BEIJING – The number of China’s centrally-administered state-owned enterprises (SOEs) was reduced to 123, from 125, after two mergers were approved by the State Council, the country’s Cabinet, the state-assets manager said Thursday.

China National Real Estate Development Group Corporation was merged into China Communications Construction Company Limited (CCGRP) and became a wholly-owned subsidiary of CCGRP, while Shanghai Ship and Shipping Research Institute became a wholly-owned subsidiary of China Shipping (Group) Company following the merger.

No additional details concerning management changes and the value of the companies were released by the government agency, the State-Assets Supervision and Administration Commission (SASAC). Wang Zhiyong, an analyst with Bohai Securities, predicted more mergers and acquisitions would occur in China’s central SOEs involved in nonferrous metal and coal, as well as in commerce.

SASAC chief Li Rongrong said in late July that the Chinese government sought to reduce the number of SOEs to less than 100 while focusing on creating 30-50 large groups with strong international competitiveness by the end of 2010.

However, he said SOEs should retain their absolute dominance in important industries such as electric power and the power grid, petroleum and chemicals, telecommunications, coal, aviation, and shipping.

China Daily

HONG KONG – Top global luxury brands like Burberry and Coach are pouring funds into China’s multi-billion dollar luxury market, wresting control of their brands from Chinese partners as they swoop back into a market set to become world No 1.

Many piled into China over the last decade, pairing with re-sellers and joint venture partners, but with so much at stake, they are severing these ties and bringing their own considerable financial and marketing muscle as well as expertise to China.

In July, Burberry said it plans to buy its network of 50 China stores in 30 cities, now operated by its franchisee, for 70 million pounds ($107.5 million), a deal seen as adding up to 20 million pounds to its 2011-12 operating profit.

French handbag maker Longchamp has decided to buy out its Chinese distributor, and has assembled a Chinese team to take care of administrative tasks. Polo Ralph Lauren has also bought back China distribution right from Dickson Concepts.

“This is definitely a trend for luxury brands to operate in China themself,” said Marie Jiang, retail analyst from Pacific Epoch, a China focused advisory firm.

“It’s a booming market and is in a period of high growth at least in the next 3 to 5 years,” she said, adding she expects to see about 30 percent sales growth in luxury brands each year in the coming few years.

China is now the world’s No 2 luxury goods market, with sales up 12 percent in 2009 to $9.6 billion, accounting for 27.5 percent of the global market, according to consultancy Bain & Co.

The figure is expected to grow further to $14.6 billion in the next five years, making it the world’s top luxury market.

“Many of them gained experience after more than a decade of operation in the mainland, and are ready to roll over to the next phase of development of operating on their own, so they can reduce the distribution cost and raise the operating margin,” said William Lo, an analyst at Ample Finance.

SOARING SALES

With its growing economic muscle, China has become an increasingly important contributor to the bottom lines of makers of luxury goods, as such brands appeal to many keen to show off their newly acquired wealth.

Earlier this week, Coach said its China business could reach $250 million by fiscal 2012, and double from that by fiscal 2015 — a sizeable contribution for a company expected to post about $4 billion in total revenue for its current fiscal year.

Lamborghini, the Italian luxury sports car maker owned by Volkswagen, said its sales more than tripled in China to 86 cars in the first half of 2010, making the market its second-largest after the United States, even as its global revenues fell 2.6 percent with 674 cars sold during the period.

To keep their China expansion alive, many of the global players are expected to move into China’s second- and third-tier cities in the coming years to tap demand there.

The largest cities in China’s coastal areas now form the main sales base for most luxury goods makers, but are home to just 5 percent of the population, leaving huge room for growth inland and in smaller cities, said Selina Sia, a retail analyst at Mirae Asset Financial Group.

“Just like a newborn baby, it’s in infancy stage,” Sia said. “You have to get the quantity and at the same time you have to build and protect your image.”

Swiss luxury goods maker Bally said earlier this week it plans to expand into lower-tier Chinese cities in coming years and has started opening boutiques in Hohhot in Inner Mongolia.

