Article

Chinese Market: composition and characteristics

    By Rodolfo Jardón

    Editor

The ambition of every company: to conquer the Chinese market

China has a huge market, both to trade with and to invest in. The figures of the balance of payments speak for themselves: imports: USD 1,817 billion. Exports: USD 2,050 billion. It is the second largest economy by size, with a per capita income of USD 9161.97. In this article we also review the main characteristics of Chinese consumers, as diverse and numerous in the country itself.

           

      China is the world's most populous country, with approximately 1.300 million inhabitants. This means that just for the sheer number of potential customers is ideal for developing export strategies to this country. Since 1979, the rural population decreased from 71% to 64% and the urban rose from 29% to 36%, in the last decades. The population is primarily found in the east, on the coast of the south and eastern China seas. The Sichuan province is the most populated and is inhabited by more than 100 million people, in an area equivalent to that of Spain. The average density in Eastern China is 300 inhabitants per square kilometer, and in Western China, the figure is 40. These figures tell the story of a migratory process that began with the market reforms. The current policy seeks to bring investment into the country, with the aim of obtaining a more harmonious development.

            Most of the population inhabits rural areas, due to the predominance of agriculture as the main source of livelihood. However, the industry hyper thrust led to a very fast growth of many densely populated cities. China is a unitary multi-ethnic country with 56 ethnic groups in total. Among them, the Han is the largest and represents 92% of the entire population, while the other 55 reach only 8%, and constitute ethnic minorities.         

            China's population growth is fairly quick. According to statistics, in 1949 China's population was 540 million. From the 70s on, the State has been implementing the family planning policy consisting of "good parenting and healthy procreation", reducing the birth rate from 34.11 per thousand in 1969 to 16.57 per thousand in 1997, and the natural growth rate from 26.08 per thousand to 10.06 per thousand. This family planning is known as the one-child policy. In accordance with the natural growth rate of 1970-1997, it is estimated that over 20 years of implementation of this planning, and because of it, China had 300 million inhabitants less.

            Among the 55 ethnic minorities, those who exceed or are close to 5 million are the Zhuang, Manchu, Hui, the Yi, Miao, Uighur, the Tujia, Tibetans and Mongols. The Zhuang population exceeds over 15 million people, being the largest ethnic minority.

            These are the most relevant figures that can provide a proper perspective of what is spoken or written, when referring to the Chinese market.

• China is the second largest economy with a GDP, measured in current prices in USD (U.S. dollars) of 8,277,040 million. Its GDP, measured according to World Bank standards in Purchasing Power Parity (PPP, according to its acronym in English) is $ 12,405,670 million, according to the latest data available.
•  Its GDP per capita is USD 9161.97
• Its foreign trade throws these figures. Imports: USD 1,817 billion. Exports: USD 2,050 billion
• Its main trading partners are the United States, South Korea and Japan. Behind are the European Union and Latin America, thus showing tremendous potential for growth in trade with the Asian giant.
• Its economic structure is as follows: Agriculture, 10.10% of GDP. Industry, 45.3% of GDP. Services, 44.6 of GDP.

Data Source: EW Economic Statistics Database.

Data Source: www.tradingeconomics.com

                 In a very enlightening comparison, we can say that China is like the European Union, for its geographical diversity and different levels of demographic and socioeconomic variables. Hence, the Chinese market segmentation presents many shades to elaborate a successful entry strategy to its markets. Chinese Market segmentation can be done by region or province, by income and wealth of its inhabitants, also by its administrative divisions. Performing this research can reveal many characteristics of the Chinese consumer.

            An extensive field research reveals key aspects of the Chinese consumer characteristics:

• Chinese consumers have not very clear and distinct perceptions about Western companies, their brands and products. This fact implies the existence of opportunities but also challenges for Western companies wishing to export or invest in China. The image of a company, or brand, has more influence in the purchasing choices of male individuals than in female ones.
• The purchase criteria is guided more by getting quality for the money spent, than by the image of the company or product that it is acquired.
• The Chinese consumer is eager to experiment with new brands, products and services. This finding is a strong incentive for SME companies wishing to enter or invest in the Chinese market.
• Chinese consumers are unwilling to pay higher prices for abstract added value to products. Within this category, we can mention as an example, certification for organic food products or certification for low carbon and greenhouse gases in the manufacture and marketing of a product.

