Rich Chinese Fleeing to United States

Most countries worry about brain drain. China is worried about millionaire drain.

A new report in China shows that 150,000 Chinese – most of them wealthy – emigrated to other countries in 2011. While that number may not seem high for a country of more than a billion people, the flight of China’s richest – and the offshoring of their fortunes – could cost the country jobs and economic growth, according to the study from the Center for China and Globalization and the Beijing Institute of Technology.

“The private economy contributes more than 60 percent of China’s GDP and it absorbs a majority of employees. So if private business owners emigrate with their capital, it would mean less investment in the domestic market, so fewer jobs would be created,” Wang Huiyao, director of the Center for China and Globalization, told the state-run China Daily today.

The fleeing millionaires mainly made their money in real estate, foreign currency and deposits and stocks, among other fields, according to the report. They are mainly leaving Beijing, Shanghai and coastal provinces such as Zhejiang, Guangdong and Jiangsu. (Read more: BRICs Outpace U.S. in Millionaires)

The Chinese government has struggled to stem the tide of wealthy Chinese moving abroad or tunneling their fortunes out of the country. Last month, Zhang Lan – the founder of the South Beauty restaurant chain and a powerful political player – emigrated to an unknown foreign country. She had previously been an outspoken critic of rich Chinese who moved abroad.

When asked about her reasons for moving, her spokesman told China Daily, “It’s a private issue.”

Officially, Chinese individuals are allowed to move only $50,000 offshore every year. But many Chinese have been skirting the rules and moving money to overseas accounts, or buying property, art, wine and other assets overseas.

The Wall Street Journal recently estimated that more than $225 billion flowed out of China in the 12 months ended in September. (Read more: What Do Wealthy Chinese Women Want?)

The report on emigration said that for Chinese moving abroad, the main reasons cited for leaving are the security of their assets, improved quality of life and better education for their kids.

China’s wealth flight, however, has been America’s gain. The United States was the top destination for wealthy Chinese in 2011, according to the report. Canada and Australia came second and third.

The report said that the United States had granted 87,000 permanent resident permits to Chinese nationals in 2011. Of those, 3,340 were approved through special investment visas, which allows wealthy foreigners to apply for American citizenship if they agree to invest more than $500,000 on job-creation projects. The program has become largely Chinese, with more than more than two thirds of all of the visas granted going wealthy citizens of mainland.

China Ramps up it’s Patent Industry, Surpasses USA

China Surpasses U.S. in Number of Patent Applications

By Sheri Qualters – The National Law Journal – December 12, 2012

Last year, for the first time, more patent applications were filed in China than in the United States. This surge reflects China’s increasing intellectual property maturity and growing pains, according to U.S. Intellectual property lawyers and experts.

In a December 11 announcement, the World Intellectual Property Organization reported that China’s patent office took in 526,412 applications, compared to 503,582 in the U.S. Patent and Trademark Office and 342,610 in Japan’s patent office.

Worldwide patent filings exceeded the 2 million mark, with 2.14 million filed last year. That’s a 7.8 percent boost over the 1.99 million applications filed in 2010.

“Sustained growth in IP filings indicates that companies continue to innovate despite weak economic conditions. This is good news, as it lays the foundation for the world economy to generate growth and prosperity in the future,” said WIPO director general Francis Gurry at a press conference in Geneva.

The numbers reflect a boost in innovation by Chinese nationals, said Stuart Meyer, an intellectual property partner at Fenwick & West in Mountain View, Calif. It’s not just U.S. inventors wanting to get protection in China because it’s commercially important, he said. “That’s a real sea change.”

Ultimately, such filing shifts could affect U.S. patent policy, which offers great protections for intellectual property producers, he said.

The balance is shifting a little bit because more U.S. companies are dealing with licensing intellectual property owned by foreign patentees, said Meyer. “We’re the ones that don’t need such rigorous protection because we’re on the other side of the coin. It changes the way we’re going to be thinking about this in the coming decades.”

The numbers are a milestone in the way innovation is distributed around the world, said Q. Todd Dickinson, executive director of the American Intellectual Property Law Association. “Clearly china is in growth mode in terms of research and development and patent filings track that closely.”

He also said China’s intellectual property system is maturing. “Clearly they’re using IP to protect indigenous innovation.”

The filings show that everyone wants to do business in China, but China also needs to improve patent enforcement, said Peter Toren, a partner at Weisbrod Matteis & Copley in Washington.

“I’ll be more impressed when I get the real sense that China is enforcing patent rights…I want to see them allowing companies to really enforce the rights they have,” Toren said.

 

Major Developments in China since last Leadership Change

How China Has Changed Since the Last Leadership Transition

Published: Thursday, 8 Nov 2012  

By: Rajeshni Naidu-Ghelani, CNBC

All eyes are on China this November as the country prepares for the once in a decade leadership transition within the ruling Communist Party.

The world’s second biggest economy has undergone a massive transformation within the last 10 years. From rapid urbanization and economic growth to social and political development, China has marked many milestones and firsts in the past decade — highlighting its significance on the global stage.

With this in mind, we look at six major changes that China has undergone since the last leadership transition in 2002. Focusing on factors like economic development to changes in consumer behavior, we look at how big of an impact China’s transformation has had on the rest of the world.

