK Canada Kazakhstan US US Australia

49 Jan-11 KHD Humboldt Wedag International AG Germany 50 Jan-11 BorsodChem Zrt. Hungary

51 Jan-11 Adriana Resources's Lac Otelnuk Project Canada 52 Jan-11 Aurobindo (Datong) Bio Pharma 53 Jan-11 Elkem AS 54 Jan-11 Easy Time Trading (Ratio Knitting) 55 Jan-11 Sheraton Universal Hotel India Norway Hong Kong US

USD 120.7 mn 60.00% n/a USD 2 bn USD 55 mn USD 90 mn 80.50% 100.00% 100.00% 100.00%

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

The Beijing Axis

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The China Analyst

Strategy

Strategy

The China Analyst

Mapping China in the Global Contracting Industry

A map of the global contracting industry illustrates the rapid pace of growth of construction activity on the African continent, the region where the contracting industry had the highest CAGR between 2004 and 2009 (32%). Yet Africa's growth is closely followed by the Middle East (25%) and Latin America (24%). In these developing regions of the world, the largest revenues are being earned by Chinese contractors. Thus in the fastest-growing regions, Chinese contractors are effectively leveraging their low cost advantage to capture market share. In the developed regions of Canada, the US and Europe, however, the Chinese presence has grown only marginally. By The Beijing Axis KM & Research Unit

Canada
0% 0.4%
2004 2009

22% 5 13

Europe
0.4% 1.6%
2004 2009 Total 20 Chinese companies in 2009

11%

Middle East
Total 35 Chinese companies in 2009

Total four Chinese companies in 2009

66

10.8% 101 25% 25 77 4.1%

2004 2009

US
0.8% 0.5%
2004 2009 Total four Chinese companies in 2009

9% 23 34

Asia
19%

24.9% 16.8%

Africa
36.6% 32% 30 73
Fasted growing markets with with fastest growing Chinese presence
2004 2009 Total 46 Chinese companies in 2009

Latin America
5% 1.6%
2004 2009 Total 19 Chinese companies in 2009

14 24% 19 27 14.7%
Total 47 Chinese companies in 2009

57

2004 2009

Total Revenue of ENR 225, USD bn

Chinese Companies Share of Total Revenue in Region 2009 2004

2004 2009

LEGEND

Total Revenue CAGR*, 2004 to 2009 Total Revenue 2004 Total Revenue 2009

Source: ENR. Notes: *Compound Annual Growth Rate. Refers to the Top 225 Global Contractors as identified annually by Engineering News-Record.

36 The Beijing Axis

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The China Analyst

Strategy Strategy

CCC: China Inc.'s Leading EPC Contractor

Now boasting one-sixth of global construction industry market share, Chinese contractors and design firms have become influential players and often the benchmark in the international construction market, whether in terms of quality, price or efficiency. CCC, arguably the most internationalised of the Chinese contractors, is probably China's most internationalised contactor. Here we take a closer look at CCCs competitive advantages and growth strategy. By Javier Cuat

total of 50 Chinese international contractors made it into the 2011 edition of ENRs (Engineering News Record) Top 225 International Contractors list. In other words, roughly one out of every five of the most globally competitive contractors hails from mainland China. Despite the global financial crisis, Chinese contractors are progressively increasing their global market share, especially in the emerging markets of Asia and Africa. The global financial crisis, in fact, gave Chinese contractors an opportunity to enhance their international profiles by leveraging their ready access to project financing. Communications Construction Co Ltd. (CCC), incorporated in 2006, is the fourth-largest contractor in China in terms of revenue, and is principally engaged in the construction of transportation infrastructure and port machinery manufacturing. It is the country's largest port construction and design entity, as well as the top dredging company. It is also a leading manager of road and bridge projects in China and a global champion in crane manufacturing through its two subsidiaries, SPMP, and A-share-listed ZPMC. As the most internationalised of Chinese international contractors, CCC is not only a well-recognised brand in China but also overseas, where it has executed projects of increasing scale and complexity. How has CCC achieved this scale and capabilities in such a short period of time? What have been their competitive advantages and their growth strategy? What does it mean for international contractors facing increased competition from China at home and in other markets? Borne of reform The establishment of CCC was a milestone in Chinas reform of its state owned enterprises (SOEs) and the result of SASAC's (the State-owned Assets Supervision and Administration Commission of the State Council) strategic planning. After Chinas accession to the WTO in 2001, international contractors started taking a more active interest in Chinas fast growing economy as a target market. This presented substantial challenges to Chinese contractors, as China suffered from a highly fragmented industry landscape; competition was already fierce at home and relied on less-advanced technologies. In order to improve industry efficiency and productivity, SASAC urged a number of strategic mergers and acquisitions with the goal of establishing some 30-50 large SOEs capable of competing against their international peers. This marked the beginning of CCC.

China Communications Construction Group (CCCG), the parent company of CCC, was established in late 2005 with the merger of CHEC (China Harbour Engineering Company) and CRBC (China Road and Bridge Corporation). The two companies, previously owned by SASAC, were at one point the leading transportation-related infrastructure design and construction groups in China, each with more than 50 years of operating history. CHEC was then one of Chinas leading SOEs focused on dredging, design and construction of ports and port machinery manufacturing, while CRBC was a leading SOE involved in the design and construction of roads and bridges. Further restructuring took place in 2006 when CCC was established as a joint-stock company. As a result, CCCG became the immediate parent of CCC and all core business units were transferred to CCC. This was a very strategic move as it allowed CCC to raise funds for future international expansion. Since both CHEC and CRBC belonged to the Ministry of Communications and their business and management styles were similar, their merger was successful. This enabled them to develop a certain synergy with the consolidated entity dramatically increasing its competitiveness in bidding for larger and more complex projects. This in turn improved the overall operating efficiency and profitability of the company. After restructuring, SASAC achieved its main objective: the establishment of a full-service, vertically-integrated transportation infrastructure construction group capable of fulfilling monopolistic positions in some sectors domestically. The combined strength of both companies signalled a breakthrough in Chinas drive to create competitive global champions. Before the merger, CHEC and CRBC were ranked 31st and 48th, respectively, among the worlds largest global contractors, while after the merger, CCCG catapulted to 20th overall. CCC is now Chinas largest international contractor, with over USD 7 billion in international revenue. A vertically integrated business model A vertically integrated business model is CCC's core competitive advantage. Today, CCC is active in infrastructure construction, infrastructure design, dredging and port machinery manufacturing, and relies on its in-house capabilities to execute EPC projects, with very little sub-contracting. This approach has enabled CCC to allocate resources more efficiently, reduce costs over time, achieve economies of scale and most importantly, increase its competitive profile and market share in the domestic and foreign markets.

38 The Beijing Axis

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The China Analyst

CCC Revenue by Region (USD bn, 2006 vs. 2010)

50 Overseas China USD 40.3 bn 40

CCC Revenue by Business Unit (%, 2006 vs. 2010)

USD 14.4 bn 100% USD 40.3 bn

80%

Other Port Machinery Manufacturing Dredging

30

CAGR = 29.3%
60%

20 USD 14.4 bn

CCC relied on Chinas infrastructure boom to weather the global financial crisis

40% Infrastructure Design 20% Infrastructure Construction

10

2006

2010

2006

2010

Source: CCC Annual Reports; The Beijing Axis Analysis. Note: China does not include Hong Kong and Macao.

Source: CCC Annual Reports; The Beijing Axis Analysis

As China's largest port constructor, CCC enjoys synergistic benefits though its dredging operations, which are usually complementary services to port construction projects. In addition, as one of the Chinas leading road and bridge construction entities, CCC is able to build roads and bridges that connect port areas with inland cities and provinces. Similarly, as Chinas industry leader for port, road and bridge design, CCCs infrastructure design capabilities are complemented by its construction business, enabling the company to construct high-end projects of increasing scale and complexity. Because of its superior operating scale, CCC has more pricing flexibility, increasing its average profit margins. Through its two port machinery manufacturing subsidiaries, moreover, CCC can also undertake all the procurement for a project, which provides a very unique competitive and price advantage over its competitors. Shanghai Zhenhua Port Machinery Co. Ltd (ZPMC) and Shanghai Port Machinery Plant Co. Ltd (SPMP), both owned by CCC, have transformed the group into a world leader in its areas of business. Individually, Shanghai-listed ZPMC is the world's largest container crane manufacturer with a global market share of about 76% in terms of units ordered, according to 2010 figures. In recent years CCC has seen further integration across its value chain, mainly through inorganic growth, and is moving into new business areas and accessing new complementary markets. CCC is now also engaged in road and bridge construction machinery manufacturing, logistics services and trading of construction-related materials and equipment, among other areas. The companys investment business is gradually becoming a new source of growth. Finally, the most significant factor in CCCs overall competitiveness is the use of Chinas state-backed banking institutions, the so-called EPC+F business model. CCC has direct access to some of Chinas financial institutions, such as Exim Bank or Sinosure, that provide discounted loans and sources of finance for CCCs overseas projects. In fact, this is one of the main challenges that international contractors face when bidding for international projects.