         (Source Deloitte)

            To conquer the consumer is the goal of all business strategies that are projected to the Far East. There is nothing amazing about it: the developed economies have made crisis their usual mode of operation and the Chinese government's official policy, is to encourage domestic consumption, as an engine of growth to replace the anemic exports to markets in Europe and the United States. 

News

IPO changes 'will help investors'

Steps taken by the China Securities Regulatory Commission (CSRC) 

The number of shares sold by existing shareholders should be less than the number offered to investors who will hold them for at least 12 months, the CSRC said.

"The system of share transfers from existing shareholders has some deficiencies. The measures will protect the interests of new shareholders," said Hong Hao, managing director and chief strategist at BOCOM International Holdings Co Ltd.

"The commission took these steps to optimize the transfer system, which can combine the 'invisible hand' of the market with the 'visible' hand of the regulator," said Liu Jipeng, a professor at the China University of Political Science and Law.

The CSRC released a reform plan covering IPOs at the end of last November that allows some shares from existing shareholders to be transferred, raising the proportion of tradable shares in a company.

But problems have emerged in the process, such as that involving Jiangsu Aosaikang Pharmaceutical Co Ltd.

On Jan 9, it announced plans to issue 55.466 million shares at 72.99 yuan ($12.07) each, with 78.6 percent of the shares to be transferred from existing shareholders. The IPO was halted the next day.

Zhang Xiaojun, a spokesman for the CSRC, said that proportion was "too high" and not in line with the purpose of an IPO.

Another step taken by the CSRC last Friday was intended to further meet the requirement of small and medium-sized investors.

Under that rule, if the amount of shares subscribed by online investors is higher than 150 times the original online placement quota, at least 90 percent of the entire IPO should be sold online.

So far this year, 48 Chinese companies have listed on the A-share market, raising 22.4 billion yuan.

The average IPO price-earnings ratio of those companies was 29. Among these, 39 transferred shares from existing shareholders.

"The reform plan is significant for China's stock market in the long run. The measures should be refined and errors should be corrected in the implementation process," Hong said.

"But the IPO pricing should be more market-oriented," Hong added.

He said that only referring to the average industry P/E ratio doesn't fully explain a company's true value - IPO pricing should be decided by the market.

On Jan 12, the CSRC announced a rule saying that if a company's IPO P/E ratio is higher than the industry average, the company must warn retail investors of this fact and delay opening subscriptions by three weeks.

"The current IPO pricing is inflexible because there are not many listed companies in the A-share market and good ones should get high valuations," said Zhang Bo, a senior vice-president at Northeast Securities Co Ltd.

News

Sinopec Sets Timetable for Inviting Outside Investors

Fu Chengyu, chairman of state-owned oil giant China Petroleum & Chemical Corp. (Sinopec), said it will release a detailed plan on how it will invite private capital into its sales unit in June and complete fundraising in the third quarter of this year. 

Sinopec said in January that it would restructure its sales assets, estimated to be worth over 300 billion yuan, to introduce non-state investors in a pilot in which no less than 30 percent of a new sales company will be offered to outside investors. Sinopec is to set up the company on March 31 and complete a comprehensive audit on it by the end of June, Fu said. Sinopec's sales business contributes 35 percent of the company's total profits.

 Sinopec

Another oil giant, China National Petroleum Corp. (CNPC), has also promised to invite private and other non-state investors to jointly develop blocks with estimated reserves of 600 million tons of oil. The company said it would allow investors to hold up to 49 percent of the projects.

The news has excited the market because both companies have offered up their best assets for the pilots. Industry experts said Sinopec's assets in refining and sales are quite competitive, while CNPC is stronger in upstream oilfield development.

Opinion

  After the NPC: Xi Jinping’s Roadmap for China

Brookings Institution

By: Arthur R. Kroeber

Opinion | March, 2014

A year after he and his colleagues took control of China’s government, Xi Jinping has emerged as an extraordinarily powerful leader, with a clear and ambitious agenda for remaking the Chinese governance system. Economic, social and foreign policy are now on a far more clear and decisive course than they were during the drifting and unfocused last years under president Hu Jintao and premier Wen Jiabao.

Xi arguably wields more personal authority than any Chinese leader since Mao: he has subdued the fragmented fiefdoms that arose under Hu; has arrogated all key decisions to himself, unlike Jiang Zemin who delegated much economic policy power to his premier Zhu Rongji; and does not have to deal with the cabal of conservative patriarchs that often hemmed in Deng Xiaoping.