Analysts said rapid development of high-end shopping malls and retail spaces across the country should help the domestic expansion of luxury groups, especially as mall operators could offer attractive terms to land big-name brands.

“Luxury brands don’t like to spend a lot of money, its all about branding generally,” said Steve Yi, chief strategy officer of Grey Group, a global market communications agency.

“They will depend on family and friends’ opinion” to appeal to consumers.

China Daily

SHANGHAI – More than half of China’s existing residential structures will be demolished and rebuilt in the coming 20 years, according to a senior researcher from the Ministry of Housing and Urban-Rural Development, a claim that has sparked fresh questions about the short lifespan of Chinese buildings.

Chen Huai, director of the policy research center at the ministry, was quoted on Friday by Southern Metropolis Daily as saying that homes built before 1999 will be dismantled to make way for new development during the next two decades. Chen said some historical relics that deserve protection will be spared the wrecking ball.

He explained that buildings constructed before 1949 have long passed their designed lifespan of 50 years. Many of those built between 1949 and 1979, for historical reasons, were essentially makeshift and met basic needs for housing during a difficult time but were not meant to be used for the long-term.

“Given China’s fast economic development and pace of urbanization, houses built between 1979 and 1999 cannot meet the demands of modern living, either because of limited space or a lack of supporting facilities,” he said. “Only those homes built after 1999 are likely to be preserved in the longer term.”

Chen confirmed the Guangzhou-based newspaper report in an e-mail reply to China Daily later on Friday and said poor-quality houses are not a new problem in China and have been talked about for many years.

China annually sees more construction than any other country. In recent years, the nation has had up to 2 billion square meters of development annually. Each year, China uses 40 percent of the world’s cement and steel, the main ingredients of the construction industry.

Around 40 percent of building land is created every year by the demolition of older developments.

But both experts and industry watchers have questioned the rapid speed of demolition and reconstruction, suggesting poor building practices and a lack of consistent urban planning, along with a blind pursuit of economic gain on the part of developers, are the real reasons for the relatively short lifespan of buildings.

In April, Qiu Baoxing, vice-minister of the ministry, said during an industry forum that Chinese buildings can only stand for between 25 and 30 years. In contrast, the average life expectancy of a building in Britain is 132 years and they last around 74 years in the United States.

“Although, before the 1970s, buildings did need to be rebuilt for safety reasons, what we see nowadays is the blind demolition of relatively new buildings, some of which have only been standing for less than 10 years,” said Li Dexiang, deputy director of the school of architecture at Tsinghua University.

Yu Hongsheng, director of the Urbanization Research Center under the Shanghai Academy of Social Sciences, agreed.

“Today, there is an impulse from both the government and developers to build newer and higher buildings to gain greater profits, which has accelerated the pace of the demolition of old buildings. But it is actually not in line with the concept of sustainability and has even pushed up real estate prices,” he said.

Yu added that ordinary working people end up bearing the brunt of rising house prices.

With China’s urbanization rate likely to be close to 50 percent by 2015 and the growing need for more residential buildings, Yu suggested that the government invests more in developing towns in suburban areas where there is more land and less need for demolition before development.

Li also pointed out that the pursuit of profits coupled with a lack in consistency in urban planning had led to a huge waste of construction materials. He said the country should improve the recycling of reclaimed materials.

In China, construction waste comprises 30 to 40 percent of the total volume of urban waste. The erection of a 10,000-square-meter building typically creates 500 to 600 tons of waste and the demolition of a similar sized building creates 7,000 to 12,000 tons, according to industrial data.

Poor building quality is also a major concern for China’s construction industry, which has been plagued by scandals in recent years.

In June 2009, a 13-floor newly-constructed building in Shanghai toppled, killing one worker. An investigation revealed its foundations had been undermined by a combination of soil piled 10 meters high on one side and the digging of an underground garage on the other.

The scandal was soon followed by numerous media reports of poor building quality in other parts of China.

“The rush for speed and pursuit of maximum economic interests are to blame,” said Yu.