Examples of large and complex projects that CCC is currently conducting overseas include the Island and Tunnel of the Hong Kong-Zhuhai-Macau Bridge, Phase II of Sri Lanka Hambantota Port, Cameroon Kribi Deepwater Port, and Serbia Belgrade Zemun-Borca Bridge. In 2010, new contracts or overseas infrastructure projects accounted for about 19% of CCC's total value of new infrastructure construction contracts. Significance for international contractors So what are the strategies that foreign companies can formulate and implement in order to counter such core competitive advantages? The case of CCC has illustrated the following: Competing against Chinese international contractors in bidding for international projects may work in the short term in more developed markets but the long term view is uncertain. Although they often lack specific local knowledge and face local protectionism hurdles, they are quickly catching up with international best practices, regularly hiring local experts to overcome these challenges Engaging with China is becoming a matter of survival. The trend of competitive Chinese enterprises expanding into emerging markets guarantees this It is vital to understand the past, present and future of Chinas contractors. Core advantages and practices will determine the success of foreign players in global construction markets in the long run. They must adapt to China, as China has already adapted to them Corporate partnership is key, but meaningless without risk mitigation, flexibility and a proper China strategy In short, international contractors must develop creative China-engagement strategies to adapt to a shifting competitive landscape. What added value can international contractors offer over their Chinese counterparts and how can these be sustained in the long run? International contractors must answer such critical questions today so that they can remain competitive tomorrow. Javier Cuat, General Manager: Beijing Axis Strategy javiercunat@thebeijingaxis.com

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39

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Regions

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Regional Overview: BRIICS

Brazil, India, Indonesia and China going strong; Russia and South Africa still lagging behind With the economy of Brazil showing signs of slowing after expanding in 2010 at its fastest pace in 24 years, President Dilma Rousseff must manage expectations in the years ahead as Brazil tries to break through bottlenecks and upgrade its infrastructure ahead of the 2014 World Cup and 2016 Olympic Games The economy of Russia grew less than expected in H1 2011 (even amid high oil prices) due to the effects of more than USD 30 bn in capital flight, largely attributed to uncertainties surrounding the upcoming 2012 presidential elections Exports from India have been steadily growing and are on course to reach the governments target of USD 300 bn for the current fiscal year, driven by increased government support to exporters to tap into new markets in Latin America and Africa. However, local reforms aimed at empowering Indian industries to become more competitive over the long term along with monetary tightening measures are threatening to slow growth moving forward The GDP of Indonesia is projected to grow nearly 7% in 2011, driven by soaring domestic consumption, global demand for Indonesian coal, tin, copper, and palm oil, increased FDI and a sound macroeconomic policy. Yet gold-driven inflation is starting to spread through the economy In China, the economy grew by 9.6% y-o-y during H1 2011 as China seeks to become less reliant on the economies of the US and Europe and diversify its export markets. Consumer inflation, especially for food, remains the most pressing concern, and policymakers are increasingly willing to use the renminbis continued appreciation against the US dollar as an inflation fighting tool, a move which also pushes Chinese manufacturers to move up the value chain and encourages domestic consumption Economic growth in South Africa slowed sharply in Q2 2011 to 1.3% from 4.5% in Q1, which can be largely attributed to the ongoing sovereign debt crisis in Europe and an overall weakened global economic outlook. With an unemployment rate hovering above 25% of the labour force, South Africa might lower interest rates to regain recovery momentum, fuel investment and increase exports from its contracting manufacturing sector
Russia 140 mn

Legend Population, 2011E GDP, 2011E GDP per capita, 2011E

USD 1,895 bn USD 13,543 India 1,233 mn USD 1,704 bn China 1,348 mn USD 6,516 bn USD 4,833

Brazil 195 mn USD 2,421 bn USD 12,423 Source: IMF South Africa 50 mn USD 383 bn USD 7,585

USD 1,382

Indonesia 238 mn USD 823 bn USD 3,465

BRIICS Real GDP Growth (%, 2010-H1 2011)

12

BRIICS Inflation and Unemployment (%, June 2011)

Inflation Unemployment rate*
9.00% 6.80% 8.62%
5

2010
10

H1 2011
10

9.40% 6.50% 6.87% 5.30% 4.61% 6.00%

6.50%

4.10%
0

Inverted scale China India Indonesia Brazil South Africa Russia

-5 -10 -15

-20
0

-25

25.70% Source: Trading Economics. * Note Unemployment: China (Mar), India (Mar), Indonesia (Feb)

Source: Trading Economics; China NBS; IMF

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Regions

Regional Focus: CHINA-AFRICA

In 2010, China-Africa trade surpassed the USD 100 billion mark for the first time, and despite the political turmoil in North Africa, trade in H1 2011 is around 30% higher y-o-y. We also review the major ChinaAfrica deals in H1 2011, and profile China Civil Engineering Construction Corporation, one of China's leading EPC contractors in Africa.

China-Africa Briefing: China Eyeing Unrest in North Africa; Building Relations with the Sudans; First China-Africa NGO forum
China is paying close attention to the political situation in North Africa and the potential impact on Chinas resource security in the region. Libya in particular is one of China's leading suppliers of crude oil in Africa; in 2010 Libya exported roughly USD 4.5 billion worth of oil to China. Over the years, China has invested billions of dollars in infrastructure projects in Libya, which China is urging the emerging post-Gaddafi government to protect during the transition period During a meeting in late June, President Hu Jintao and his Sudanese counterpart Umar al-Bashir signed agreements on infrastructure and equipment loans and for economic and technological cooperation. On 9 July, China also welcomed the independence of South Sudan, which holds three-fourths of old unified Sudans oil reserves. President Hu also pledged to develop Chinas mutually beneficial relationship with the continents newest country In late August, around 200 representatives from 20 Chinese and 100 African non-governmental organisations gathered in Nairobi, Kenya for the first China-Africa NGO forum. The two-day forum, with the theme 'Enhance partnership and promote friendship between China and Africa', featured discussions on climate change and food security, NGOs' credibility and transparency, and the relationship between governments, NGOs, businesses and communities

China-Africa Trade
Total Trade In H1 2011, Chinas total trade with Africa reached USD 78.96 bn, up 29% y-o-y. South Africa and Angola were Chinas largest trading partners (see chart below to the right). China's imports from Africa experienced rapid y-o-y growth in H1 2011, yet China's exports to Africa decreased slightly China Imports from Africa Chinese imports from Africa in H1 2011 totalled USD 46.34 bn, up 65.3% y-o-y China Customs data for Q1 2011 showed that the five China-Africa Trade (USD bn, 2001-H1 2011)
80 China Imports from Africa 70 60 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: China National Bureau of Statistics; CEIC; The Beijing Axis Analysis

biggest African exporters to China (South Africa, Angola, Sudan, Libya and Congo) accounted for just over 80% of Chinese imports from the continent during this period China Exports to Africa Chinese exports to Africa in H1 2011 totalled USD 32.60 bn, down 1.65% y-o-y China Customs data for Q1 2011 showed that the five most popular export destinations for Chinese goods in Africa were South Africa, Nigeria, Egypt, Liberia and Algeria. These five countries accounted for 54% of the total China's Africa Trade by Country (USD bn, Q1 2010 vs. Q1 2011)
Imports Q1 2010 Others DRC Liberia Algeria Congo Brazzaville Egypt Libya Nigeria Sudan Angola South Africa Imports Q1 2011 Exports Q1 2010 Exports Q1 2011