Perhaps the biggest surprise of Xi’s first year was the speed with which he consolidated his power and signaled his policy intentions. He achieved this through two big house-cleaning drives. First was an anti-corruption campaign that neutralized a powerful political enemy (former security boss Zhou Yongkang), brought to heel a powerful vested interest (state oil giant China National Petroleum Corporation, much of whose senior management was arrested) and signaled the costs of opposing his reform agenda by sweeping up 20,000 officials at all levels of government. The other was the so-called “mass line” campaign that involved party, government and military officials engaging in “self-criticism” sessions and getting marching orders from party central.

So there is no question that Xi has power. What does he intend to do with it? The Decision document that emerged last November from the Communist Party plenum made clear that his aim is comprehensive governance reform. This does not mean eroding the party’s monopoly on power; quite the reverse. The intention is to strengthen the party’s grip by improving the administrative system, clarifying the roles of the market and the state (resulting in a more market-driven economy but also in a more powerful and effective state), and permitting a wider role for citizen-led non-governmental organizations—so long as those NGOs effectively act as social-service contractors for the state and do not engage in advocacy or political mobilization.

And at the recent National People’s Congress (NPC) we got additional detail on Xi’s economic program, which is the most comprehensive structural reform agenda since the late 1990s. (Xi’s propagandists make the bolder claim that it is the most sweeping reform program since Deng’s original “reform and opening” drive of the late 1970s.) Much commentary has focused on the Plenum Decision’s emphasis on giving the market a “decisive role,” and this shift is indeed important. But Xi is not some Chinese version of Ronald Reagan or Margaret Thatcher: for him and his colleagues, the market is a tool, not an end in itself. The respective roles of state and market need to be clarified, but the state role will remain very large. Xi’s economic agenda is not just about deregulation and improving the environment for private enterprise; it is also about fixing the state-enterprise and fiscal systems so that they become more effective instruments for achieving state aims.

Xi Jingping

If Xi succeeds, the result will be a China with a more efficient economy, a better run and somewhat more transparent government—and a Communist Party with enhanced legitimacy and tighter control of all the crucial levers of power. But there are also two less rosy potential outcomes. One is that his reforms fail, and China is left with a debt ridden, slow-growing economy with an overbearing state sector and an increasingly dissatisfied population. Another is that he succeeds—but either becomes a permanent dictator himself, or establishes the belief that China only be ruled by a strongman, thereby retarding the development of a more open and participatory political system.

It’s the economy, and we’re not stupid

On the immediate economic policy questions, a gulf has opened between foreign and many non-official domestic analysts on the one hand, and the apparent stance of the government on the other. According to the prevalent outside view, China’s biggest problem is the huge increase in leverage since the 2008 global financial crisis: total non-financial credit rose from 138 percent of GDP in 2008 to 205 percent last year. Unless this spiraling leverage is brought under control, the argument goes, China risks some sort of financial crisis. To stabilize the credit/GDP ratio, annual credit growth must fall from its current rate of around 17 percent to the trend rate of nominal GDP growth, which now appears to be around 10 percent. But such a dramatic fall in credit growth must almost certainly cause a drop in real GDP growth, at least in the short run. The conclusion is therefore that if Beijing is serious about controlling leverage, it must accept significantly lower growth for at least a couple of years. If on the other hand the leaders insist on keeping economic growth at its current pace, this means they cannot be serious about controlling leverage and imposing structural reform, and a train wreck is more likely.

As far as we can tell from the agenda laid out at the Plenum and the NPC, Xi and his colleagues do not agree with this analysis. Their priorities are to restructure the state-owned enterprises (SOEs) and the fiscal system, and maintain real GDP growth at approximately its current rate of 7.5 percent. The leverage problem, by implication, can be sorted out over several years.

The argument in favor of this approach is that SOE and fiscal reform strike at the root causes of the debt build-up. Local governments have borrowed because their expenditure responsibilities exceed their assigned revenues, they have an implicit mandate to build huge amounts of urban infrastructure, and they face no accountability for the return on their investments. SOEs have borrowed because their return on capital has deteriorated sharply. Improving SOEs’ return on capital and cleaning up local government finance, should greatly reduce the demand for unproductive debt, and hence bring credit and economic growth back into alignment—eventually. In the meantime credit will flow at whatever rate permits real GDP to keep humming at 7 percent or more, meaning that leverage will continue to rise.