China Daily

Compared to USA, China is still in the early stage of e-commerce online shopping development. Base on statistics from enfodesk, in 2009, the online e-commerce market in China reached 252.7 billion RMB (about $37.7b USD). The market scale in USA was $134.9 billion 3 times greater than China. However, the population in China is 4 times greater than USA. This leaves a significant opportunity for online merchants to capture the worlds largest internet population.

China’s economy is becoming stronger and many foreign companies are concerned that China will no longer pay attention to or support  foreign investment. However, according to the  British financial newspaper,  ”Financial Times” states “Thriving China is ever more open for business” . The article was written by Deming Chen, officer of China Ministry Commerce.

Chen Pointed out that : “Sales of consumer goods rose in 2009 to Rmb12,530bn, contributing more than half of gross domestic product. This year China’s domestic market will grow by Rmb2,000bn ($295bn, 193bn, 229bn), outstripping exports. The US is set to gain in particular. The independent American Chamber of Commerce in China recently published a report arguing that in the next 30 years the US can achieve “three trillion-dollar goals”: $1,000bn for annual US exports to China, $1,000bn for revenues of US businesses in China producing goods and services for the Chinese market, and $1,000bn for cumulative Chinese FDI in the US. “

In a sign of shifting global fortunes, China edges out Japan, the one-time biggest US debt holder, currently with $787billion, or 19.8%. This is an increase from $298billion in 2005. In addition, Hong Kong holds $146billion up from $44billion in 2005, putting China/Hong Kong US debt holdings over $1trillion foreign treasury holdings.

As some of the world’s prominent fund managers have turned increasingly bearish about investment prospects in China, Guy Hands at Terra Firma, during his latest trip to Beijing, calls for the world’s young people to “Go East.

But the optimism from the chairman and founder of Terra Firma Capital Partners Ltd., one of the largest private equity funds in Europe, may have arrived late. Many believe the golden period for investment in China is over.

Indeed, Hands’ statement that Terra Firma has started looking for Chinese partners for some businesses may strike some as a tad anachronistic.

“We feel very strongly that the economic future of the world for the next 20 to 50 years is going to be dominated by China,” he told a press briefing in Beijing, adding that the confidence the West had a year ago about a quick recovery “is not there today”.

Kynikos Associates founder Jim Chanos and British hedge fund manager Hugh Hendry are two well-known hedge fund managers who have decided to short China. Both believe that China’s credit excesses have led to bubbles that will burst.

Even Hands acknowledged that the subject of his latest visit to China has been related to “more where I came from, than where I arrived”. Indeed, his view about Europe, and China, may not have shifted so much, had his fund not put a severe dent in its track record by buying EMI Group Ltd..

Terra Firma in 2007 bought EMI for 2.4 billion pounds — around $4.8 billion at the time — in a deal largely financed by loans from Citigroup Inc. The deal soured quickly after its completion as the financial crisis amplified the already significant declines in the recorded music market.

Terra Firma closed that deal in late July or early August of 2007, around the same time that a couple of Bear Stearns hedge funds ran into trouble in the mortgage markets.

“We were wrong by two weeks,” he said in September last year. If Terra Firma had not invested, it would still have 90% of its fund and “would look like geniuses”, Hands said at the time.

“The world has become more difficult to invest in over the last 10 years”, he said. To be successful over the next 20 to 30 years, one would need to think more globally, he said.

Hands didn’t elaborate on what has attracted him most about China. But he indicated that U.K. Foreign Secretary William Hague, who was his best man, shares his optimism, pointing out that Hague visited Beijing as one of his first stops after he took the position.

China Real Time

China’s decision to end the yuan’s de facto peg against the dollar could have a significant impact over time on the fortunes of corporations big and small, Chinese and foreign—even though any movement of the Chinese currency in the near term is likely to be too gradual to matter immediately for  the bottom line. Below is a look at how it might affect the property industry:

China’s property sector, which was on a tear until the government began tightening the sector in April, will benefit from the rising buying power of Chinese consumers, analysts say.

Commercial property–which sees more foreign investment than housing—could experience a boost in interest from foreign funds, says one property analyst from a Chinese brokerage. Real-estate investment funds with long-term horizons, for example, could be attracted to China if they expect long-term yuan appreciation.

