Winning the battle over the Chinese Yuan? Think again.

Let’s start with today’s Bloomberg highlights, ‘Yuan Climbs to Strongest Since 1993 as Obama Criticizes China.’The Yuan has been going up against the US dollers on a ninth day amd the Bloomberg writes,

'The yuan has appreciated 1.8 percent since June 19, when the People’s Bank of China said it would pursue a more flexible exchange rate after keeping the currency at about 6.83 per dollar for almost two years'

Presumably, this is a great news for the US politicians fighting hard to rein in China’s ever expanding trade surplus with the US, which is said to damage the latter’s manufacturing and job market.However, on the China’s side, it may well have its plan by leveraging a more flexible exchange rate to help achieve another round of economic restructure.

First of all, expecting a stronger Yuan stops China’s export-driven momentum may have been groundless. From 2005 to date, Yuan has increased its value against US dollars by 20 percent. However, figures from Chinese Ministry of Commerce show that China’s export volume is also growing as fast as 20 percent every year during 2005 to 2008.

And also, a rising Yuan can help the Chinese policy makers handle the pressing inflation issues. From earlier this year, workers in Southern China have been protesting and even killing themselves to demand a higher pay. Keeping Yuan at low while paying workers more in foreign invested companies means to create more local currency in circulation. This adds pressure to expectation therefore economic stability in a macro sense. Hu Xiaolian, the vice president of the People’s Bank of China published an article on the central bank’s website to address this issue. The recent movement of Yuan has reflected that the policy makers are taking their concerns into actions.

But, looking into the micro-level, manufacturing business along the China’s coastline indeed face challenges imposed by competitors offering cheaper and younger labours: Dell is expanding into interior China, Top Form, a bra maker for Calvin Klein has given up new investment in China as they see cost rising in other Chinese cities ‘a matter of time’ so they are to build a factory in South East. On top of these, a stronger Yuan is almost like s a tickling clock over their heads to tell them that ‘time is up’.

Some have already fought back for survival. The International Herald Tribune wrote about undergoing Chinese businessmen model shifts: Chicony, supplier for Xbox and Dell is diversifying its business by opening department stores, Kwonnie, who used to assemble parts for Philips is planning its own line of home appliance. They are creating own brands exploring direct sales channel, moving upwards to more profitable part of the supply chain, and competing with former customers. In another words, a stronger Yuan may in the end transfer the pressure to the companies who have lobbying hard to make the Yuan appreciation happen.

Essentially, China thrives as the world’s most competitive manufacturer while it adds value on the raw materials and half finished products it has imported. So even if the upgrading of business model at the frontline takes efforts and time to happen, a stronger currency at least offers China more overseas cheap buy options. Reducing import cost and getting hold of strategic overseas assets (especially natural resources) can possibly offset the current rising cost in a long run.

The appreciation of Yuan was almost ‘doomed’ to happen as the China-US trade spat gets heated every now and then after Yuan stayed at the same level in the wake of the financial crisis in 2008 after continuously rising from 2005. Hot money that speculating Yuan’s appreciation is one of the major issues the Chinese policy makers have to tackle. Zhou Xiaochuan, governor of the central bank of China has called for diversifying the currency basket by including Euro, Yen and other currencies of major trading partners. Hu Xiaolian, in an interview with a leading Chinese Business weekly in August, implied if the value of Yuan could be adjusted to a basket of currencies rather than Dollar alone, risks of hot money flow will be reduced.

Planet Google, looks lonely without China

Eric Schmidt, CEO of Google who claimed to have 5000-year patience (as long as the Chinese history) for Google's business in China, would not have foreseen Google.cn may fail to reach its fifth birthday. A blog post declared ending of censorship was widely interpreted to signal a pulling out plan as a non-filtered search engine is not possible for current China. In its own word, Google is said to be irritated by Chinese hacker's attack to get information from Human Rights activists' Gmail accounts. Google claimed to rise its informal motto 'Don't be evil' in defence of human rights and Internet freedom.

Without a deal sealed, both sides across the negotiation table, Google and the Chinese government are already victims under lime light. the Chinese government is again loosing its reputation on human rights issues, but it continues to be the government for over one sixth of world population. However, Google is merely gaining back some points from its heavily criticised decision to cooperate with the Chinese government on censorship. From a business perspective, if Google finally does quit China, its guiding ambition-'organize the world's information' is very likely left as a fantasy by leaving out nearly 400 million Chinese web users out of its reach. Google can argue its Chinese business, which only accounted for around 1 percent of its annual revenue the last year(estimated by analyst at Collins Stewart), is not a big deal. But this might just well footnotes the reason for Google to challenge Beijing.