In other words, the government thinks the debt build-up is merely a symptom, and it intends to attack the underlying disease while letting the symptoms take care of themselves. One can feel comfortable with approach this on two conditions: first, that the government is right that the debt buildup does not itself pose an immediate threat to economic health; and second that the government is serious about tackling the structural problems.

Debt – what, me worry?

The safety of the current debt trajectory is a judgment call. On the plus side, the last several months have seen a steep decline in year-on-year credit growth, with very little apparent impact on economic activity. Growth in broad credit (including activity in the “shadow” financing sector) peaked at 23.5 percent in April 2013 and declined continuously to 17 percent in February, while GDP growth remained basically steady in both real and nominal terms. If this pattern holds, it suggests that leverage will continue to increase, but at a slower rate than in the past two years, so the runaway-train risk is reduced.

The government’s own case for the safety of the present debt situation implicitly rests on a report by the National Audit Office (NAO) in late December, which found the debt position of local governments to be poor but manageable. Total liabilities of local governments as of 30 June 2013 were found to be Rmb18 trn (US$3 trn), or approximately 31 percent of GDP; of these liabilities 40 percent were guarantees and contingencies (and thereby not an imminent risk to local finances). NAO’s estimate of consolidated public debt, including the central government, came in at about 53 percent of GDP, well below the levels of public borrowing in most OECD countries.

Another basis for the sanguine view on debt was an extensive national balance-sheet analysis published in December by the Chinese Academy of Social Sciences (CASS), the party’s main think-tank. CASS’s calculation methods differ from NAO’s, so the two sets of figures are not directly comparable. CASS found that total government debt was 73 percent of GDP in 2011, and that broad public-sector liabilities (including the debt of SOEs and policy banks) were 151 percent of GDP. This sounds scary until you inspect the asset side of the balance sheet, which comes in at a more cheerful 350 percent. This figure is almost certainly too rosy: nearly three-quarters of it represents the land holdings of local governments and SOE assets, whose reported values are probably well above their true market values. But even discounting these values substantially, it is still possible to conclude that the public sector’s assets comfortably cover its liabilities.

Whether one agrees with these estimates or not, it is clear that policy makers accept the central conclusion that the nation’s debt problem is serious but manageable, and that direct efforts to deleverage immediately are not warranted. The important question then becomes whether Beijing’s efforts to tackle the underlying structural problems are bearing fruit.

Rolling back the SOE tide

So what are those efforts? The agenda on State Owned Enterprise (SOE) reform is now clear. SOEs will be compelled to focus on improving their return on capital, rather than expanding their assets; private capital will be permitted to enter previously restricted sectors; direct private investment in SOEs and in state-led investment projects will be encouraged; and most likely (although government officials have been coy on this point), a swathe of underperforming locally-controlled SOEs in non-strategic sectors will be privatized or forced into bankruptcy.

In essence, this revives the zhuada fangxiao (grasp the big, release the small) SOE reform strategy of the late 1990s. The idea was that the state would retain control, and try to improve the operational efficiency, of a relatively small number of very large enterprises in strategic sectors such as railways, aviation, telecoms, power and petrochemicals, while privatizing most activity in competitive consumer goods and services sectors. This strategy was successful: in the decade ending in 2008, the number of SOEs fell from 260,000 to 110,000, the private sector’s share of national fixed investment rose from less than a quarter to 58 percent, the profitability and return on assets of state firms rose dramatically and came close to matching the returns in private firms, and the proportion of SOE assets in “strategic” sectors rose to an all-time high of 62 percent.

Thanks to the Hu/Wen leadership’s lack of enthusiasm for state sector reform, and their mandate that state firms support the massive 2009 economic stimulus, some of these gains have been reversed. Crucially, the return on assets in SOEs plummeted to less than half the private-sector average, and state firms began to re-colonize sectors from which they had previously retreated: by 2011, half of SOE assets were in these non-strategic sectors.

Now the reformers are back in charge and aim to complete the zhuada fangxiao objective. This does not mean eliminating the state sector, or privatizing the core centrally-owned firms on the economy’s commanding heights. But it does mean a determined push to shed non-core SOEs and assets, abandon consumer-facing sectors in favor of private firms, and improve the operational efficiency of the remaining SOES. The headline efforts in this direction so far have been an announcement by the Guangdong provincial government that it aims to move 80 percent of provincial SOEs to a mixed-ownership structure, with no predetermined minimum state shareholding; and an announcement by petrochemicals giant Sinopec that it will seek private investment for an up to 30 percent share of its downstream gasoline and diesel distribution operations.