One particular beneficiary will be landlords who lease space to retailers, such as Hong Kong-listed Hang Lung Properties and Renhe Commercial Holdings.

One significant effect of a rising yuan on the property business would be on how some developers raise capital. Some developers this year issued bonds abroad ahead of a possible appreciation—which would make dollar debt cheaper in yuan terms—even though they have to pay relatively high coupons. Hong Kong-listed Country Garden issued a $550 million global bond this year with a yield of 11.375%.

Such offerings have dried up more recently, because China property bonds have lost some of their appeal amid concerns that the government’s property-tightening measures will hurt their finances, and also because there was a glut in of supply in the bond market.

Johnson Hu, an analyst from UOB KayHian, says the main reason for overseas fundraising was tighter monetary conditions at home, but anticipation of yuan appreciation may have helped make developers like Country Garden more willing to offer fatter yields.

But the effect on most developers in China would be limited, analysts say. Residential developers wouldn’t see much impact on house sales from a mild appreciation of the yuan, analysts say, especially given recent property-tightening measures and restrictions on house purchases by foreigners.

And most developers are locally funded. CapitaLand, for instance, a Singapore-listed property developer that recently doubled its China portfolio through a $2.2 billion acquisition of Orient Overseas Developments, borrows in yuan for its China business. “This forms a natural hedge,” said a CapitaLand spokesperson.

Typically, property developers here source materials for construction and third-party vendors from domestic companies, so the revaluation of the yuan is expected to have minimal impact.

Johnson Choo, a spokesperson from CentraLand, a property developer based in Zhengzhou, said his company sometimes engages foreign consultants like architects, who must be paid in foreign currency, which would mean savings if the yuan rises. But these payments typically make up a very small part of CentraLand’s expenses, so “it would not have a significant impact,” he says.

China Real Time

China on Tuesday released an official white paper on the country’s Internet industry. It reviews the history of China’s Internet, from its first connection in 1994, a single 64-kilobit line in Beijing’s Zhongguancun district, to the present day, when China boasts more Internet users than any other country. (See full text of the white paper in English here and in Chinese here)

At the end of 2009, the number of Chinese Internet users reached 384 million, or 28.9% of the population, a higher penetration rate than the world average, the paper notes. The paper states that China aims to raise the Internet penetration rate to 45% of the population within five years.

Google on Monday announced a new approach to its operations in China. But the company’s late-night blog post leaves some questions about its new approach unanswered, and whether they fly with the Chinese government remains to be seen.

The key change is in how Chinese visitors to Google.cn, Google’s China web address, are taken to Google.com.hk, its Hong Kong site. Unlike Google’s old Google.cn search site, which it censored in compliance with Chinese regulations, the U.S. company doesn’t filter the Hong Kong site — although it is subject to filtering by China’s Great Firewall for users inside China. Since March, Google.cn has automatically redirected to Google.com.hk, but now users in China land on a clickable image of a search box that links to the Hong Kong site.

In Google’s post, David Drummond, the company’s chief legal officer, says that the Chinese government found the redirect “unacceptable.” But will Beijing see the new method — what Google calls a “landing page” that points to the same destination as the redirect — as much of a change?

Drummond also writes that the changes were prompted by concerns that China wouldn’t renew Google’s Internet Content Provider license. “Without an ICP license, we can’t operate a commercial website like Google.cn — so Google would effectively go dark in China,” he says.

But Internet users in China still have access to Google.com even if Google.cn went away, unless Beijing were to start blocking access for users in China to Google’s global sites (like Google.com), an escalation analysts have said is unlikely. Search results that point to censored sites are still unavailable, and Google.com has been blocked by China in the past, but the idea that Chinese Internet users could search on Google.cn and no other Google sites is a long running misconception.

In China, government officials haven’t yet had much to say. A Foreign Ministry spokesman said Tuesday that the Chinese government “encourages foreign enterprises to operate in China according to the law,” and the Ministry of Industry and Information Technology said it wouldn’t be able to respond immediately.

China Real Time