In his article published in New York Times Magazine in 1970, Milton Friedman wrote 'there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase it profit'. In the four decades since then, corporations have undergone a rapid shift: some, like Starbucks has expanded across national territory and their business become transnational, even global; some, like Nike, has managed to keep the core part of their business (such as brand or R&D) while outsource others to wherever local condition is more favorable; some congregate as a cluster in a certain region, such as the Silicon Valley to gain advantage as a sector.

However, despite changes in the form, purpose of all private business remains the same. Like other Internet companies tried water in China earlier, Google gives up some ethnics for the 'land of promise'-- it agreed to censor search results on its Chinese site to be launched in 2006. When Google hired Kai-fu Lee in 2005 to set up Google.cn, the seven-year old company understood too well the strategic importance of China--population of its web user is soon to exceed U.S.'s to be the world number one, and it has lots low-cost IT talents.

Looking back from four years later, the embarrassing lose-lose situation may possibly mark an end for Google's adventure in China. This reflects weakness of global Internet companies whose expansion has been perceived as unstoppable.

First of all, Google's failure to achieve domination in China is commercial. For foreign companies, China is indeed an attractive market, but unfortunately a tough one. Google has so far failed to achieve what it has compromised for: Baidu, Google's major local rival in China, has more than twice Google’s market share. China, together with four other countries (Russia, Japan, Korea and Czech) still stand in the way for Google to be global dominant search engine. Virtually, none of global Internet companies has really succeeded in China. when Google came to China in 2006, the earlier batch such as Yahoo, AOL, eBay, Amazon and MSN that entered just after new millennium have mostly failed: After suffering from large share losses, they were either sold to local IT companies, or simply shut down. From these examples, Google learnt not to expect a quick return and starting up with localised strategy: It recruits local engineers to develop products for local markets(which might also be extended for global use), and it has 26 small advertising sales units dispersed over 20 major cities across the country. However, result of Google’s business in China did not turn out to be satisfactory: In 2009, sales recorded in China only account tiny bit of its global business and well behind its local rival. There are some reasons can explain Google's disappointing performance from purely commercial considerations. First,Google developed its core search technology based on English, which naturally becomes alien while sorting information in a linguistically and culturally different language. To be accepted by users also turned out to be more difficult for similar reasons. Google had to adopt a Chinese name 'guge' and spent $20mn to buy 'g.cn' with from a local Internet company after it found Chinese do not remember how to spell 'google'. Make everything worse, Google found its local competitors more aggressive than it has estimated. Baidu for instance,funded by foreign venture capitals has abundant amount of cash at its disposal.

Second, as a pioneer to test boundary of state and market in China, Google demonstrates powerlessness of foreign business in front of the Chinese government. If Google were a company provides hardware, it would have been much easier maintaining a solid relation with Beijing, just like Cisco which supplies equipments and technique to implement censorship in China has enjoyed. The problem is, what Google aims to do--organising information is just what the Chinese Communist Party is also keen on. The Golden Shield Project (usually referred as the Great Firewall) was launched the same year Google started and it serves to control information in the Party's interest. Filtering information was justified to protect the youngsters from pornography and a means to maintain social stability and is empowered by judiciary enforcement.

As the first official response to Google's blog post, Jiang Yu, the spokeswoman for Foreign ministry, re-alleged that 'foreign companies are welcomed to do business in China, but they have to obey the Chinese law'. Local government holds an arbitrary position in building its local business environment with local laws, qualification and procedures to get an operating license, tax and policies etc. Google and other information-related companies often find themselves in a particular awkward position in China due to the product they provide. They are strictly required to operate within the 'Chinese law' which often runs in conflict with their interest. International bindings such as WTO is not that helpful in reducing this kind of conflict as Google was not treated unfairly compared with its Chinese competitors, in in terms of level of censorship for instance. Western society has long believed economic liberalization will finally bring in democracy in China. Google has now found this expectation far too naive: to play the game in China, it is often the global companies that have to adapt, not China.

More widely, the breach of Gmail accounts loomed the future of cloud computing. Google as a leading company that advocates cloud computing heralded a one-stop destination for information. Users of Google's Software as a Service soon realize that amount of information they have stored in their Gmail account has made them independent on the service provider and therefore hard to abandon it casually with a click. Here is where security rises as an issue. In the year Google launched of email service in 2006, 60 users found information on their accounts permanently lost due to an internal problem of Google. Google was fortunate that this news was not widely exposed. But this time, although Google is an obvious victim of Chinese cyber attacks, its ability to protect users' privacy is in question. And as a specialist told Financial Times, “It would be a mistake to assume that Google is any more vulnerable than other providers. Any mail server that we have tested is vulnerable to an attack”. It is such a blow to the whole industry!