Funding the unfunded mandates

SOE reform was a surprisingly strong component of the Third Plenum decision; fiscal reform took center stage in the recent NPC session. China’s central fiscal problem is unfunded mandates for local governments. Localities control less than half of revenues but are responsible for 85 percent of government expenditure. In theory, the gap is supposed to be bridged by transfers from the central government, but in practice the transfers often do not match up well with localities’ actual needs. Not surprisingly, they respond to this structural deficit by resorting to a variety of off-budget funding schemes, a lot of which involve grabbing land and selling it to developers at a big markup.

A mismatch between local expenditure and revenue was a deliberate feature of the landmark 1994 tax reform (in whose design finance minister Lou Jiwei was involved as a junior official). But until the early 2000s, localities’ expenditure share was roughly stable at around two-thirds of the total; unfunded mandates and chronic deficits have grown dramatically in the past decade.

The centerpiece of Lou’s fiscal reform strategy is a recentralization of expenditure responsibility and a more flexible transfer system, reducing incentives for local-government rapacity. But in his budget speech he outlined a host of other detailed reforms, whose combined effect would be curb over-investment in real estate and heavy industry, permit fiscal policy to become more countercyclical and increase budget accountability. The main items include:

• Revenue estimates “are now seen as projections instead of tasks to accomplish.” This aims to discourage the current practice of trying to increase tax collections during economic downturns.
• Adoption of a three-year budget cycle and accrual accounting.
• Increase local government borrowing authority (from a small base), via provincial and municipal bonds.
• Make budgets at both the central and local level more open and transparent.
• Clean up the maze of local government tax breaks.
• Impose the long-delayed tax on property values, establish an environmental protection tax and hike the resource tax on coal.

Good diagnosis, but will the cure cause more harm?

All in all the reform agenda is a strong one: its diagnosis of China’s economic ills is compelling, and the proposed cures seems sensible. There are three concerns. First, there is the worry that the government has underestimated the financial risks of the burgeoning debt burden and a rapidly-changing financial system. The only clear promise of stronger financial regulation so far is Lou’s statement that a deposit insurance system will be launched later this year. This would reduce moral hazard by clarifying for investors which financial assets are guaranteed and which are risky. But more action to cut debt and restrain the “shadow banking” sector may be needed.

Second, it is possible that reforms may be thwarted by powerful bureaucratic and business interests: some reforms (like the property tax) have been proposed in the past but gone nowhere. On the whole, Xi’s success at whipping officialdom into line by the anti-corruption and mass line campaigns suggests he will be more effective than his predecessor, but there is no guarantee. Finally, there is the worry that Xi’s program succeeds, and validates highly centralized and authoritarian style of governance that could harm China’s long-term prospects for development into a more open and liberal society.

Opinion

The Sino-Russian relationship is strengthening in a globalized world

By Anna Novikova

Ph.D in economic theory, specialized in geopolitical studies and energy sector

The recent financial and economic crisis resulted in a profound shift of the world order. The world economic centers are multiple now. The recent economic growth and the gain of political power of the two of the most important emerging economies (China and Russia) is discussed in this essay on the example of their energy sectors. The energetic collaboration and the strengthening bilateral relationship are analyzed. 

            It often happens that when a geopolitical or economic center goes through rough times or a crisis, the periphery tends to maintain the fast pace of its development. This was the reason why we have witnessed the most impressive growth of the last decade in four of the biggest emerging economies: Brazil, Russia, India and China (acronymed into the BRICs by Goldman Sachs in 2001). These economies have grown in different ways, and for different reasons, but their economic might, has influenced the overall geopolitical picture, destabilizing the American hegemony in economic terms.

             

            China and Russia had not always had a linear relationship, until it was significantly improved in late 1980s by Mikhail Gorbachev. In 1996, the two sides signed agreements to establish stronger economic ties and to develop common political grounds. The two countries have been developing their relationship ever since, and are eager to benefit from each other’s economic might and political power to hold influence on the world stage. A welcome reduction in world tensions, and a new partnership that may even stick.