Rapid Economic Growth

The Work Bank

Riding the wave of rapid economic expansion, China’s growth engine has remained strong over the past decade. China’s economy grew from being the 5th largest in the world in 2002 to 2nd only to the U.S. by 2010. 

The country has seen an average annual gross domestic product (GDP) growth of 10.6 percent since the last leadership transition in November 2002. Yearly economic growth was in the double digits from 2003 to 2007 and hit a high of 14.2 percent in 2007 — levels not seen since the early 1990s. However, like the rest of the world, China was impacted by the global financial crisis in 2008 and saw its GDP fall to 9.6 percent that year. Since then, the superpower has been able to maintain strong economic growth of over 9 percent, but it continues to be plagued by fears of a hard landing. GDP in the second quarter of this year fell to 7.6 percent, hitting its slowest pace in three years.

Many economists now expect China’s annual GDP to fall below 8 percent in 2012, with even Beijing setting a target of 7.5 percent growth — marking China’s first drop to that level since 1999. Uncertainty over how the new leadership will deal with slowing growth is intensifying and several analysts have told CNBC that policymakers may be taking their eye off the ball when it comes to the economy to prepare for the once-a-decade leadership transition. The politics involved in the government change may be slowing the policymaking in China and deterring the government from making significant economic decisions, according to experts. 

Rising incomes

National Bureau of Statistics China

Economic development has led to rising incomes in China as workers demand higher wages to cope with soaring living costs in major cities.

In a 10 year period, the per capita income of urban residents rose from $827 in 2001 to $3,711 in 2011, according to the National Bureau of Statistics of China. That’s a nearly 350 percent increase. China’s average minimum wage has been rising an average 12.5 percent annually from 2006 to 2010, and the government announced earlier this year that minimum wages should grow by an average of at least 13 percent in the five years to 2015.

Rising wages has become a major concern for local and international manufacturers betting on “cheap” Chinese labor for growth. Many are moving production inland to save on costs, while others are looking into alternative manufacturing hubs in Asia like Vietnam, the Philippines and Indonesia. For example, Apple supplier Foxconn, in the news recently for labor unrest at its Chinese factories, announced in August that it would invest $10 billion in Indonesia to tap into one of the cheapest labor forces in Asia.

Stocks Outperform in a Decade

Thomson Reuters

China’s battered stock market, which was down more than 20 percent in 2011, and is lower by nearly 6 percent so far this year, has made headlines recently for being the worst performing major equity market in Asia — a sharp contrast to China’s growth story.

Still, taking into account the total gains made over the past decade paints a more bullish picture. The Shanghai Composite index rose 35 percent from 2002 to 2011, far outperforming the U.S. benchmark S&P 500 which only rose 9 percent in the same period. But, despite the substantial 10-year gain, it hasn’t been all smooth sailing for Chinese equities. The Shanghai Composite fell about 65 percent to 2,016 in October 2008 during the global financial crisis from a peak level of 5,725 in September 2007. While stocks continued to gain ground up until August 2009, it has been in a steady decline since.

Despite the downtrend in the last three years, several analysts are still optimistic about a turnaround in Chinese equities on the growing possibility of more easing by the government to spur growth. Japanese brokerage Nomura predicted in July that Chinese stocks could climb as much as 20 percent by the first quarter of 2013 after having bottomed in early June. Meanwhile, the notable head of Goldman Sachs Asset Management — Jim  O’Neill — said in September that Chinese equities present the “most attractive” investment opportunity in all of the BRIC markets.

Internet Explosion

China Internet Network Information Center

By sheer numbers, China is experiencing a technology boom unlike anywhere else in the world. Its internet population surpassed half a billion users in 2011 — making it by far the world’s biggest online market. That’s a more than 362 percent increase since 2005. Even then, the internet usage penetration remained at 38 percent in 2011, presenting further growth potential.

About four out of 10 Chinese use the internet, accounting for a total of 538 million users, according to state-run agency China Internet Network Information Center (CNNIC). That population is set to jump to 700 million users by 2015, according to the Boston Consulting Group (BCG), which is more than double the entire population of the U.S. The country’s fast growing online market provides a big opportunity for retailers and BCG predicts that China’s online retail sales will triple to more than $360 billion by 2015 to make it the world’s largest online retail market.

Smartphone makers are also looking to increase their presence in the country’s mobile phone market. Nearly 70 percent of China’s internet users connected to the web through their handsets in 2011, according to the CNNIC.

Mega Rich Get Richer

The Hurun Research Institute

China’s billionaire count has surged in the past decade, spurred on by the country’s rapid economic development.

In 2001, China had only one billionaire, but that number has jumped to 251 this year —according to the Shanghai based Hurun Report — making it second only to the U.S. in the world when it comes to most billionaires. Billionaires account for just 1.3 percent of wealth individuals with $30 million or more in China, but control nearly a quarter of the ultra-rich group’s wealth of $1.58 trillion, according to research firm Wealth-X. These billionaires are worth an average of almost $2.6 billion each.

China’s consumption and construction boom are two of the major drivers of wealth for the super-rich with a majority of billionaires counting on property as one of their main sources of wealth. The public listing of companies has also made business owners billionaires overnight. But recently, the stock market has also caused China’s billionaires to lose almost a third of their combined wealth with the benchmark Shanghai Composite falling 20 percent from August 2011 to July 2012, according to Wealth-X. In total, the population of China’s wealthy with assets worth $30 million and above shrank by 2.3 percent in the past year, while their combined wealth decreased nearly 7 percent to $1.6 trillion.