Without doubts, Google builds an global empire faster and more efficient than anyone could have imagined. A normal Internet user can get almost everything he/she wants only from a wide range of Google products apart from the search engine: browsing Internet with Google chrome, Chatting on Gtalk, Shopping with Google checkout, reading Google Books, getting updated with Google News, and even have a virtual trip on Google earth. With the launch of Google phone, it has pushed everything further: to take all these with you in your pocket! Google is getting closer to its ambition, but it is too optimistic to conclude a borderless winner as its experience in China has just suggested the opposite.

A speech on Internet Freedom given by Hillary Clinton, the U.S. Secretary of State emphasized the fundamental importance of information. This is both good and bad news for Internet companies. For the gloomier side, when national diplomacy and security expands into virtual battlefields, as it already did, global Internet companies will find themselves even more powerless in front of politics.

Planet Google has so far failed to prove an exception.

Google risks business in China by ending censorship

Hacked Gmail accounts have pushed Google to start talks with Chinese government of an unfiltered search engine

On January12nd, after Google announced to stop censoring search results on Google.cn, its Chinese site launched in January 2006, the site and its office in China are therefore under risks of being shut. According to Google’s blog, this decision was made after investigation of attacks on Google’s infrastructure in mid-December has found out that “a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists.”

The investigation holds evidences to show that “two Gmail accounts appear to have been accessed” by the attackers, but only account information (such as the date the account was created) and subject line, rather than the content of emails have been obtained. Google also found itself not the only victim of this attack, “at least twenty other large companies from a wide range of businesses--including the Internet, finance, technology, media and chemical sectors--have been similarly targeted”. Google also discovered that “the accounts of dozens of U.S.-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties” via phishing scams or malware placed on the users' computers.

Based on these findings, Google reviewed its approach to China and decided not to continue censoring searching results on Google.cn, which gained its appearance in China by agreeing to censor some results. Google is well aware of consequences of this decision, and plans to talks with Beijing for the future:

“so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all.”

One the same day that Google published this statement, Baidu.com, a Chinese leading search engine which has roughly three times market share than Google.cn(statistics by China Internet Network Information Center ) in China was attacked by Iranian hackers, reported Financial Times. Baidu.com crashed for more than 5hours due to attacks on its domain server in US.

This time, look wider

With its steady trade surplus and strong foreign investment, China sits on top of world’s largest foreign reserve. As the recent global slowdown has forced many foreign companies to spin off assets, Chinese companies are gaining opportunities to expand further.

China’s economic growth has essentially benefited from a high level of direct foreign investments (around 40 percent of GDP estimated by IMF) which concentrated in manufacturing and later moved into capital and property markets. Since 1990s, Chinese companies and investors were encouraged to “go abroad” for investment and Chinese outward investments spurred especially after its entry to WTO in 2001. In 2009, China’s non-financial outward overseas investment is to reach $42bn while it attracted $77.9 bn in foreign investment in the first 11 months, says a paper by China’s Ministry of Commerce on December 22^nd.

Together with its exports, overseas contracted projects and labor services, Chinese companies are searching for greater presence in international business. Overseas merger and acquisition accounted for 43.5 per cent of Chinese outward foreign investment in 2009.

According to the China’s 11^th Five-Year-Plan running to 2010, its outward overseas investment stock will reach $60bn, and the Chinese government has been active pushing companies to compete internationally with fiscal support, favorable regulation and educational trainings.

In short term, outflow of capital can at least reduce the appreciation pressure for its currency from long-term current account surplus.

Also, by investing in energy and raw material rich regions, such as Latin America and African, China is to secure resources for future developments. Early this year, Chinese Prime Minister Wen Jiabao announced another $10 billion concessional loans to 31 African countries, doubled the size of what Chinese had offered 3 years ago. Africa now accommodates a tenth of China’s total overseas direct investment whose return is to be granted from the region’s development. Some recent big deals have also proved China’s resource hunger was driving the direction of its overseas investment.

At same time, overseas investment contributes to China’s economic restructure and improves Chinese companies’ international competitiveness. From Swiss oil explorer Addax AXC.TO’s buyer Sinopec to Hummer’s new owner Sichuan Tengzhong Heavy Industrial Machinery, Chinese state owned enterprises so far are the leading forces investing overseas. But more private companies such as Lenovo and Huawei are gaining international comparative advantage by acquiring advanced technologies and marketing networks abroad.

However on general, the scale of China’s outward overseas investment is still regional as over half of its oversea investment locates in Asia, predominately in Hong Kong. And comparing with developed countries, China’s capital stock is still very extremely low: By the end of 2002, China’s outward FDI stock only equals to one per cent of Japan’s and half a per cent of US’s.

In addition, as the failure of China’s mining company Northwest Nonferrous in a deal to invest in a Nevada gold mine due t U.S. national security concerns this week just showed, Chinese companies’ over seas ambition is far from free to expand.