China Exports to Africa

H1 2011

Source: CEIC; The Beijing Axis Analysis

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The China Analyst

China-Africa Investment
Trends Based on the major China-Africa investment activities in H1 2011, China's investment appetite in Africa remained strongest in three sectors namely Oil & Gas, Mining, and Infrastructure (see our China OFDI dealsheet in the China Capital Section for details on specific deals) Major Recent Deals and Developments In May, the government of Chad and Chinese engineering firm CAMC signed a USD 1 bn agreement for the construction of a new international airport north of the capital NDjamena. The new airport will have an ultra modern terminal, and the project also includes the construction of a 40 km motorway between the airport and the capital In May, Chinas Export-Import (Exim) Bank granted Cameroon a loan of USD 542 mn for the construction of the 210 MW Memveele hydropower dam on the Ntem River. The Memveele dam is expected to be completed within five years In June, Kenya signed a concessional loan agreement worth around USD 110 mn with China. The loan will be used to build the third referral hospital at Kenyatta University in the capital city of Nairobi In June, Chinese bank ICBC granted a USD 285 mn loan to Zambia for the development of a new electricity transmission line. The new line will connect Zambias power grids with those in Tanzania and Kenya In July, Canadian rare earths miner Great Western Minerals announced that it had signed an agreement with Ganzhou Qiandong Rare Earth Group (GQD) to build a rare earths separation plant in South Africa, to be followed later by the building of a mine A consortium of Chinese investors is currently bidding for Gold One International Ltd., estimated to be the lowest cost gold producer in South Africa, for about USD 642 mn. In early August, Gold One obtained approval from SAs competition authorities for the buyout In August, Chinese steel producer Shandong Steel Corporation completed the acquisition of a 25% stake in the Sierra Leone-based Tonkolili iron ore project for USD 1.5 bn, which is owned by London-listed Africa-focused mining giant African Minerals Ltd In August, a contract of USD 526 million was signed between the China Water and Electric Company (CWE) and the Guinean government for the construction of a dam in the country's capital Conakry. The construction of the dam is expected to take 24 months In August, China Development Bank agreed to lend Ghana Africas newest oil producer USD 800 million to build natural gas infrastructure On a state visit to China in August, Mozambican President Armando Guebuza signed ten cooperation agreements with Chinese President Hu Jintao. Included among these was an agreement for Chinese firm China Kingho to finance the construction of a new railway line linking the town of Maotize in western Mozambique to the port of Beira

Chinese Contractors in Africa: China Civil Engineering Construction Corporation

Brief Country Profile Established in 1979, China Civil Engineering Construction Corporation (CCECC) is one of Chinas leading contractors for international projects, with over 80% of its revenues coming from overseas projects. CCECC is active in 40 countries and regions and has established more than 20 offices overseas CCECC was transformed into a state-owned enterprise for project contracting out of the earlier Foreign Aid Department of the Ministry of Railways (which participated in Chinas then largest foreign-aid project in Africa, the TAZARA railway) Its range of services include international contracting for railway construction, civil engineering design & consultancy, real estate development, trading, industrial investment and hotel management CCECC Selected Major Projects in Africa Nigeria Abuja-Kaduna railway project (USD 874 mn; 2011-14) Construction/Rehabilitation of Nigerian railway system (USD 528 mn; 1995-2000) Botswana Rehabilitation of Botswana railway (USD 40.56 mn; 1996-99) Uganda Rehabilitation of Nakivubo drainage channel (USD 14.55 mn; 2000-03)
Source: CCECC company website

Djibouti Djibouti Industrial and Commercial School (USD 10 mn; 1991-93) Rwanda Stadium of Rwanda (USD 21 mn; 1984-88) Tanzania Kahama and Shinyanga water supply project contract no. 4 (USD 47 mn; 2005-06) 140km track renewal on central line (USD 6.25 mn; 2005-06)

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Regional Focus: CHINA-AUSTRALIA

Australia continues to ride the resource boom, posting a GDP growth rate of 2.3% in 2009-10. Bilateral trade with largest trade partner China increased by more than 45% from 2009 to 2010, reaching USD 88.1 bn. Investment activities remain robust with sustained interest in mining and increasing interest in agroprocessing, renewable energy and other sectors. However, concerns loom over a fluctuating Australian economy, over-reliance on China and skill shortages. China-Australia Briefing: New carbon pricing scheme in Australia; Active cross-border investment climate
Australia has finally established a carbon pricing scheme that will be applied to all energy use except private cars and some other categories of transport. The AUD 23 (USD 25, EUR 17) per tonne carbon dioxide government-determined price (expected to rise to AUD 25.4 in 2014-15) is currently higher than the European emissions trading price and will affect 500 companies that are considered the biggest polluters in Australia. China declared its own plan of implementing an emissions trading scheme by 2015, setting a target of cutting its energy intensity by 16% and reducing its carbon intensity by 17% from 2011 to 2015 The recently released Foreign Investment Review Board (FIRB) Annual Report for 2009-10 established that the board approved 4,401 proposals during the year, a drop of 18% from the 5,352 approvals in 2008-09. China had the most approvals with 1,766, followed by Malaysia with 524 and the UK with 410. However, in terms of value, the US was the largest foreign investor in Australia with USD 34.50 bn, followed by the UK with USD 25.29 bn and China with USD 14.38 bn. Chinas total investment approval value decreased by 27.51% from USD 19.83 bn in 2008-2009; however, Chinas interest in the mineral exploration and development sector remained robust at USD 10.76 bn or 74.84% of the total

China-Australia Trade
Total Trade Sino-Australian total trade increased by almost 47% from USD 60.1 bn in 2009 to USD 88.1 bn in 2010, according to China Customs (CC); whereas the Australian Bureau of Statistics (ABS) puts the increase at 45% from USD 62.1 bn in 2009 to USD 90.2 bn in 2010 Trade figures for 2011 seem poised to break the 2010 record as H1 2011 trade of USD 51.75 has surpassed 2010s halfway mark of USD 37.72 bn In monthly terms, CC put Chinas highest trade deficit with Australia yet in January 2011 at USD 4.45 bn. Said month saw China exporting USD 2.79 bn worth of goods to Australia while importing USD 7.24 bn worth of goods. According to ABS, Chinas highest trade deficit with Australia occurred in March 2011 when China exported USD 2.91 bn to Australia while importing USD 5.86 bn, resulting in a trade deficit of USD 2.96 bn China Imports from Australia In JanMay 2011, Chinas imports from Australia totalled USD 29.93 bn according to CC (USD 26.38 bn based on ABS), with a high of USD 7.24 bn in January 2011 A USD 94 bn supply deal has been signed between China Petroleum & Chemical Corporation (Sinopec) and Australia Pacific LNG, a joint venture between ConocoPhillips and Origin Energy, to supply China with a further 4.3 million tonnes of LNG annually for 20 years. Sinopec will pay USD 1.66 bn for a 15% stake in the said joint venture China Exports to Australia In JanMay 2011, Chinas exports to Australia totalled USD 12.53 bn according to CC (USD 16.11 bn based on ABS), with a high of USD 2.79 bn in January 2011 China Annual and Monthly Trade with Australia (USD bn)
China exports to Australia (lhs) China imports from Australia (lhs) Annual/monthly trade balance (rhs)
80 70 60 50 -15 40 -20 30 20 10 0 -25 0

8 7

-5

-1
-10

6 5 4 3 2 -4 -3 -2

-30

1 0 -5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 .05

-35

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2010 2011

Source: China Customs; The Beijing Axis Analysis. Note: Balance = Chinese exports to Australia - Chinese imports from Australia, hence negative scale.