            Bilateral economic connections based on the geo-economic platform reveal themselves to be more profound, more effective than a simple exchange of goods. This is why certain Russian regions, like Siberia, the Urals and the Far-Eastern regions initiate the geo-economic way of developing their extra-economic connections by initiating co-operation and establishing joint ventures with the Asian countries. Thus, the economic boundaries now shift the existing geographic frontiers and infiltrate them.

                                                               

            Until recently, the main focus of Russian hydrocarbon exports was Europe. The Russian oil supply to Western countries has been decreasing throughout the past year and in July of 2013 Russian oil exports fell to their lowest level in the past ten years - 2,1 million barrels/day. According to some experts, the growing volumes of the Russian oil refining industry might also cause decreasing oil exports. Some of the EU member states have been very aggressive in lobbying of the so-called “third energy package” (an attempt to dictate prices on imported gas). The European Union is gradually losing its status of the monopolistic consumer of the Russian energy resources, remaining however its most important economic partner. The Russian export policy and its reorientation towards the Asian-Pacific market were caused by the change of EU energetic policy and its recent focus on the liberalization of the market.

            According to China National Petroleum Corporation (CNPC), in 2014 Chinese oil demand is going to grow by 4,8% and thus reach 514 million tones. China’s own oil production will be 210 million tones. Russian imports, in the overall oil consumption, will reach 59%. Among other large exporters to the Chinese market, there are Iran, Central Asian countries (Kazakhstan, Turkmenistan, Uzbekistan) and Venezuela. 

            “Rosneft”, a Russian state-owned oil company, is planning to double its exports to China from 15 million tons to 30 million by 2015. According to the Financial Times, Russian oil exports to China now total about 500,000 barrels a day. The Russian state-controlled “Transneft” has recently put into operation the second line of the oil pipeline “Eastern Siberia – Pacific Ocean” (ESPO). The second line, 2000 km long, connects Skovorodino in the Amur region and a special sea oil port Kozmino in the Primorye region.  Previously the oil exports were transported by railway. The power capacity of the “ESPO-2” is 30 million tons, with a planned increase to 80 million by 2020. The construction of the second ESPO line started immediately after the inauguration of the first in December2009/January 2010. The export of Russian oil to China is fixed by a 20 year contract with annual capacity of 15 million.  Russian "Rosneft" has invited CNPC to discuss a potential increase in oil supplies via the Atasu-Alashankou section of the Kazakhstan-China pipeline, linking Atasu in Central Kazakhstan to Alashankou (Alataw Shankou) in China. 

          

Data source: BP (2011)

            According to the Russian “Rosneft”, the biggest ESPO importers in the East are Japan and China, between them accounting for 65% of the overall ESPO export, in the first half of 2013. The Russian vice-premier Arkady Dvorkovich stated, that “Rosneft” is planning to increase its export to China by 9 million tons a year, to realize a new project of a refinery in Tianjin. An agreement was signed in 2010 as part of the Vostok Petrochemicals joint venture (49% Rosneft, 51% CNPC) on preparation of a feasibility study for the construction of an oil refinery at Tianjin, in China. The new refinery will be able to process 13 mln tones (95 mln barrels) of oil, of which 9 mln tones will be from Russia. Under the agreements achieved between the two companies, the refinery should be commissioned no later than in the final months of 2020. Target markets are Northern China and regions of the country’s Central Plateau, including Beijing, Tianjin, Hebei province, Changzhi, Jinan and Shandong province, as well as the Eastern Chinese seaboard. The major source of oil exported to China remains Vankor field in the Krasnoyarsky Region, Eastern Siberia. The Vankor oil and gas field (operated by "Rosneft", through its subsidiary "Vankorneft") is the biggest field to have been discovered and brought into production in Russia in the last 25 years. The proven hydrocarbon reserves of the Vankor are 1.603 mln boe.

            The Russian gas sector has been going through rough times, which is mostly due to the fast growth of shale gas production. Both North and South America are having a shale boom; and some European countries, such as Poland and Germany, are starting their own shale drilling, which enlarges the market, making gas more plentiful. This fact dramatically impacts on the demand for Russian gas and its state-owned giant, “Gazprom” (which, according to The Economist, produces 75% of Russia’s gas). Experts are hopeful that the shale boom will limit “Gazprom” and its still limitless power on the European gas market, thus cutting its prices. Europe is still one of the biggest importers of “Gazprom’s” gas and is the source of 40% of its revenues. The European Commission criticized the company’s dominant position on the European market and launched an antitrust probe, to diminish its power in the region by introducing a new liberalization policy. Therefore, the market  should be open to more players and further growth; and financing of renewable resources is encouraged.