10 must-knows before buying a property in China

[a class exercise]

China’s housing prices has been rising from July 2009 and in November recorded the highest rate in the 16months according to National Bureau of Statistics of China. Although growing rapidly, real estate costs in Beijing and Shanghai are still far cheaper than in Hong Kong or Tokyo.

While investors seem to be worrying of a second pricing dip across debt-drenched mature markets, how about getting into the Chinese market before it gets too late? Here are ten things you must know as an amateur foreign buyer in China.

1 Eligibility

Before everything else, it is good to know if you are able to buy a property in China. Only foreigners have lived in China for at least one year are allowed to purchase a property since July, 2006. This was aimed to curb foreign speculation and did have a great impact on foreign investment in Chinese property market. “We have since then ceased our service in buying property in China.” said one agent from Property Frontier, a London based property agency. But residents of Hong Kong and Taiwan and Chinese overseas are excluded from the regulation.

2 Buying Procedures

Foreigners must apply for permission to buy property, which can be granted through the public security bureau. When signing the contract, a deposit, typically of 30%, is due. This can be refunded if the deal falls through. The official transfer process must go through the Realty Transaction Department and it can take a month or more. The Realty Transaction Department will provide a date for the official Realty Transfer Notice to be given. At the final transaction date, money is exchanged, any legal fees paid, transfer and property taxes are due and the final transfer documents are signed.

3 Ownership

All property in China is under a 'land use right' system, similar to the western leasehold concept. There are three types of lease on land: residential, which is run on a 70-year lease; commercial, which is on a 50-year lease; and industrial, on a 40-year lease. At present, due to the relatively recent nature of this system's creation, what happens at the end of this period is uncertain. The laws of private property protection are quite clearly outlined in constitution.

3 Rental Market Condition

In February 2009, the average rental yield (percentage of rent to purchase price) in major Chinese cities was 4.42% which is relatively low compare to other Asian countries but higher than Hong Kong and Taiwan, according to Global Property Guide research. Government fiscal moves have encouraged individuals to buy, not rent. High-end property rental market was heavily hit during the crisis, as vacancy rates in luxury residential properties in Shanghai rose to 24.2% in Q2 2009, and at 30.2% in Beijing according to Colliers International

5 Tax Policies

After the Central Economic Work Conference finished in early December, the State Council has just re-imposed a sales tax on properties sold within five years after cutting the period to two years in January. This reversal of tax on home sales is said to be “much milder than the market had expected.” Comment Clement Luck, a Shanghai Based analyst at Centaline Property Agency.

6 New Hot Spots

In 2007, 66 out of the 88 land transactions involving foreign investment identified by Knight Frank, an international property agency, were located in second tier cities. The Knight Frank 2008 Report indicates that China’s first tier investment cities are mainly Shanghai, Beijing, Guangzhou and Shenzhen. But with surging land prices and the lack of urban land availability in those cities, property developers have gradually shifted their attention to China’s second tier cities instead.

7 Locals

As many developing countries, laws are different throughout the country, so it is a good idea to have a local real estate agent and/or lawyer to help you through. Zimny, a private investor in Shanghai, said the most important thing when buying in China was to get experience people to help “You can find well-established, well built, well designed properties, and you can find competitive prices. But the buzz words here are: be smart. ”

8 Property Funds

If you do not want to miss out a investment opportunity, but are either not eligible to be a buyer, or feel uncertain to secure a good deal, or simply frustrated by complexity of purchasing in a foreign country. Then property funds majored in Chinese market maybe a better option for you. Property funds invest in Chinese market by both purchasing properties (mainly commercial properties) and holding shares in Chinese developers. However, according to Jiancheng Ye, Chairman of DTZ China investment department, only five foreign funds invested in China this year, less than half of usual number. He also hinted that foreign funds are preparing a transition to reduce operating cost such as tax, and to collect funding in local currency.

9 Currency

The prospects of appreciation of the Chinese Yuan add expectation that property values will eventually get a boost.

10 “Bubble”

After Dubai, fears of bubble in Chinese property market also rise, especially with anticipation that the low interest in U.S. can drive an excessive capital flow into the region. Andy Xie, former Morgan Stanley Chief Aisan economist warned China’s property markets to burst as a bubble when inflation accelerates in 2011 in a interview with Bloomberg, while the Economist argued even if its asset prices slump, the damage will be less grave thanks to the less debt-driving borrowing. It said that only around a quarter of middle-class homeowners have mortgages and the average loan-to-value is less than 50%.

In a recent report, Fitch Ratings predicted that China's property market will remain stable with housing price fluctuation to remain within the narrow range in the next year. Fitch Ratings forecasted that Chinese developers would see moderate growth in sales and profit next year, supported by the country's urbanization process and rise in incomes. Hope 2010 will also bring modest good news for investors.