Australia Annual and Monthly Trade with China (USD bn)

Australian exports to China (lhs) Australian imports from China (lhs) Monthly trade balance (rhs)
60 20

50

15

40 10 30 5 20 0

10

1
-5

2001 2002 2003 2004 2005 2006 2007 2008 2009 20102011. 5

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

Source: Australian Bureau of Statistics; The Beijing Axis Analysis

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The China Analyst

Australia State Watch: Victoria

State Trade Profile; Trade with China With a real gross state product (GSP) of USD 211.59 bn in 2008-09, Victoria is Australias second-largest state economy It is a net importer with exports of USD 17.55 bn and imports of USD 51.37 bn in 2009-10 Main exports in 2009-10 were food and live animals (28.5%), followed by machinery and transport equipment (19.6%) Main mineral commodities produced are brown coal, petroleum and gas Key industries as shares of GSP are financial and insurance services (12.5%), manufacturing (10.5%) and ownership of dwellings (7.7%) In 2009-10, China was Victoria's largest trading partner, with total trade amounting USD 11.35 bn, followed by the United States with USD 6.66 bn and Japan with USD 5.89 bn Victoria Trade with China (USD bn, Jan 2010-May 2011
1,200

Exports to China (lhs) Imports from China (lhs)

Monthly trade balance (rhs) -400

1,000

800

-600

600

400

-800

200

J F M A M J J A S O N D J F M A M 2010 2011 Source: Australian Bureau of Statistics; The Beijing Axis Analysis

-1,000

China-Australia Investment
Approved Chinese Investments in Australia by Sector Major Recent Deals and Developments In June, it was reported that Australian coking coal (USD, 2009-10) Manufacturing producer Caledon Resources had agreed to be bought Services USD 174.83 mn by Guangdong Rising Assets Management for USD 507 USD 633.11 mn mn. Caledon Resources has two coal mines in Queensland Resource processing In July, ASE-listed MetroCoal announced that China Coal USD 671.08 mn Import & Export Company (CCIEC) had received approval from the Chinese government to form a USD 33 mn joint venture with MetroCoal in which CCIEC will acquire Real estate USD 2.13 bn a 51% stake in MetroCoal's Columboola mining area in Queensland In July, Zijin Mining Group confirmed that it will invest an additional USD 30 mn in Australian miner and explorer Norton Gold Fields Limited. The Chinese gold miner Mineral exploration currently holds 16.98% of Norton's total equity Total: USD 14.37 bn & development In July, Northwest Nonferrous International Investment USD 10.76 bn acquired a controlling stake of 48.7% in Synergy Metals, an ASE-listed company engaging in mineral prospecting Source: FIRB; The Beijing Axis Analysis for USD 13.8 mn In August, Yanzhou Coal completed its USD 222.3 mn acquisition of Syntech Resources. The Australian coal miner owns Carnaby Downs mine a 700 million metric ton thermal coal project in Queenslands Surat Basin. Chinas third-largest coal producer is also reportedly in the running for Whitehaven Coal, one of Australias largest remaining independent miners, along with Indias Aditya Birla Group and Peabody Energy of the US In August, China Nonferrous Metal Industry Foreign Engineering and Construction Co. stated that it would increase its stake in Terramin Australia Ltd, a base metal production company with an operating mine in South Australia and other advanced projects in Australia, from 14.38% to 19.86%. Terramin made it clear that it will use the USD 5 mn sale proceeds to develop two zinc and lead mining projects China Datang Corporation Renewable Power Co Ltd has finalised a JV with Australian company CBD Energy Limited and Hebei-based Baoding Tianwei Baobian Electric Co Ltd. Under the agreement, Datang will hold a stake of 63.75% in the JV, called AusChina Energy Group, while CBD Energy will hold 23.75% and Baoding Tianwei will hold the remaining 12.50%. With an investment of USD 3.19 bn, the JV is expected to establish wind farm and solar power plants in three years, with the goal of becoming a major player in the renewable energy market in Australia Shanghais Bright Food Group has agreed to buy a 75% stake in Champ Private Equitys Manassen Foods Australia Pty Ltd. The famed 'White Rabbit' candy owner is eager to increase its overseas sales and footprint and has been looking at various acquisition targets for the past few months In August, Insurance Australia Group agreed to pay USD 103.3 mn for a 20% strategic stake in Chinese general insurer Bohai Property Insurance Pty Ltd.

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Regional Focus: CHINA-LATIN AMERICA

China has continued to strengthen its political and economic ties with Latin America in 2011. An official visit to the region by one of Chinas leading political figures, along with continued trade and investment growth are indicative of strengthening strategic ties between China and Latin America. In this edition, we revisit Chinas relationship with Mexico, including an interview with the Ambassador of Mexico to China, Jorge Guajardo. China-LatAm Briefing: High Level State Visits Solidifying Political and Economic Ties
In June, Chinese Vice President Xi Jinping travelled to Uruguay, Cuba and Chile on official visits. In Chile, Xi delivered a speech at the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC), where he stated that countries in the Latin American and Caribbean regions have become more dynamic in their diplomatic activities and have emerged as a new force in global governance In Uruguay, Chinese Vice President Xi Jinping signed 17 accords with Uruguay in the fields of economy, trade, investment, culture, social welfare, industry and tourism. China is now Uruguays second-largest trade partner in the region, behind Brazil In Cuba, Havana and Beijing are currently implementing important cooperation projects in the fields of tourism, telecommunications, transportation, biotechnology and energy. China is also Cubas second-largest trade partner behind Venezuela, with China's main exports to Cuba largely revolving around infrastructure-related industries In April, Brazils new President Dilma Rousseff, along with her counterpart Hu Jintao, pledged to further develop the two countries strategic relationship during the formers state visit to Beijing. The meeting resulted in the signing of approximately 20 trade agreements worth a total of USD 1 bn, as well as a number of large-scale investment proposals. China became Brazils largest investor as well as the second-largest importer of Brazilian goods in 2011

China-LatAm Trade
Total Trade In H1 2011, Chinas total bilateral trade with LatAm reached USD 93.1 bn, an increase of 35% y-o-y Brazil, Mexico and Chile were Chinas largest trading partners in LatAm, accounting for 33%, 16% and 16%, respectively, of Chinas total trade with the region during H1 2011 Chinas trade deficit with the region fell to USD 5.5 bn in H1 2011, a decrease of 20% y-o-y China Imports from LatAm China's total imports from Latin America during H1 2011 China-LatAm* Trade (USD bn, 2003-H1 2011)
100

amounted to USD 49.3 bn, an increase of 30% y-o-y Approximately 86% of LatAms exports to China in H1 2011 originated from just three countries: Brazil (45%), Chile (19%) and Venezuela (12%)

China Exports to LatAm Chinas total exports to LatAm in H1 2011 reached USD 43.8 bn, an increase of 41% y-o-y In H1 2011, nearly 70% of Chinas exports to the region were concentrated in Brazil (33%), Mexico (24%) and Chile (11%) China's LatAm* Trade by Country (USD bn, H1 '10 vs. H1 '11)
Imports H1 2010 Imports H1 2011 Exports H1 2010 Exports H1 2011

China exports to LatAm 80 China imports from LatAm

Bolivia Cuba Paraguay Uruguay Ecuador Peru

60

40

Venezuela Colombia Argentina

20

Chile Mexico Brazil 15

0 2003 2004 2005 2006 2007 2008 2009 2010 H1 2011

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

12

10

15

20

25

Source: CEIC; The Beijing Axis Analysis

* Note: LatAm here refers to the Latin American Integration Association (LAIA). LAIAs members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.

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The China Analyst

China-LatAm Investment
Trends While foreign investment in Latin America grew by 40% in 2010 to USD 113 bn, 2011 has seen further growth, driven by the official visit from Chinas Vice-President Xi Jinping earlier in the year which resulted in millions of dollars worth of trade and investment deals in the region Current developments in the global economy, particularly in the financial markets, will also prompt Chinese enterprises to take better advantage of relatively bargain prices and acquire companies and assets abroad to satisfy China's demand for resources as well as gain access to new markets abroad. Latin America is expected to be one of the regions that will benefit the most from this trend Major Recent Deals and Developments In April 2011, the Export-Import Bank of China (China Exim Bank), announced that it will formally launch a yuan-denominated sovereign fund targeting Latin America before the end of 2011. The USD 1 bn fund will mainly focus on infrastructure construction in collaboration with the Inter-American Development Bank In May 2011, Chery Automobile Co. announced that it will break new ground in Latin America with its USD 200 mn factory in Venezuela, which is expected to start producing vehicles for the regional market later this year. Chery had previously signed a cooperative agreement with China Development Bank and the Venezuelan government to set up the new factory, which will be Cherys second-largest in Latin America, following its auto manufacturing facility in Brazil In June 2011 it was announced that Chinas ZTE was going to start producing its own Android-based tablets in Brazil. ZTE plans to invest a total of USD 250 mn in its operations in Brazil and expects to employ some 2,500 people in the country by 2014 Ecuador announced in June that its loans from China will reach at least USD 3 bn in 2011 and the governments oil revenue forecast will exceed the fiscal budget by some USD 60 mn, reassuring investors that South Americas seventh-biggest economy will be able to keep servicing its debt In August 2011, Chinese home appliances and electronics manufacturer Midea announced plans to invest USD 223.3 mn to acquire a 51% stake in the Latin American air-conditioning business of Carrier, a US home appliances provider In August 2011, the Industrial and Commercial Bank of China Ltd., Chinas largest commercial bank, stated that it would buy an 80% stake in Standard Bank Argentina SA for USD 600 mn In August 2011, Argentinas Mining Secretary announced that the government is in discussion with Chinese investors over the building of a USD 750 mn copper refinery. The proposed project would process copper concentrates into 210,000 tons of cathode copper and 700,000 tons of sulphuric acid per year. The names of the potential Chinese investors have yet to be disclosed