            In light of all these facts and considering the overall situation and new tendencies on the European market, the best strategy for “Gazprom” would be to move its exports to Asia and to China in particular. The possible revenues would be much more significant, compared to those in Europe.

         

            In Turkmenistan, already China’s largest foreign supplier of natural gas, China’s president, Xi Jinping, inaugurated production at the world’s second-biggest gasfield, Galkynysh. This gasfield’s production will help triple Chinese imports from Turkmenistan. In Kazakhstan China is investing $30 billion in oil production in Kashagan, the world’s largest oil discovery in recent decades. In Uzbekistan, Chinese president, Mr. Xi, concluded $15 billion deals in oil, gas and uranium fields. Although China is the biggest trading partner of four of Central Asia’s five countries and is becoming more  present in the region, the Russian presence is still overwhelming. China’s focus lies in obtaining admittance to hydrocarbon and mineral fields worldwide to satisfy its growing energetic consumption, so China needs to wield some political influence to ensure that goal. 

           

  

Data Source: China Customs, 2011.

            In spite of the growing role of alternative and renewable energy sources in the world energy balance, hydrocarbons are going to remain principle energy sources in the foreseeable future. Among other regions of common interest between Russia and China, the Central Asian countries and the Arctic region have become the two priorities, which now share first place in the geo-economic priorities of both countries.

            The Arctic strategy is being developed by 30-40 experts of some of the most important institutes and scientific centers in China (such as Polar Law & Politics Research Institute, Center for Maritime & Polar Region Studies and Polar Strategic Studies Division). Presently, China is forcing the possibility of becoming a part of the Arctic Union, which in the long run will enable it to have more control over the Russian hydrocarbons export market. Agreements on cooperation in the Arctic zone were already achieved with Denmark and Iceland. The Sino-Norwegian partnership will improve in the foreseeable future. The focus of China’s interests in the Arctic zone is thought to be purely economic, which explains the great interest shown by many arctic nations towards the possible collaboration. The Arctic countries do not seem to be intimidated by the Chinese political power  that the country might gain in the region. 

            China’s political intentions coincide with recent tendencies in world economic affairs. The 21st century is going to become a century of multiple political and economic centers and further economic globalization. There has been a significant shift in economic relations, which are no longer linear but complete, assuming new shapes and new understandings based on competitiveness. The world economy is becoming a multi-step, multilayered structure, where both Russia and China are considered among the most important economic forces, which are advancing progress.

Article

State-Owned Enterprises Slowly Letting Go

From Shanghai to Guangdong, private investors will be welcomed under a new phase of SOE reform. This is in essence a management transformation. Remains to be seen how capital will be managed, defined and changed. Research in these areas is still being conducted. . It's still a far-reaching topic under discussion.

“By Gateway to China Staff”

Sources say that Shanghai is home to three platforms involved with state-owned capital – Shanghai Guosheng (Group) Co. Ltd., Shanghai International Group Co. Ltd. and Shanghai State-owned Capital Management Co.

Guosheng is geared toward manufacturing companies, and Shanghai International focuses on financing. Shanghai State-owned Capital Management was founded in 2010 with 100 million yuan from the city's State-owned Assets Supervision and Administration Commission of the State Council (SASAC)   to manage state-owned shares and market operations.

Shanghai SASAC now manages 55 SOEs, down from 79 in 2008. Some 93 percent are doing business in 20 leading industries.

Shanghai has three classes for its State Owned Emterprises (SOE) : competitive, functional and public service-oriented. Each has a different administrative structure and management mechanism. They also vary in human resource and executive compensation areas.

The Shanghai government wants strategic emerging industries to account for 80 percent or more of all SASAC-controlled assets within five years. Key areas would include advanced manufacturing, services and infrastructure.

Shanghai

The vice director of the Shanghai SASAC, Lin Yibin, said 62 percent of SASAC assets already focus on these strategic areas. And about 40 percent are tied to infrastructure concerns and public services.

Guangdong's government has likewise proposed steering state-owned holdings into companies engaged in infrastructure, public services and resource-related industries. Officials also want to leave a door open to future investments in new industries that emerge as economically important.

A recent Huatai Securities report found that most SOEs in Guangdong are either competitive enterprises or tied to social services. Few are large, assets are generally dispersed, and the government wants to introduce private investors to competitive companies, and perhaps public services firms, at a relatively rapid rate.

