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Download this week’s newsletter as a PDF here: CPW No. 16 (May 12-19)
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This upcoming week looks to be dominated by foreign policy concerns. Heads of states and delegations from nearly 40 countries have descended on Shanghai for the fourth summit meeting of the Conference on Interaction and Confidence Building Measures in Asia (CICA), which is being held Tuesday and Wednesday. In addition, four state visits will take place, by the leaders of Russia, Iran, Kazakhstan and Kyrgyzstan. Expect to hear a lot of talk about the New Silk Road.
Get em’ while they’re hot
SASAC vice chairman Li Xiaonan is reported to have said that the overall framework for SOE reform will be formulated in three documents (the Guiding Opinions on Deepening SOE Reform, the Plan for Reorganizing the Structure of the State-owned Economy and the Plan Reforming the State-owned Assets Management System), but no timeline was given. Li said that the process is slow because so many different ministries are inputting into the process. Another SASAC official said it is unlikely that the reforms would be formulated until the end of 2015.
The fact that the reforms will take time to formulate comes as no surprise; the Chinese system is inherently cautious, and SOE reform is one of the most sensitive issues within the Party. The slow pace might even be a good sign as it implies that the reforms will be far-reaching- superficial reforms would be much easier to formulate and propagate quickly.
Though we won’t see a comprehensive reform plan any time soon, we should see continued promotion of “mixed ownership” in SOEs. These efforts got another shot in the arm last week when CNPC announced that it would sell off its First and Second West-East Gas Pipelines. CNPC is the latest of several central-level SOEs to announce big changes; state-owned titans Sinopec, China Resources, CITIC, Baosteel, China Telecom and State Grid among others have all announced restructurings, sell-offs, or other reforms in the past few months.
Apparently, SOEs have been told to get rid of assets with internal rates of return of less than 12%. SOEs have an incentive to sell in order to demonstrate that they are complying with the new directives; many are also under pressure to reduce debt levels. It looks like a buyer’s market, and firms and investors in traditionally state-owned sectors such as energy, oil and gas, utilities and telecoms should be on the lookout for attractive deals. A fair number of these assets are likely to have strong underlying values that were previously not realized because of poor management and operation.
Let’s make a deal
Putin arrived in Shanghai Tuesday for the CICA. Everyone expects the long-awaited CNPC-Gazprom gas deal to finally be signed, especially seeing as the two companies’ executives met in Beijing again this weekend, ostensibly to hammer out pricing issues (long the main sticking point in concluding a deal).
RT reports that CNPC will pay USD 350-400 per 1,000 cubic meters, but this seems too high to me. CNPC has long asked for a price around USD 250. Considering Russia’s need to diversify away from European customers, as well as China’s recent successful efforts to increase gas imports from Central Asia, it would seem that CNPC holds all the cards in the negotiations.
There is probably too much pressure to finalize the deal for the two parties not to reach an agreement this time. The final price should be a good barometer of Sino-Russian relations, with a higher price indicating that China is willing to do a favor for a friend in need, and that recent rhetoric on both sides about improving relations is real. Conversely, a low price would seem to put paid to talk of a new era of Sino-Russian friendship, and would be evidence that the mistrust and tensions that have characterized bilateral relations for decades are still the order of the day.
Indecent exposure
Guangzhou’s Deputy Party Secretary Fang Xuan has “retired early”, apparently a result of Party efforts to crack down on “naked officials” who have spouses and/or children living abroad. The move follows the publication in January of new guidelines for promoting officials that explicitly stated that naked officials would be weeded out.
When meeting foreigners, Chinese officials often bring up relatives overseas- it’s an easy way to break the ice and establish a connection. In the past, this was a positive sign that one’s official counterpart would have an international perspective, or at least the desire to appear as if he did. Now, such an admission would have to be seen as a warning sign that investing in a relationship with said official might not be an effective long-term strategy.
The anti-corruption campaign shows no signs of slowing down. In the past week Wang Qishan chaired several meetings on improving anti-corruption efforts, PBSC members went to the provinces to promote the Mass Line Campaign and numerous new investigations were announced. All this upheaval within the Party increases uncertainty for companies operating in China; it’s never been more important to understand who one’s government stakeholders are, what risks they might face and what potential changes could mean for business.
Smoother sailing
The South China Sea is boiling after CNOOC’s placement of an oilrig in contested waters, resulting in protests and violence in Vietnam. But there were positive signs last week that the East China Sea might be becoming a bit calmer. Ministers from APEC countries met in Qingdao, Shandong Saturday as part of preparations for this year’s summit to be held in Beijing in October. China’s Minister of Commerce Gao Hucheng met with Japan’s Minister of Economy, Trade and Industry Toshimitsu Motegi on the sidelines of the meeting, the first ministerial-level meeting between China and Japan on Chinese soil since tensions began rising in autumn 2012.
On the same day a trilateral investment treaty between China, Japan and South Korea took effect. The treaty, agreed in 2012, is seen as a precursor to a trilateral FTA.
As a result of tensions arising from disputes over the Diaoyu/Senkaku islands, bilateral trade growth has been negative for the past two years, and Japanese investment in China is down 47% in the first four months of this year. Leaders in both countries are under considerable pressure to deliver economic growth, and improving bilateral trade and investment would do just that. Let’s hope that the logic of economics forces a more accommodative posture on both sides.
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