China-LatAm Country Watch: Mexico

Brief Country Profile Mexico is one of the largest and most developed countries in Latin America, boasting a GDP of USD 1.4 tn (2010) and a GDP per capita of USD 9,580 Mexico's economy rebounded strongly from the effects of the global financial crisis, when its economy contracted by 6.1% (2009). In 2010, Mexicos economy grew by 5.5% China-Mexico Bilateral Ties China and Mexico are potential competitors competing in the US and Latin American markets, yet over the past decade their relationship has become more strategic as they are important sources of growth for one another China has expressed interest in intensifying its investment in Mexico in the fields of agriculture, mining, and manufacturing among other sectors. Chinese manufacturers can especially save on logistics costs by setting up operations in Mexico Chinas total trade with Mexico reached USD 24.7 bn in 2010, an increase of 30% y-o-y; bilateral trade between the two countries has been growing at a compound annual growth rate of 30% since 2000 Chinas total exports to Mexico in 2010 reached USD 17.8 bn, an increase of 45% y-o-y. Electronic components China Trade with Mexico (USD bn, 2000-H1 2011)
20 Chinese exports to Mexico Chinese imports from Mexico 15

10

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: UN Comtrade; CEIC; The Beijing Axis Analysis

H1 2011

(29%), machinery (22%) and optical, photo and technical equipment (11%) made up the bulk of Chinas exports Chinas total imports from Mexico increased by 77% y-o-y to approximately USD 6.9 bn in 2010. Electronic equipment (28%), mineral ores (20%) and motor vehicles (11%) were the main exports to China

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Seizing Every Opportunity: Ambassador of Mexico to China, Jorge Guajardo, on Mexico's Thriving Business Relationship with China
Ambassador Jorge Guajardo is seeing the best ever economic relations between Mexico and China, but he sees much more potential for the future. Bilateral trade has increased substantially, and Mexican companies such as Grupo Bimbo and Softtek have found success in China. Yet Mexico, he believes, is now more ready than ever to be one of China's main partners in the region.

around USD 400 million. Something similar occurs with Mexican investment in China. The official figure is over USD 100 million, but actual investment is around USD 400 million. However, these investments have been made by well-known companies such as Grupo Bimbo and GRUMA from Mexico and Lenovo and Huawei from China, so we are confident that investment will grow rapidly in the coming years. Can you cite some case studies of Mexican businesses in China? Which Mexican companies have been successful in China? I will give you a few examples. Grupo Bimbo is the largest producer of bread in the world, with a history that goes back to 1945 in Mexico City. Bimbo bought a small Spanish bread company in Beijing in 2006. It has since tripled the size of its business, bought new brands and expanded to half a dozen cities, including Shanghai. Softtek is an IT company based in Monterrey, Mexico. It arrived in Beijing in 2007 and has been working with high level clients from China and other countries since then. Just to mention two examples of this, they provided IT support for the Australian delegation during the Beijing Olympics and the US Pavilion at the Shanghai 2010 World Expo. Nemak is one of the worlds leading manufacturers of aluminium components for automobile motors, with state-of-the-art technology. They have a plant in Nanjing and supply the leading car manufacturers in China, both local and international. I am sure that in the near term, both the number and the success of Mexican companies investing in China will increase. What are Mexicos main competitive advantages as an investment destination in Latin America? Mexico has unique advantages. It has the largest Spanish speaking market in the world, with a population of 112 million, almost equal to that of Argentina, Colombia and Venezuela combined. It has one of the highest standards of living in the region, and its GDP per capita is around 40% higher than Brazils. The economic future of the country is promising. For instance, according to a Goldman Sachs forecast, Mexico will be the fifthlargest economy in the world in 2050, behind only China, the US, India and Brazil. Mexico has a wide net of free trade agreements, covering 44 countries, including the US, Canada, the European Union and Japan, collectively covering two-thirds of the worlds GDP and over a billion people. It has a unique geographic position, with a 3,300km-long border with the US, and long coastlines along the two largest oceans in the world, the Atlantic and Pacific.

The Ambassador of Mexico to China, Jorge Guajardo

lease provide an overview of the China-Mexico trade and investment relationship. Economic relations between Mexico and China are at their best level in history, but there is still huge potential to develop them further over the short, medium and long term. Last year, trade between the two countries amounted to almost USD 50 billion; Mexican exports to China reached USD 4.2 billion while imports reached USD 45.7 billion, leaving Mexico with a big deficit. However, many Chinese products imported by Mexico consist of components and parts of other products that are assembled in Mexico and then exported to third countries, mainly the US. China is Mexicos second-largest trading partner. It is Mexicos second-largest source of imports behind the US, and the thirdlargest destination of Mexican exports behind the US and Canada. In 2010, total trade grew 43.4% and Chinese imports from Mexico expanded by a full 90%. In the first five months of 2011, exports have grown almost a further 50%. Investment is still modest. Official figures indicate that Chinese investment in Mexico is around USD 130 million, but if we consider investments made by Chinese companies through subsidiaries based in third countries, the total investment is

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The Mexican economy is not only big, but also sophisticated, and its open to foreign trade and investment. Mexico has signed Agreements to Promote and Protect Foreign Investment with 25 countries, and Treaties to Avoid Double Taxation with 36 economies, including China in both cases. What are the opportunities for Chinese companies in Mexico? And the challenges? We have identified several sectors with opportunities for Chinese investment in Mexico. The most promising are automotive, new and renewable energy, mining, infrastructure construction and electric & electronic products. Let me elaborate on three sectors: automotive, infrastructure construction and mining. Mexico is the fifth-largest exporter of automobiles in the world and ranks among the ten leading manufacturers. Eight of the ten leading original equipment manufacturers in the world have assembly plants in Mexico. Through its free trade agreements network, exporters of cars and auto parts established in Mexico have access to the main markets in the Americas, Europe and Japan. The administration of President Felipe Caldern has invested heavily in infrastructure construction to upgrade the communication, transportation and logistics capabilities of Mexico. Investment in infrastructure has increased from 3% to 5% of GDP and the projects are open to international companies. Mexico is the largest producer of silver in the world and is ranked among the leading 12 countries for production of eighteen types of minerals. A Behre Dolbear report published in 2010 placed Mexico as the worlds fourth-best investment destination for mining in a 25-country list and in first place for fiscal regime. When it comes to global manufacturing, as a low cost sourcing country itself, is Mexico a competitor to China in Latin America? Or is it a case of complementarity? Mexico views itself not as low cost sourcing country but as a strategic platform for international companies from around the world. It is true that due to the gap between the average income of workers in Mexico and the US, historically Mexico has been a low cost manufacturing base, but now the situation has changed dramatically. With the improvement in global logistics, communications and information technologies, a country like China can directly compete with Mexico despite it being on the opposite shore of the Pacific Rim. International companies will be greatly impressed by the opportunities that Mexico offers. Its workforce is young and well educated and trained. There is a strong supply of managers and engineers with good command of English and knowledge of US and European cultures. We are in the same time zone as the US and the main cities in North America are within a six-hour flight-time radius. The international division of work is a reality and Mexico offers a distinctive platform because of its geographic location, human resources quality, solid economic and logistics foundations and a sound legal and administrative framework friendly to foreign trade and investment.