Following in Shanghai's footsteps, the Guangdong government has proposed better financial opportunities for (SOEs). Its plan is to delegate financial responsibilities to SOEs with track records that prove they can properly handle money matters. These would then become state-owned capital investment firms in charge of companies helping other SOEs manage risk and capital.

Premier Li Keqiang recently proposed letting private investors participate in central government-controlled SOE investment projects in areas including financial services, petroleum, electric power, railroads, telecoms and resource development.

In step with the premier's call, the Chongqing government proposed at a January work conference rolling out nearly 100 state-owned capital projects with combined initial investments totaling nearly 200 billion yuan by the end of the year. These projects would be open to private investors.

Chongqing also plans to form up to five, state-owned capital investment companies with the ability to compete nationwide. Another goal for 2014: the government of the southwestern city wants to see at least three of its SOEs launch initial public offerings.

Mixed Ownership

But exactly what the central government means by "mixed ownership" has yet to be clarified in the context of SOE reform.

Mixed ownership has in one sense already begun, since a large number of SOEs own minority stakes in companies with no government ties.

According to SASAC, various private partners have already invested in 52 percent of all central government-controlled SOEs or their subsidiaries. And as of late 2012, these central SOEs and their subsidiaries held controlling stakes in 378 listed companies. And more than 53 percent of all shares in these listed companies were not in state hands.

The nation's local-government-controlled SOEs, according to records, had stakes in 681 listed companies. And more than 60 percent of the shares in these companies were held by the state.

A study by the All-China Federation of Industry and Commerce found that private enterprises already participate in a mixed ownership economy in three ways. Some private enterprises have gotten strong enough to participate in SOE projects or become an SOE shareholder. Mixed ownership can also occur when private enterprises hope to introduce advanced management systems and improve competitiveness. In the third scenario, private enterprises eye to break into monopolized sectors through a partnership with SOEs.

As of January 1, state investments created a mixed ownership environment that covered 31 percent of all enterprises in Guangdong, excluding Shenzhen. The state invested in these enterprises by including non-public investments. Proportions of provincial government-owned and municipal government-owned enterprises in the same region were 45 and 27 percent, respectively.

Under a provincial government timetable, all Guangdong SOEs must complete administration system reforms by 2015. Moreover, more than 60 percent of SOEs must be mixed ownership enterprises by 2017, and that ratio must rise to more than 80 percent by 2020.

Thus in Guangdong, investment capital for the mixed ownership scheme flows both ways: SOEs can accept private investors, and state-run companies can invest in private enterprises. But in other parts of the country, local governments have proposed one-directional schemes whereby private money would be welcomed by SOEs.

Some governments have proposed mixed ownership via securitization. Shanghai, for example, is looking at increasing state-owned asset securitization to at least 40 percent. It was 35 percent as of 2012.

Guangdong's plan would include no low limit for state-owned company shareholding. It would exclude a few SOEs in special areas such as state policy functions. But mixed-ownership enterprises in which the state has a minority stake would not be subject to government or SOE oversight.

Only a few SOEs today have mixed-ownership structures, according to Shi Jun, deputy director of the Chinese People's Political Consultative Conference's Economic Commission. Most of these are weak structures, he said, which means any private investors involved usually have to passively accept whatever SOE managers decide.

"To develop mixed ownership," Shi said, "we must find a way to resolve market entry restrictions and used legal means to protect private enterprise assets."

Supporters of SOE reform also see a connection between mixed ownership and adjusting executive compensation systems in ways that better reflect market conditions, according to Zhou of the enterprise reform institute.

SOE leaders should open their positions to market forces, Zhou said, as a first step to a market-oriented salary system.

Reform plans for Guangdong and Shanghai have embraced this point. The Guangdong plan, for example, calls for establishing a system of hiring professional managers through which the market would determine how talent is recruited for high-level management positions at SOEs.

Han Zheng, Shanghai's party boss, said that "the process of recruiting presidents for some enterprises will be marketized" and "the government cannot interfere in the daily operations of enterprises."

A director at a Shanghai SOE who asked to remain anonymous said he sees advantages to working for a salary based on the market rather than party standards.

"If my salary is set too high, then other government cadres at the same level might object," he said. "As an entrepreneur, especially in an enterprise in a highly competitive industry, competitive salaries are several times higher than at SOEs."