Consumption Boom

National Bureau of Statistics China

Consumer spending in China has seen double digit growth for a decade, creating a path for the country to become the world’s biggest consumer market by 2015, according to government authorities.

Its fast growing consumer class of about 130 million has given a big boost to markets from retail and housing to travel and other discretionary sectors. China’s consumer retail sales, for example, are expected to surpass $5 trillion in 2015, according to Commerce Minister Chen Deming. Rising incomes amid rapid urbanization are major reasons behind China’s consumption boom and the World Bank expects the growth to continue as income per capita climbs to more than triple to $16,000 by 2030 from about $5,000 now.

Businesses like carmakers, luxury retailers, and hotel chains have been flocking to the world’s second largest economy to target Chinese consumers. Italian fashion house Prada, for example, counts on China as its biggest market with 30 percent of its global sales in the fiscal year that ended in January 2012 coming from the country. The luxury retailer has 19 stores in China, but plans to open up to 15 more this year. The world’s largest premium carmaker BMW, meanwhile, increased sales of its flagship BMW brand in China by 55 percent in September compared to the previous year, while its Mini cars saw sales jump a whopping 121 percent in the same period.

But not all retailers have had a similar level of success in China. Home Depot, the world’s largest home improvement chain, struggled to win over Chinese shoppers with its U.S. style do-it-yourself model. The U.S retailer announced in September that it will close all seven of its big box stores to focus on specialty stores and e-commerce in China.

How Will China’s Changing Leadership Affect US Relations

Will U.S.-China Relations Change After China’s Historic Leadership Transition?

By Bernice Napach | Daily Ticker

The U.S. is not the only superpower facing political change this week. China begins its 18th Communist Party Congress on Wednesday and party leaders will decide who will lead the world’s second biggest economy.

“This is an historic time to be watching China politically now,” says Nicholas Consonery, Asia analyst for Eurasia Group, a global political risk research and consulting firm. “The Communist Party, which has been in charge since 1949, is going to see a big transition in the entire leadership of the party.”

Consonery tells The Daily Ticker that the Party’s standing committee, which leads the country, will almost completely turn over and may even be reduced in size from nine to seven members. These individuals will likely run China for the next 10 years.

It’s expected that Xi Jinping, China’s vice president, will be named the new head of state and Li Kequiang, the current executive vice premier, will become the new premier. Although the changes will announced by Nov. 11, they won’t take effect until March 2013.

Consonery says the changes are wide and deep — the equivalent in the U.S. to a change in the presidency, the Joint Chiefs of Staff, the Supreme Court and the governorships of most or all the states, all at once.

“It’s not just change at the top of the party, but the whole party structure,” adds Consonery.

Related: China’s Slow Growth ‘Marks an End of an Era’ But No Hard Landing China’s new government will face many domestic challenges including a slowing economy, a growing middle class and increasing demands for political reform. China’s economy grew at a 7.4% annual rate in the third quarter—its slowest since the first quarter of 2009.

China’s new leadership with also have to contend with an increasingly fraught relationship with the U.S. and its Asian neighbors.

The Obama Administration has been bringing more cases against China through the WTO, charging China with unfair trade practices.

Related: America vs. China: “Free Trade is Only for Friends,” Says Prof. D’Aveni “The U.S. is clearly headed in the direction of taking more forceful stances with China over trade and economic issues,” says Consonery.

In Asia, there’s a “growing level of concern about China’s rise…on the part of many of its neighbors and a clear determination on the part of the U.S. to increase its engagement there,” says Consonery. China and Japan both claim ownership of the uninhabited Senkaku Islands, which are currently controlled by Japan.

Chinese surveillance ships have been seen sailing in the waters around the islands. On Tuesday the U.S. and Japan began an 11-day join military exercise in the area.

International Patent Litigation – Is There a Home Court Advantage?

Author’s Note: Did Samsung get a fair trial against Apple in Northern California? Can Apple get a fair trial in Korea or China?  All interesting questions with potential billion dollar outcomes depending on the answer.

Some in Asia See Bias in U.S. Apple Verdict

By Jessica Seah  The Asian Lawyer  September 3, 2012

On August 24 a California federal jury awarded Apple Inc. over $1 billion in its smartphone patent infringement suit against Samsung Electronics Co. Ltd.—the largest patent verdict ever. The same day, a Korean court issued a split decision widely seen as more favorable to Samsung, and, last Friday, a Japanese court ruled against Apple outright, ordering the U.S. company to pay Seoul-based Samsung’s legal costs.

The contrast in outcomes has not been lost on intellectual property lawyers in Asia.

“I am surprised Samsung lost all counts in the case in the U.S.,” says one Beijing IP partner with an international firm. “I think there is a clear home court advantage there.”

Other IP lawyers in the region expressed similar sentiments, with some noting that perceptions of bias in the U.S. Apple ruling could provide cover to courts in the region, particularly those in China, that have been accused of favoritism themselves.

Matthew Laight, an IP lawyer and the Hong Kong–based China managing partner for U.K. firm Bird & Bird, says that inexperienced Chinese judges in patent cases could potentially draw the wrong lessons from the Apple case.