Success Stories of Chinese Investment in Mexico

In the last ten years, several Chinese companies have made successful investments in Mexico, paving the way for more companies to explore the opportunities that lay ahead in the second-largest economy in Latin America. Among the top Chinese investors in Mexico is Huawei. The world's leading producer of telecommunications equipment has been in Mexico since 2001, where it has established its regional headquarters for Latin America. Huawei sells its products to the major telecommunication carriers in Mexico and in 2009 arranged for USD 1.2 billion in credit from the China Development Bank to increase its supply to Telcel and Telmex, large telecommunications firms in Mexico. Lenovo landed in Mexico in 2007 with an investment of USD 20 million to establish a PC factory in Monterrey. The factory has a production capacity of 5 million units a year that are sold in the local market, but are also exported to the US and Latin America. Golden Dragon Copper Tube is the leading manufacturer of precision copper pipes in the world. It established a factory in the state of Coahuila in 2007, investing around 100 USD million and creating hundreds of jobs. Chinese companies have also established operations in the mining and consumer products industries. In 2008, Jinchuan Group Ltd. acquired the Canadian company Tyler Resources Inc. for 214 million Canadian dollars, including the rights to exploit the Bauerachi copper and molybdenum project in Chihuahua, around 130 km from the Pacific coast of Mexico in Sinaloa State. Hubei Tobacco established a joint venture with a local partner in Quintana Roo state in 2008 to manufacture cigarettes using Mexican tobacco leaves under Chinese brands, both for the local market and to export to Central America. How do you see China - Latin American relations going d h l forward and how will Mexico play a role in Chinas growing interest in the region? Relations between Latin America and China are at their best level in history. I think the links between the region and China will increase and diversify in the future, benefiting both sides in terms of trade, investment and tourism, but also in the realms of culture, science and technology cooperation, among others. Mexico is one of the largest economies in Latin America; it enjoys the most strategic geographical position and is the most globalised country in the region. The bilateral relationship with China was upgraded to the Strategic Partnership level in 2003 and Mexico will continue to be one of the main regional partners for China due to its intrinsic weight in terms of economy, culture and politics and as a bridge to other geostrategic regions: North, Central and South America, and the Caribbean.

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Regional Focus: CHINA-RUSSIA

While bilateral trade between China and Russia maintained steady growth in the first quarter of 2011, the two countries are still locked in long-running negotiations on gas prices and oil supplies. With the highly anticipated natural gas 'super deal' put on hold, the major event of the year in the China-Russia space could be in the banking sector where China Investment Corporation is set to participate in the SPO of Russias largest bank. China-Russia Briefing: Hu Jintao state visit to Russia; Direct currency trading; Open door for investment from Hong Kong in Eastern Siberia
On 15-18 June, Chinese President Hu Jintao undertook a state visit to Russia. Included in a package of other political and economic deals signed during the visit was a power generation deal and an investment cooperation deal between China Eximbank and Russias En+ Group. A main topic for discussion during the state visit was the terms of pending natural gas supplies from Russia to China, although agreement has still not been reached due to differing price expectations on the two sides In June, the central Bank of Russia and the Peoples Bank of China signed an agreement on foreign trade payments using their national currencies. In accordance with this agreement, Russian and Chinese companies will be able to settle accounts using both freely convertible and national currencies. Trade partners will have the right to choose the currency independently, by mutual consent On 17 April, Russian President Medvedev paid his first visit to Hong Kong and met with Donald Tsang, Chief Executive and President of the Executive Council of the Government of Hong Kong. The main topic of the meeting was to highlight opportunities for investment from Hong Kong in Eastern Siberia and Russia's Far East, following the cross-border cooperation programme for these regions and Chinas North-East, which was announced two years ago

China-Russia Trade
Total Trade Bilateral trade between China and Russia increased substantially in H1 2011, reaching USD 35.8 bn, an increase of 40% y-o-y (see chart to the right) China Imports from Russia Chinas imports from Russia in June 2011 amounted to USD 3.17 bn, up 39.6% y-o-y Chinas imports from Russia for H1 2011 amounted to USD 18.6 bn, an increase of 33.7% y-o-y China Exports to Russia China's exports to Russia in June 2011 amounted to USD 3.54 bn, an increase of 42.7% y-o-y China's exports to Russia for H1 2011 amounted to USD 17.2 bn, an increase of 45.7% y-o-y China-Russia Monthly Trade (USD bn, Jan 2010-Jun 2011)
2010 7 6 5 4 3 2 1 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: China National Bureau of Statistics

2011

China-Russia Investment
Major Recent Deals In March, DST Global, a Russian investment group focusing on internet projects, joined a group of investors (including US retailer Walmart) putting hundreds of millions of US dollars into Chinas internet retailer 360buy.com. The exact amount of the investment was not disclosed In May, Israeli businessman Lev Levaev sold 18% of the Russian-Angolan mining company Katoka to China Sonangol, a joint venture between China International Fund (CIF) and Sonangol, an Angolan oil and gas parastatal. As a result, control of one of Africas largest diamond fields was transferred to a China-Angolan alliance. Lev Levaev had bought Katokas stock of shares from ALROSA, Russia's largest diamond producer, for USD 20 mn in the late 1990s, when ALROSA was suffering financially due to the absence of export quotas In June, Chinese car glass producer Fuyao Glass signed an agreement with the local government of the Kaluga region in Russia to build a plant with capacity to manufacture three million car glass sets annually. According to the agreement, Fuyao Glass will invest USD 200 million in the project, and the region will provide utility networks and other infrastructure. The launch of the first phase of the

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plant is scheduled for 1 December 2012, and the plant is expected to reach full capacity in February 2013 In June, during the St. Petersburg International Economic Forum, Russias largest private power generation company, Eurosibenergo, and Chinas largest public hydropower corporation, China Yangtze Power, signed an agreement for the construction of three power stations in Eastern Siberia. These stations include Lenskaya a thermal power plant in the Irkutsk region (capacity of 1200 MW), NizhneAngarskaya hydro power plant in the Krasnoyarsk region (capacity of 600-1200 MW) and the Transsiberian hydro power plant in the Zabaikalsk region (capacity of 400-900 MW). A joint venture, YES Energo, will be set up to implement these projects

In June, China Investment Corporation (CIC) received an offer to participate in the second public offering (SPO) of Russias largest bank, Sberbank. The offer came from one of the investments banks that will organise Sberbanks SPO, planned for the autumn of 2011. The Russian government plans to sell 7.6% of Sberbanks shares, and CIC may purchase 5%. Considering the market capitalisation of Sberbank, 5% may amount to about USD 3.5 bn, which will automatically make this deal the largest ever Chinese investment in the Russian finance sector. CICs strong interest in Sberbank follows CICs participation in Februarys SPO of Russias second-largest bank, VTB, when it purchased 1% of VTBs shares for USD 100 mn

China-Russia Resources Watch

More Russian iron ore exports to China; Protracted gas price negotiations; CNPCs debt repayments; Biogas construction joint venture in Russia 2011 saw a sharp y-o-y increase in Russias iron ore Russian Iron Ore Exports to China (Mn tons, 2004-10) supplies to China through one of the main routes, the 10 railway crossing point Zabaikalsk-Manzhouli. During the first six months of 2011, China imported 8,789 wagons of 8 iron ore (with total weight exceeding 500,000 tons). For the same period last year, Chinas imports through this route totalled only 4,497 wagons (with a total weight of 6 200,000) In April, Russia's Biogas EnergoStroy and China National Bioenergy Company (the largest bioenergy enterprise 4 in China, affiliated with State Grid) signed a memorandum of understanding (MOU) on the establishment of a network of biogas facilities in Russia based on waste 2 products of the local crop, livestock and utility sectors. Russian and Chinese collaborative technologies will be 0 used for complex processing of raw materials. A joint 2004 2005 2006 2007 2008 2009 2010 venture (JV) will be set up to handle the construction Source: UN Comtrade of these facilities in different regions of Russia by the autumn of 2011. The facilities will produce heat, eleccommenced with payment reductions tricity and biogas. At some point in the future these The price of natural gas supplies from Russia to China companies plan to build Russia's first large biotech plant was the main topic of discussion between President Hu producing wood fuel pellets from the waste of wood Jintao and his Russian counterpart Dmitry Medvedev harvesting and wood processing in the Samara region during the St. Petersburg International Economic Forum in the southeastern part of European Russia (SPIEF) on 16 June. Gas will be supplied via the Altai pipe By the end of May, China's oil giant China National line from Western Siberia through the western section of Petroleum Corporation (CNPC) paid debts to the Russian the Russian-Chinese border. It is planned that gas delivcompanies Transneft and Rosneft for oil supplies. CNPC eries of about 30 billion cubic metres a year will begin transferred USD 78 million to Transneft and USD 118 in 2015. However, China and Russia have yet to reach million to Rosneft. According to Transneft representative agreement on pricing, and there was little progress at Igor Demin, taking into account the amount received the SPIEF on this issue. The Chinese side wants to pay from China, CNPCs debt to Transneft declined to about USD 235 per 1,000 cubic meters, although the average USD 20 million. The amount of outstanding CNPC debt forecast for export prices of Gazprom to Europe in to Rosneft has not been disclosed. Disputes between the 2011 is USD 352 per 1,000 cubic meters. As for Russias companies arose from the fact that the parties could not initial plans to export 38 billion cubic meters of gas to agree on the tariff for pumping oil through Russia via the China along the eastern route (driving gas supplies to Eastern Siberia-Pacific Ocean (ESPO) pipeline. According 68 billion cubic metres a year and making China the to a contract signed between the parties in February largest importer of Russian gas by far), negotiations for 2009, the pumping tariff covered the whole length of this route are currently inactive. According to Gazproms the ESPO. However, the Chinese side concluded that the CEO, Alexey Miller, Russias gas monopoly currently only tariff for pumping to Skovorodino in the Amur region pursues the western route project (the starting point of the branch to China) would be 7% less. From the beginning of 2011, CNPC had unilaterally