“Chinese judges are just getting their heads around whether or not to grant injunctions in patent disputes,” Laight says, “so the result of the Apple-Samsung case may influence how judges see things.”

Many lawyers in the region noted that the U.S. decision was made by a jury. The Korean and Japanese cases were both decided by judges.

The Beijing partner says he found the U.S. ruling less reasonable than the Korean one, in which the three-judge Seoul panel found that both Apple and Samsung infringed each other’s patents and ordered a halt to sales in the country of certain products from both companies. Some observers have said that ruling was more favorable to Samsung because it had already discontinued the affected products.

Apple’s hipper image helped with the California jury, the Beijing partner thinks. Despite being the world’s largest technology manufacturer by revenue, Samsung was the effective underdog in the U.S. case.

“Samsung was pitted against the most revered and successful company in the world,” he says. “So there is definitely a local bias there, especially when decided by jury. I have my doubts against the jury really understanding such a complex case.”

The seven men and two women of the jury found that Samsung infringed all but one of the seven patents at issue—a patent covering the exterior design of the iPad. They also decided that Apple didn’t violate any of the five patents Samsung asserted in the case.

In an interview with Bloomberg, jury foreman Velvin Hogan rejected accusations of local bias. He said the jurors were “inundated” by evidence, and the fact that Apple was headquartered in Cupertino, California—not far from the San Jose courtroom in which the case was heard—made no difference.

Morrison & Foerster and Wilmer Cutler Pickering Hale and Dorr represented Apple, while Quinn Emanuel Urquhart & Sullivan acted for Samsung.

In Japan, Apple had claimed that Samsung infringed its patent on synchronization and sought $1.3 million in damages. District Judge Tamotsu Shoji in Tokyo rejected Apple’s claim, though Apple has other infringement claims pending in Japan.

According to Yoshikazu Iwase, an IP partner at Tokyo-based Anderson Mori & Tomotsune, the Japanese court decision was not surprising because “traditionally Japanese judges are conservative in enforcing patents” and local judges are usually “not directly affected by the decisions of other jurisdictions.”

Still, large Asian corporations are generally accustomed to litigating in the United States and have faith in the fairness of the courts there. Though there may be a sense that Apple enjoyed a home-court advantage in San Jose, says Jones Day Tokyo partner Michiku Takahashi, that stops well short of the kind of bias they worry about in China, where courts are not independent and are generally seen as favoring well-connected parties.

“Experienced Japanese companies are not too bothered about court bias, but comparatively they are generally more concerned about decisions made by Chinese courts, than, say, in the U.S. or in Europe,” she says.

Many lawyers believe the Apple-Samsung fight will trigger a wave of new patent litigation targeting big Asian companies. Geoffrey Lin, a Shanghai-based IP partner at Ropes & Gray, says that lawyers will start to go back to look at their clients’ business models to make sure they are closely protected by their patents.

“International technology companies, especially those that manufacture smartphones, are going to start looking at jurisdictions where there is a lot of trolling,” says Lin.

Takahashi says smartphone-related patent litigation has already become common in recent years. “There has been an increasing number of patent troll cases here in Japan, where non [technology] practicing entities are registering smartphone patents,” she says. “So the Apple matter may give even the larger Japanese phone companies more confidence to litigate when they feel their patents have been infringed.”

But Laight says that while the Apple-Samsung case has gotten a lot of attention, the dispute might not be a sole driver for an increase in patent litigation in Asia.

Asian electronics companies from Japan, Korea, and Taiwan have long litigated against each other both in their home jurisdictions and around the world. Laight notes that now Chinese companies are getting in on the act. Last year Shenzhen-based telecommunications firm Huawei Technologies Co. filed patent infringement lawsuits against its smaller Chinese rival ZTE Corp. in courts in France, Germany, and Hungary. The patents relate to data card and 4G technologies, and ZTE has allegedly used Huawei’s trademark on some of its data cards. ZTE has countersued, alleging that Huawei infringed its 4G patents.

 

 

Chinese Companies Make Quick Exit from US Markets

Chinese firms leave US stock markets amid complaints about price, accounting scrutiny

By Joe Mcdonald, AP Business Writer | Associated Press 

BEIJING (AP) — Just a few years after Chinese companies lined up to sell shares on Wall Street, a growing number are reversing course and pulling out of U.S. exchanges.

This week, Focus Media Holding Ltd., announced its chairman and private equity firms want to buy back its U.S.-traded shares and take the Shanghai-based advertising company private. The deal would value Focus Media at $3.5 billion, according to financial information firm Dealogic.

Smaller companies also are withdrawing from U.S. exchanges. In a sign of official encouragement, a Chinese business magazine said a state bank has provided $1 billion in loans to help companies with listings abroad move them to domestic exchanges.

The withdrawals follow accusations of improper accounting by some companies and a deadlock between Beijing and Washington over whether U.S. regulators can oversee their China-based auditors.

Some Chinese companies say they are pulling out of U.S. markets because a low share price fails to reflect the strength of their business. Withdrawing also eliminates the cost of complying with American financial reporting rules.

Focus Media “has been seriously undervalued on U.S. stock markets” and being taken private will help to promote its “long-term strategic development,” said a company spokeswoman, Lu Jing.