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The Beijing Axis News: MarchSeptember 2011

Greater China and Asia
12th Asian Ferro-alloys Conference - Hong Kong, China On 28-30 March 2011, the 12th Asian Ferro-alloys Conference was held at Kowloon Shangri-La, Hong Kong. Matt Pieterse attended the event and delivered a presentation entitled The move westward and elsewhere for Asian M&A on 30 March. 7th Annual Asia Mining Congress 2011 - Singapore On 4-8 April 2011, The 7th Annual Asia Mining Congress 2011 was held at Marina Bay Sands, Singapore. Kobus van der Wath (Founder and Group Managing Director) attended the event and chaired the Africa Mining Investment Forum on 4 April. AFBG on Africa: Penetrating the South African Market Singapore On 6 April 2011, AFBG on Africa: Penetrating the South African Market, a dialogue session by the Singapore Business Federations Africa Business Group (AFBG), was held at Keppel Towers in Singapore. Kobus van der Wath was a panelist of the session entitled Perspectives from a Southern African company/businessmen. Brazil-China Seminar Attended by Brazilian President Dilma Rousseff - Beijing, China On 12 April 2011, Javier Cuat (General Manager, Beijing Axis Strategy) and Barry van Wyk (Senior Consultant) attended a bilateral trade and investment seminar at the China World Trade Centre in Beijing. The event was attended by the President of Brazil, Dilma Rousseff, as well as Chinese Vice Premier Wang Qishan. 5th CCPIT Chinese Enterprises Outbound Investment Conference - Beijing, China On 28 April 2011, the China Council for the Promotion of International Trade (CCPIT) hosted the fifth installment of its annual conference on Chinese outbound investment. Dirk Kotze (General Manager: Strategic Projects) and Haiwei Huang attended the seminar. Dirk was also invited to deliver a presentation at the event on the major trends and dynamics of Chinas drive to invest abroad, particularly focusing on implications from a Chinese perspective. Investment in Energy and Natural Resources Current Themes and Issues - Beijing, China On 24 May 2011, Javier Cuat attended and delivered a presentation entitled An Examination of Chinas Strategy for Outbound Investment in Mining and Infrastructure Sectors in Africa. International Chromium Development Association Members Meeting 2011 - Hong Kong, China On 1-3 June 2011, the International Chromium Development Association (ICDA) Members Meeting 2011 was held in Hong Kong. Matt Pieterse attended the meeting and delivered a presentation entitled The Influence of Asia on the World Economy. FutureChina Global Forum - Singapore On 11-12 July 2011, the FutureChina Global Forum 2011 was held at the Ritz-Carlton in Singapore. Kobus was invited as the panelist of a session entitled Chinese Outbound M&As: From steady growth to a tidal wave? Annual Precious Metals Meeting - Guiyang, China On 26-27 July 2011, the Annual Precious Metals Meeting was held in Guiyang, China. Haiwei Huang attended the event and delivered a presentation entitled The Development and impact of Chinese Mining Investment in Africa. 3rd Mining Investment Summit 2011 - Singapore On 27-28 July 2011, the 3rd Mining Investment Summit 2011 was held in Singapore. Kobus van der Wath delivered a presentation entitled The outlook for the Asian and global commodities market. Other events recently attended by The Beijing Axis in Greater China and Asia:
13-14 April 25-29 April BRICS Business Forum ACBC Trade and Investment Delegation to Beijing 27 April South Africa Freedom Day Celebration 29 May - 1 June 17th Coaltrans Asia 5th Annual Asia Mining Partnering Forum Mines and Money Beijing 2011 Investment Policies and Foreign Economic Market Opportunities and Risks in Asia, Africa, Latin America Sanya, China Beijing, China Beijing, China Bali, Indonesia Beijing, China Beijing, China Beijing, China

2-3 June 14-16 June 25-26 June

Africa
Africa Project Access Business Briefing - Johannesburg, South Africa On 18 May 2011, the Africa Project Access Business Briefing was held at Werksmans Attorneys in Johannesburg, South Africa. Nitesh Dullabh of the South African office attended and delivered a presentation entitled Strategic Market Entry by Chinese Companies in Africa. Zambian Mining and Energy Conference - Lusaka, Zambia On 15-17 June 2011, the 1st Zambian International Mining and Energy Conference (ZIMEC) was held in Lusaka, Zambia. Nitesh Dullabh attended the event and delivered a presentation entitled Chinas Importance to the African Resources Sector on June 15. 10th Coaltrans South Africa - Johannesburg, South Africa On 21-22 June 2011, Coaltrans South Africa was held at the Hilton Hotel Sandton in Johannesburg, South Africa. Kobus van der Wath attended the event and delivered a presen-

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tation entitled The Role and Importance of Asia for African Coal. Africa Mining Congress 2011 - Johannesburg, South Africa On 19-22 July 2011, the Africa Mining Congress 2011 was held at the Sandton Convention Centre in Johannesburg, South Africa. Kobus van der Wath attended the event and delivered a presentation entitled China as a Driver of the African Resources Sector on 20 July. Other events recently attended by The Beijing Axis in Africa:
1-3 March 25 March 18-20 May 7-8 June 26-28 June Energy Indaba 2011 CIPS Gauteng Regional Conference IMEXPO SADC China Trade Fair & Investment Forum Africa Iron Ore 33rd Annual SAPICS Conference & Exhibition for Supply Chain, Logistics and Operations Management Professionals Impala Platinum Holdings Limited CEO - David Brown (GIBS Forum) Mozambique Coal The India Africa Business Network Launch American Chamber of Commerce Breakfast SA-Angola: Trade and Investment Forum Johannesburg, South Africa Johannesburg, South Africa Johannesburg, South Africa Cape Town, South Africa Johannesburg, South Africa

Xstract Lunch Time Technical Series - Brisbane On 16 August 2011, Xstract held one of its Lunch Time Technical Seminars in Brisbane, Australia. Kobus van der Wath delivered a presentation entitled The Why, What & How of China Procurement. Other events recently attended by The Beijing Axis in Australia:
5 July 1-3 August 16 August 22 August 31 August - 2 September 22-23 August 30 August Australia China Business Council Diggers & Dealers Sydney Kalgoorlie

CIPSA Strategic Procurement Forum Perth 7th Annual Coaltrans Australia Brisbane Africa Down Under Conference Perth Coaltrans Australia China Procurement Roundtable (Organised by The Beijing Axis) Brisbane Perth

Europe and Americas

Structured Commodity Finance Conference 2011 - London, UK On 13-14 April 2011, the Structured Commodity Finance Conference 2011 was held at the Crowne Plaza Hotel in London, UK. Matt Pieterse attended the event and delivered a presentation entitled Chinas Impact on Global Commodity Markets and Increasing International Investment on April 13. Texel Breakfast Briefing - London, UK On 16 May 2011, Matt Pieterse attended and delivered a presentation entitled China Moving Westwards and How Europe Stands to Benefit. World Mining Investment Congress - London, UK On 17-19 May 2011, the World Mining Investment Congress was held at the Royal Garden Hotel in London, UK. Matt Pieterse attended the event and delivered a presentation on 18 May. HARBOR Annual Aluminium Outlook Conference - Chicago, US On 20-22 June 2011, the HARBOR Aluminium Conference was held at the Swissotel in Chicago, US. Lilian Luca delivered a presentation at the event entitled Chinas Economic Growth and its Expected Effects on Aluminium Supply and Demand on June 21, and another presentation entitled CHINA SOURCING: Perspectives on Why, What and How on June 22.