The company, formed in 2003, operates electronic advertising displays in elevators, grocery stores and other locations.

“We haven’t considered whether to list the company on Chinese markets but that possibility has not been excluded,” Lu said.

U.S.-traded Chinese companies faced scrutiny after auditors for several quit and others were accused of accounting irregularities. Concerns about company finances have caused share prices to tumble, costing investors several billion dollars.

“Probably all these companies have some questionable accounting, so they may prefer to move out of the U.S., not to come under too much scrutiny,” said Marc Faber, managing director of Hong Kong fund management company Marc Faber Ltd.

A financial firm, Muddy Waters Research, accused Focus Media last year of overstating the number of its display panels and questioned acquisitions reported by the company. Focus Media denied the allegations and said independent auditors confirmed the size of its network.

This week, Muddy Waters founder Carson Block said in a statement: “The markets are far better off if a few deep pocketed investors own Focus Media instead of mutual funds and other public shareholders.”

The group proposing to take the company private includes its chairman, Jason Nanchun Jiang, and private equity firms Carlyle Group, CITIC Capital Partners, CDH Investments and China Everbright Ltd.

The status of Chinese companies in the United States could be complicated by a dispute between U.S. and Chinese regulators over whether American inspectors will be allowed to examine the work of their China-based audit firms.

Washington wants auditors to hand over documentation on companies that are under investigation but Chinese authorities have barred the release of some information. If a settlement is not reached, the SEC could reject audits by China-based firms, forcing companies to find new auditors.

In May, Beijing took steps to tighten control of local affiliates of major accounting firms by issuing a requirement for Chinese citizens to head those offices.

Dozens of Chinese companies issued shares on Wall Street over the past decade, raising billions of dollars from investors who wanted a stake in the country’s booming economy.

Many were private companies that could not raise money on Chinese exchanges that were created to finance state industry or wanted the higher public profile.

Chinese regulators encouraged the move as a way for entrepreneurs to raise money and speed the development of China’s economy. But in recent years Beijing has encouraged private companies to issue shares in China to help develop its markets and give Chinese households better investment options.

Regulators have made it easier for private companies to join China’s two exchanges in Shanghai and the southern city of Shenzhen, though most listings still are for state enterprises. The Shenzhen exchange created a second board for small companies, imitating the U.S.-based Nasdaq market.

Major state companies such as oil giant PetroChina Ltd. and China Mobile Ltd., the world’s biggest phone company by subscribers, also have issued shares abroad. None has indicated it plans to withdraw from foreign stock exchanges.

The economics also are shifting in China’s favor.

U.S.-traded companies saw share prices plunge following the 2008 global crisis, while economic growth at home, even after a recent decline, is still forecast at about 8 percent this year. Rising Chinese incomes are creating a bigger pool of money for investment.

“Generally speaking, a company’s shares are sold at a higher premium in initial public offerings on Chinese stock markets than on U.S. markets,” said Mao Sheng, a market strategist for Huaxi Securities in the western city of Chengdu.

Also, he said, “If the company’s business is mainly in China, it will be good for its brand promotion.”

Another U.S.-traded company, Fushi Copperweld Inc., announced plans in June by its chairman, Li Fu, and a Hong Kong firm, Abax Global Capital, to take the maker of metallic conductors private.

Muddy Waters cited Fushi Copperweld in April as one of several companies it said dealt with an investment bank that helped enterprises seeking U.S. stock market listings to conceal problems and misrepresent financial information.

Fushi Copperweld denied Muddy Waters’ “vague and nonspecific” claims.

The company said its privatization will be financed with loans from the China Development Bank.

Created to support construction of highways and other public works in China, CDB plays a growing role in its corporate expansion abroad. The bank provides credit to buyers of Chinese telecoms gear and other big-ticket goods and has financed building projects in Africa, Latin America and Asia.

CDB has lent $1 billion “to help Chinese public companies leave the U.S. stock market to return to domestic markets,” the business magazine Caixin said last month.

Employees who answered the phone at Fushi Copperweld said no one was available to comment.

Also in June, China TransInfo Technology Corp., a provider of traffic management technology, announced privatization plans to be financed by CDB’s Hong Kong branch. A company spokeswoman said she could not comment because the plan is not finalized.

In October, Harbin Pacific Electric Co. withdrew from Nasdaq in a share buyback financed by $400 million in loans from the CDB.

 

Federal Reserve Approves First US Bank Acquisition in the United States by a Chinese Bank

On May 9, 2012, the Board of Governors of the Federal Reserve System (the “FRB”) issued an order (the “Order”) approving the acquisition of 80% of the shares of common stock of The Bank of East Asia (U.S.A.) National Association (“BEAUSA”), by Industrial and Commercial Bank of China Limited (“ICBC”). This Order marks the first occasion on which the FRB approved the acquisition of a U.S. bank by a Chinese bank since the Bank Holding Company Act of 1956 (the “BHC Act”) was amended by the Foreign Bank Supervision Enhancement Act of 1991 (“FBSEA”). The FBSEA, which increased federal supervision of foreign banks operating in the United States, requires the FRB to make a finding that a foreign bank seeking to acquire control of a U.S. bank is subject to comprehensive supervision on a consolidated basis (“CCS”) by its home country supervisor. The Order marks the first time that the FRB has made a full and unqualified CCS determination for a Chinese bank to acquire control of a U.S. bank, although it has previously made a so-called “limited” CCS determination in the context of Chinese banks establishing U.S. branches.

On November 8, 2007, the FRB approved an application by China Merchants Bank Co., Ltd. (“CMB”) to establish a branch in New York, New York, the first such approval for a Chinese bank since the FBSEA. The FRB made a “limited” CCS determination pursuant to a provision that allows the FRB to approve a branch application if the appropriate authorities in the home country of the foreign bank are actively working to establish arrangements for the consolidated supervision of the bank submitting the application, and all other factors are consistent with approval. The FRB’s approval of CMB’s branch application opened the door for other Chinese banks to apply for branches in the United States. Thereafter, branch approvals based on similarly limited findings of CCS were granted by the FRB to ICBC in November of 2008 and to China Construction Bank Corporation in March of 2009. The “limited” CCS determination available for a branch application is not available for an application to acquire a U.S. bank under Section 3 of the BHC Act, which requires the FRB to make a full and unqualified CCS determination.

The FRB’s evaluation of whether ICBC is subject to CCS was foreshadowed in the FRB’s August 31, 2010 determination that CIC, an investment vehicle organized by the Chinese government, qualified under the CCS standard in the context of a Section 3 application for CIC’s non-controlling, but greater than 5%, investment in the shares of common stock of Morgan Stanley. The FRB explicitly noted, however, that that finding was based on both the unique nature and structure of CIC and the noncontrolling nature of the investment under consideration in that application. In addition, the FRB noted that, in evaluating a proposal by a Chinese bank to acquire a U.S. bank, the FRB would evaluate whether that Chinese bank is subject to CCS.

In the Order, the FRB detailed its exhaustive analysis on the CCS of ICBC by the China Banking Regulatory Commission and other regulatory authorities including, among others, the People’s Bank of China, the State Administration of Foreign Exchange, China Securities Regulatory Commission and China Insurance Regulatory Commission. The Order also noted the International Monetary Fund’s most recent determination that China’s overall regulatory and supervisory framework adheres to international standards. In addition, the FRB noted China’s efforts on combating money laundering and terrorism financing and found that the anti-money laundering efforts by ICBC and the Chinese regulators are consistent with approval.

The Order should create the opportunity for other leading Chinese banks to acquire U.S. banks of a relatively modest size. Although the CCS determination is nominally bank-specific, in practice a CCS determination for one bank in a country is typically precedential for all similarly situated banks in that country. In addition, because the FRB takes the position that a CCS determination is required before a foreign banking organization can obtain financial holding company (“FHC”) status, the Order should pave the way for Chinese banks and their holding companies that are subject to the BHC Act to become FHCs.

 

Meeting the Future Chinese Leader, Xi Jinping

David Griffith’s Note: I went to the US-China Economic Forum yesterday in downtown Los Angeles as a guest of the Chinese Consul General to get a glimpse of the future Chinese leader, Xi Jinping, and I was encouraged by what I saw.  Xi appears to be a man who likes America and can in turn put a new face on China that Americans will embrace.  The American leaders there, Vice President Joe Biden, Governor Jerry Brown, and Mayor Antonio Villaraigosa looked very comfortable with the future president and their various counterparts from Chinese government at both the national and provincial levels.  Over 500 Chinese companies were part of a series of major trade announcements.  The event definitely confirms Southern California’s prominence in trade with China.

LOS ANGELES (Reuters) – China’s leader-in-waiting Xi Jinping on Friday swiped away fears that his country’s economic growth could stumble, and turned to courting American companies, film-makers and governors hungry for a slice of that growth on the final day of his U.S. visit.

At the end of Vice President Xi’s five-day trip, his U.S. counterpartJoe Biden announced China had agreed to make it easier for Hollywood to distribute movies to China’s expanding audiences. Xi (pronounced “shee”) told a business forum in Los Angeles that China would promote greater domestic demand and turn more to the United States to buy imports and send investment.

Despite recent economic slowing and persistent price pressures, Xi told the gathered business executives that China’s economic momentum would not falter as some economists warn.

“China’s economy will maintain stable growth,” he said “There will be no so-called hard landing.”

Xi is almost sure to succeed Hu Jintao as Chinese president in just over a year, and the final day of his tour of the United States featured commercial deals and reassuring talk intended to blunt American ire about the trade gap between the countries.

“We will further increase imports from other countries in the light of our economic and social development and consumer demand. We will actively expand imports from the United States,” Xi later told a midday meeting.

Biden, who accompanied Xi to Los Angeles, praised the Chinese Vice President‘s efforts to reach out to often wary Americans, but reminded him that rancor over trade imbalances and barriers had not evaporated in all the sunny goodwill.

“The crux of our discussion is that competition can only benefit everyone if the rules are fair and followed,” Biden told the midday reception for Xi.

The U.S. movie industry has long complained about China’s restrictions on the number of foreign films allowed into the country each year, a limit that they say boosts demand for the bootleg DVDs that are widely available in China.

The film announcement does not remove China’s quota system, but it might ease some of the ire.

The agreement allows more American exports to China of 3D, IMAX, and enhanced-format movies, and also expands opportunities to distribute films through private enterprises rather than the state film monopoly, the U.S. Trade Representative’s office said.