28 June

Johannesburg, South Africa Maputo, Mozambique Johannesburg, South Africa Johannesburg, South Africa Johannesburg, South Africa

5-6 July 18 July 1 August 22 August

Australia
SA Boardroom Lunch - Perth On 27 May 2011, Kobus van der Wath attended the event and delivered a presentation entitled China and its role in the Australian Mining industry. Financial Review Mining Investment Conference 2011 Sydney On 23-24 June 2011, this conference was held at the Amora Hotel Jamison in Sydney, Australia. Javier Cuat attended the event and delivered a presentation entitled Chinas Rising Outward Investment and How the West Can Benefit. AMEC (Association of Mining and Exploration Companies) Convention 2011 - Perth On 28-30 June 2011, the AMEC Convention 2011 was held at Burswood Convention Centre in Perth, Australia. Kobus van der Wath delivered a presentation entitled China and its Role in the Australian Mining Industry on June 28. Global Mining Investors n' Explorers Show - Sydney On 4-6 July 2011, the Global Mining Investment n Explorers Show was held at the Hilton Hotel in Sydney, Australia. Kobus van der Wath delivered a presentation entitled China Outbound Investment Strategy on 5 July.

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Events

Upcoming Events
The Beijing Axis can assist delegates who wish to attend events in China as well as globally. The Beijing Axis service set includes research, interpretation, negotiation and travel logistics. For more information, please send an email to info@thebeijingaxis.com, or for contact details see The Beijing Axis corporate profile on the back page.

Date
15-16 September 2011

Event
4th South African Ferro-alloys Conference

Location
Johannesburg

Local and international delegates will be in attendance at this important industry forum for a country which is vital to the ferro-alloys market. Understand how your demand can be met and build lasting relationships with these key suppliers. 10-12 October 2011 Mines and Money Australia 2011 Sydney

Mines and Money Australia 2011 Conference and Exhibition will draw on the global investor database of its sister shows to match Australian mines with both domestic and international capital. 12-13 October 2011 The 7th CIPSA Annual Conference Melbourne

With 10 plenary sessions, 25 seminars and 6 pre-conference half-day workshops, the CIPSA Annual Conference is the leading procurement event in the region. 20 October 2011 CHINAAFRICA Business Forum 2011 Johannesburg

This one day forum will bring together key business leaders, industry specialists, project managers and others to explore the current dynamic of the China-Africa relationship. 25-28 October 2011 2011 China Investment Summit London

This is the only conference of its kind bringing together European and institutional investors, sovereign wealth funds, banks, fund managers, regulators and all key stakeholders to access Chinas investment opportunities. 6-8 November 2011 13th Annual CHINA MINING Congress & Expo Tianjin

The theme of this years Congress & Expo is 'The World and China in Mining Consolidation: Co-operation, Responsibility and Development.' Over the years CHINA MINING has evolved into one of the most influential mineral exploration/extraction trade events in the world, and has come to play a critical role in bringing together top policy makers and leading industry figures. 8-9 November 2011 3rd China Overseas Investment Fair Beijing

This fair is the first authoritative and professional exhibition on China's overseas investment. 22-23 November 2011 Coaltrans Mozambique Mozambique

Coaltrans Mozambique provides a forum to discuss key developments and opportunities in both Mozambique and Southern Africa as a whole. 6-7 December 2011 Mines and Money London London

Mines and Money provides a channel for the global mining industry to cultivate long term partnerships with Londons mining stakeholders and investors, and brings together some of the most influential decision makers within mining companies, the investment community, governments and professional services.

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Previous Editions of The China Analyst

March 2011
Regulars Macroeconomic Monitor China Facts & Figures China Trade Roundup China Sourcing Strategy China Capital Mapping China Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia Features China in 2030: Outlines of a Chinese Future China appears to have an awe-inspiring future ahead of it, and its economy its set to attain unparalleled dimensions, if the future turns out like we expect. China's Construction Industry: Strategic Options for Foreign Players Entering the Chinese construction industry is a challenging prospect for foreign firms, yet opportunities still exist.

August 2010
Regulars Macroeconomic Monitor China Facts & Figures China Trade Roundup China Sourcing Strategy China Capital Mapping China Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia Features The China Factor: Supplying Chinas Phenomenal Demand for Resources How did the China Factor become a singular driving force of global demand for natural resources in the 2000s? Road to 2020: Nuclears Rising Contribution to Chinas Energy Needs Nuclear power has entered a new era in China as China targets 2020 for radically ramping up nuclear production.

May 2010
Regulars Macroeconomic Monitor China Facts & Figures China Trade Roundup China Sourcing Strategy China Capital Mapping China Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia Features Upstart: Chinas Emergence in Science and Technology After coming of age in Chinas domestic markets, Chinese are now replicating their domestic success in global markets. Building by Design: How China Develops the Developing World Chinese contractors and design firms have gone international and are shaping landscapes where its needed most: the developing world.

January 2010
Regulars Macroeconomic Monitor China Facts & Figures China Sourcing Strategy China Sourcing Blog Highlights China Trade Roundup China Capital Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia Features Fighting for Trade: China and the Threat of Protectionism Chinas leaders are worried about protectionism, yet what is the real extent of the threat to China? Rare Earths: Chinas Contribution to Modern Technology A closer look at the history of the rare earths industry in China, the controversies surrounding it, and some upcoming trends to watch.

Other Recent Publications by The Beijing Axis

An Examination of Chinas Strategy for Outbound Investment in Mining and Infrastructure Sectors in Africa Investment in Energy and Natural Resources May 2011 The Role and Importance of Asia for African Coal 10th Coaltrans South Africa a June 2011 China Sourcing: Perspectives on Why, What and How HARBOR Annual Aluminium Outlook Conference June 2011 China as a Driver of the African Resources Sector Africa Mining Congress July 2011

China and its Role in the Australian Mining Industry ry Association of Mining and Exploration Companies Convention June 2011

The outlook for the Asian and global commodities market 3rd Mining Investment Summit 2011 July 2011

To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com.
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This document is issued by The Beijing Axis Ltd. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information presented here has been compiled from sources believed to be reliable. While every effort has been made ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. The Beijing Axis, and/or a connected company may have a position in any of the investments mentioned in this document. All readers are advised to make their own independent judgement with respect to any matter contained in this document. Copyright notice: Copyright of all materials, text, articles and information contained herein resides in and may only be reproduced with permission of an authorised signatory of The Beijing Axis. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests in and shall remain copyright of The Beijing Axis and should not be reproduced or used except for business purposes on behalf of The Beijing Axis or save with the express prior written consent of an authorised signatory of The Beijing Axis. All rights reserved. The Beijing Axis 2011.

The Beijing Axis

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The Beijing Axis Group is a China-focused international advisory firm operating in four principal areas: Commodities, Capital, Procurement and Strategy. We work across various industries, but our core focus is on the mining, resources, industrial and engineering sectors. With offices in Beijing, Singapore, Perth, Moscow, Johannesburg and London, we support international firms as they act in unfamiliar territory in China and Chinese firms as they venture out and go global. We are committed to safety and sustainability, and emphasise actions and transactions. The Group is organised along four synergistic cross-border business units:

Beijing Axis Commodities

Beijing Axis Commodities supports commodity producers with their international marketing efforts and the structuring of off-take agreements, and assists commodity consumers with their procurement efforts in securing supply.

Beijing Axis Capital

Beijing Axis Capital provides independent corporate finance advisory and transaction origination services. We have a specialist China-specific approach with extensive international and Africa-specific knowledge and experience.

Beijing Axis Procurement

Beijing Axis Procurement is a China-focused global procurement house and provides a comprehensive range of services across the supply chain.

Beijing Axis Strategy

Beijing Axis Strategy provides management consulting services to CEOs and senior executives in the areas of strategy formulation and strategy implementation.

Contact Information
Beijing, China +86 10 6440 2106, +86 10 6440 2672 (fax)

Beijing Axis Commodities Beijing Axis Capital

Cheryl Tang MD, Beijing Axis Commodities cheryl@thebeijingaxis.com Matt Pieterse MD, Beijing Axis Capital matt@thebeijingaxis.com

Beijing Axis Procurement Beijing Axis Strategy

Lilian Luca MD, Beijing Axis Procurement luca@thebeijingaxis.com Javier Cuat GM, Beijing Axis Strategy javiercunat@thebeijingaxis.com

Johannesburg, South Africa

Dirk Kotze Director; GM, Africa dirk@thebeijingaxis.com +27 (0)11 201 2453 +27 (0)11 201 2508 (fax)

Moscow, Russia
Lilian Luca MD, Beijing Axis Procurement luca@thebeijingaxis.com

Perth, Australia
Doug Horak Business Development Manager doughorak@thebeijingaxis.com

Latin America Desk

Javier Cuat (in Beijing) GM, Beijing Axis Strategy javiercunat@thebeijingaxis.com

www.thebeijingaxis.com