GETTING READY FOR NEXT DECADE

The two vice presidents both suggested that Xi’s diplomacy, deals and folksy public displays could pave the way for steadier ties between the world’s two biggest economies.

Xi said that he felt from his visit that “mainstream American opinion” supports stronger ties. “I can now say that my visit has been fully successful,” he said.

“We’ve established a personal friendship and a healthy working relationship,” he said of himself and Biden.

Xi is poised to become China’s next leader after a decade in which it has grown to become the world’s second-largest economy. Beijing wants to avoid tension with Washington while the Communist Party leaders focus on the power handover.

Xi’s visit to the United States was also intended to get both sides more familiar with each other for the decade that he could be in power. He will most likely succeed Hu Jintao as party chief in late 2012 and as president in early 2013.

Under Xi, China’s economic size and military capabilities are likely to grow closer to U.S. levels.

Washington and Beijing have often jostled over economic, political and foreign policy disputes from human rights to Taiwan and most recently Syria.

The U.S. trade deficit with China expanded to a record $295.5 billion in 2011, and many U.S. lawmakers complain China’s yuan currency is significantly undervalued, giving its companies an unfair advantage.

The Obama administration has also accused China of distorting trade flows by ignoring intellectual property theft, putting up barriers to foreign investors and creating rules that favor China’s state-owned behemoths.

Xi’s stop in Los Angeles was choreographed to blunt those complaints and make China’s case that its rapid growth presents the U.S. economy with opportunities, not threats.

Scores of executives from major U.S. and Chinese companies, from Intel to Microsoft, lined up to sign deals after Xi’s address at the economic forum on Friday.

They included “Kung Fu Panda” studio Dreamworks Animation’s venture to make films from Shanghai, and Chinese telecom giant Huawei’s pledge to award $6 billion in contracts over three years to Qualcomm Inc, Broadcom Corp and Avago.

“MISSION IMPOSSIBLE” FAN

More than the publicly stern Chinese President Hu, Xi has tried to put a friendlier face on his government during his U.S. visit, including revisiting the small town of Muscatine in Iowa where he visited in 1985 and stayed two nights with a family.

The 58-year-old also visited the International Studies Learning School in South Gate — a Los Angeles enclave of mainly Hispanics — where students learn Chinese.

At the school, Xi recalled his first visit to Muscatine: “They gave me the same impression that, like Chinese people, they are warm-hearted, friendly, honest and hard-working. Twenty-seven years have passed, but that remains my impression, and it has become a deeper one.”

Xi also offered a glimpse of his personal life, telling the students he enjoyed swimming and watching sports, including American basketball, baseball and gridiron football.

Showing his familiarity with Hollywood fare, Xi said it was difficult to find time to relax. “It’s like the name of that American movie — ‘Mission Impossible’.”

After their visit to the school, Biden told reporters the talks with Xi had been very forthright, and was also intensely curious about the workings of the American political system.

“This is a guy who wants to feel it and taste it, and he’s prepared to show another side of Chinese leadership,” said Biden. “He is intensely interested in understanding why we think the way we do, what our positions are, and the need to actually broaden this kind of understanding.”

Xi was due to watch part of an LA Lakers basketball game before he left for the next two countries of his international tour, Ireland and then Turkey.

 

China and US Try to Make Trade Progress to Save Global Economy

Global economic outlook grim, China tells U.S. trade talks

Reuters November 21, 2011

By Chris Buckley

CHENGDU, China (Reuters) – Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.

Wang said an “unbalanced recovery” may be the best option to deal with what he had described on Saturday as a certain chronic global recession, suggesting Beijing would bolster its own economy before it worries about global imbalances at the heart of trade tensions with Washington.

“An unbalanced recovery would be better than a balanced recession,” he said at the annual U.S.-China Joint Commission on Commerce and Trade, or JCCT, in the southwest Chinese city of Chengdu.

The comments, echoed by Vice Finance Minister Zhu Guangyao, stopped short of suggesting China would try to boost exports as it had done during the 2008-2009 global financial crisis when it pegged the yuan to the dollar.

Instead, U.S. Commerce Secretary John Bryson told reporters that China had confirmed to U.S. officials that it planned to spend $1.7 trillion on strategic sectors in the next five years.

Beijing has previously said these sectors include alternative energy, biotechnology and advanced equipment manufacturing, underlining its aim to shift the growth engine of the world’s No.2 economy to cleaner and high-tech sectors.

The investment amount of 10 trillion yuan ($1.7 trillion) is more than two times bigger than the eye-popping 4 trillion yuan stimulus package launched during the global financial crisis, plans first reported by Reuters a year ago.

“Global economic conditions remain grim, and ensuring economic recovery is the overriding priority,” said Wang, the top official steering China’s financial and trade policy, at the start of the second day of talks with the Americans.

His comments suggested that Beijing should attend to bolstering China’s own growth before it worried about global imbalances. In other words, a strong Chinese economy that brings a continued trade deficit with the United States would be better for the world economy than a slowdown in China itself.

“As major world economies, China and the United States would make a positive contribution to the world through their own steady development,” Wang told dozens of trade, investment, energy and agricultural officials from each government seated in a conference hall.

ALARM OVER ECONOMIC RISKS

Policymakers globally have voiced alarm over economic risks, which mainly stem from the euro zone debt crisis.

On Monday, Singapore and Thailand said their economies would shrink in the fourth quarter and Japan posted a bigger than expected fall in October exports. Some central banks, including those in Brazil and Indonesia, have cut interest rates.

On Saturday, Wang gave the most dire assessment on the world economy from a senior Chinese policymaker to date.

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news agency.

The remarks weighed on Chinese and Hong Kong stocks, while world markets were also weak as investors fretted over the euro zone debt crisis.

China’s growth slowed to 9.1 percent in the third quarter from 9.5 percent in the second-quarter and 9.7 percent in the first quarter, but the rate remains in Beijing’s comfort zone.

After tightening monetary policy to fight the threat of inflation, the central bank has since loosened its grip on bank credit in a bid to support cash-starved small firms and pledged to fine-tune policy if needed as economic growth slowed down.

“It’s clear now that Beijing is ready for policy fine-tuning (to support growth) at a time when the overall domestic and foreign economic situation is not optimistic,” said Hua Zhongwei, an economist with Huachuang Securities in Beijing.

ON TRADE, FRICTION AND PROGRESS

U.S. officials said the discussions yielded progress on the question of forced technology transfers to Chinese companies, long a sore point for U.S. businesses.

In particular, China committed not to require foreign automakers to hand their new energy vehicle technology over to Chinese partners, or to establish Chinese brands as a condition for market access, said U.S. Trade Representative Ron Kirk.

“China also confirmed that foreign-invested companies will be eligible on an equal basis for any subsidies or incentive programs for electric vehicles,” said Kirk.

Although the JCCT talks do not address exchange rate policies, U.S. officials at the talks warned Wang and his colleagues that they could not ignore rising American impatience with China’s trade policies and investment barriers.

U.S. gripes about China’s trade-boosting policies spilled into President Barack Obama’s meeting with Chinese Premier Wen Jiabao on Saturday in Bali, when Obama raised China’s exchange rate policies, which many in Washington say keep the yuan cheap against the dollar in order to help Chinese exports.

However, Zhong Wei, an influential economist at Beijing Normal University, said the benefits to the United States of yuan appreciation “are nearly zero.”

“Cheap Chinese goods have been a subsidy for the poor in the U.S., and now the U.S. government wants to eliminate such subsidy while it’s having difficulty creating jobs,” he said.

At the heart of the trade friction between the two countries is a U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009.

Bryson told the talks the United States welcomed more expanded trade and investment, on balanced terms.

“But a reality also is that many in the U.S., including the business community and the Congress, are moving toward a more negative view of our trading relationship, and they question whether the JCCT is able to make meaningful progress,” said Bryson.

Tenth Anniversary of the ‘BRICs’ – Is the Western World ‘Finished Financially’?

CNBC – November 30, 2011

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC.

Murrin added he believes the power shift from the West to emerging economies beyond Europe and the United States was “unstoppable” and he blamed a lack of ideas from Western leaders on how to stimulate growth together with contracted demographics and rising inflation as catalysts for Western decline.

“We suffer from no growth and we suffer from imported inflation… that means we have negative real growth and societies fracture when you have negative real growth and quite simply our society faces fractures for trying to stick Europe back together again is not going to work with that underlying paradigm, unless you can create five percent growth to overcome that imported inflation,” Murrin explained.

Murrin said that the East was depending less on the West and the rise of a consumer society was the first step in the expansion of an economic empire.

“If you look at the cycle of an empire system from regionalization to expansion to empire, the first phases of that catalyst are when you have a self fuelled consumer society and so actually that process of building your consumer base which is really what’s going on in China, day by day their consumer base increases and the dependence on the West decreases,” he said.

Containing China

Murrin added that while China is by far the biggest emerging economy and would be at the center of a new economic order, other emerging nations were set to join the BRIC countries and new political orders and alliances would come about as a result.

“This isn’t just a BRIC story, this is the end of the Christian Western Empire versus the rise of the whole emerging world led by China as the foremost and most powerful,” Murrin told CNBC.

“I think it’s going to be the whole world trying to contain China’s growth and there’s going to be completely new alliances that take place… between Australia, Japan and India and America and possibly Russia if the foreign policy is expansive enough, there’s going to be a ring of containment trying to hold this bulging entity which is like no other nation we’ve ever seen coherently challenge for control of world commodities and resources,” he added.

Intervention Not the Answer

Finally, Murrin stressed that Europe in particular was set to experience a rapid and deep decline and intervention by the European Union and its financial institutions was not a solution to stimulate growth.

“I think there’s a real reality amongst investors and just taxi drivers, that without growth, the system’s not sustainable, so intervention is just a drug and we all know that the more drugs you put into someone, the more the system becomes immune to their response and so I don’t see this as a solution,” he said.

Pointing to previous economic downturns, Murrin said the West was much less equipped than the emerging world to deal with its current decline.

“In all our examples of disastrous events, Argentina, Russia, the Asian crisis, they’re not good references for us in the West because they take place in countries with good demographics, good commodity stories and essentially underlying tides which lift them away from their problems,” he said.

“We in the West have none of those, we live in a world where resources are increasing in prices, where we’re a consumer society, we’re an old society, we’re not innovative, we’re not expansive, so we don’t have any of those natural lifting qualities to actually pick us out of the mire which is what decline is really about,” he added.