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Baidu profit beats estimates as Google slips in China

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NEWS - China IT/Telecom

Friday, 22 October 2010 15:56

Baidu Inc., owner of China’s biggest search engine, reported third quarter profit more than doubled, beating analysts’ estimates, after the company grabbed business as Google Inc. overhauled its local operations.

Net income climbed to 1.05 billion yuan ($156.4 million), or 3 yuan per American depositary receipt, compared with 492.9 million yuan, or 1.41 yuan, a year earlier, Baidu said today in a statement. That exceeded the 959 million yuan average of 11 analysts’ estimates compiled by Bloomberg. Sales increased 76 percent to 2.26 billion yuan.

Chairman Robin Li is upgrading technology to help Baidu hang on to share gains after Google closed its Chinese site this year to avoid censorship rules in the world’s biggest Internet market. The Beijing-based company, whose stock has more than doubled this year, last month started selling content including books as part of its “box computing” service to expand revenue beyond search.

"We believe box computing will indeed further strengthen Baidu’s market position in China,” Citigroup Inc. analyst Alicia Yap wrote in an Oct. 5 report. The technology will “increase revenue opportunities for Baidu,” Yap wrote.

Baidu ADRs rose 2.5 percent in Nasdaq Stock Market trading before the earnings announcement. The stock has outperformed online rivals in China including Tencent Holdings Ltd., the country’s biggest Internet company by market value, and Alibaba.com Ltd., the leading local e-commerce operator.

Fourth-Quarter Outlook

Revenue is expected to rise to 2.37 billion yuan to 2.44 billion yuan in the fourth-quarter, Baidu said. That compares with the 2.34 billion-yuan average of analysts’ estimates compiled by Bloomberg.

The adoption of Baidu’s Phoenix Nest advertising system boosted the company’s sales, Li said in an interview in August. In December, Baidu introduced Phoenix Nest, a program designed to increase sales of online-search keywords to clients.

New applications such as e-books offered as part of the “box computing” platform will “eventually translate into financial benefits,” Baidu Chief Financial Officer Jennifer Li said last month.

Baidu accounted for 72.8 percent of China’s search-engine market by revenue in the third-quarter, rising from 71 percent in the previous three months, according to research company iResearch. Google’s share dropped to 24.6 percent from 26.8 percent, iResearch said.

Google had been losing market share to Baidu since January, when the owner of the world’s most-popular search engine said it was no longer willing to comply with Chinese government requirements for websites to self-censor content.

Google’s Shift

The U.S. company in March shut its Chinese search service and redirected local users to its unfiltered Hong Kong site.

The change led to a shift in advertising spending to Baidu from Google, James Hawkins, managing director at DGM Asia, which buys advertising from Chinese Internet companies, said this month.

In July, China renewed Google’s Internet license after the Mountain View, California-based company changed the arrangement used to point Internet traffic to the Hong Kong site. A month earlier, Google stopped automatically redirecting users to the Hong Kong site and put in place a so-called landing page that requires users to opt for the alternative service.

China had an estimated 420 million Internet users at the end of June, an increase of 36 million from six months earlier, according to data from the government-sponsored China Internet Network Information Center.


China said to mull insurance market easing for foreign firms

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NEWS - China Law

Thursday, 05 August 2010 13:19

China’s insurance regulator is considering opening the market for compulsory automobile insurance to foreign firms, said three people with knowledge of the matter.

The China Insurance Regulatory Commission may allow foreign firms to offer mandatory liability insurance, said the people, who declined to be identified because the decision isn’t final. Foreign insurers, which can now only offer some optional car insurance products, are losing out to local firms as drivers tend to choose the same company for both non-compulsory and mandatory coverage.

Easing the rules would allow overseas insurers including American Insurance Group Inc. to boost their business in the world’s biggest car market, and increase their share from 4 percent of the $164 billion insurance market six years after it was opened under World Trade Organization commitments. Auto insurance generates more than 70 percent of revenue for PICC Property & Casualty Co., China’s biggest non-life insurer.

“The government is no longer worried about foreign companies dominating China’s insurance market,” said Tuo Guozhu, a professor with Beijing-based Capital University of Economics and Business. The proposed relaxations “reflect their confidence in the nation’s own insurance industry.”

Foreign banks including Citigroup Inc. have also trailed Chinese rivals, whose strong ties with local clients and nationwide networks helped defend their dominance.

PICC added 0.7 percent in Hong Kong trading as of 11:23 a.m. local time. The shares of China Life Insurance Co., the world’s biggest life insurer, were unchanged in Hong Kong.

Banks Languish

Overseas lenders’ share of China’s banking market by assets slid to 1.71 percent last year from 2004’s 1.84 percent, according to China Banking Regulatory Commission’s 2009 annual report. That’s even as their total assets more than doubled and the number of operational entities rose 80 percent to 338.

China lifted geographical and most business limitations on foreign insurers in 2004 to comply with WTO commitments made upon its entry into the global trading group. Fifty-two overseas insurers have set up local operations, the CIRC said in December, almost tripling from 18 before the nation became a member of the WTO on Dec. 11, 2001.

Foreign insurers’ market share has risen by less than 2 percentage points from 2.3 percent in 2004.

China Life more than quadrupled revenue from 2004 to 2009 in a market that’s expanded an average 30 percent a year during the past three decades.

Foreigners ‘Trapped’

Only three out of 24 foreign life insurers made a profit in 2008, according to the 2009 Yearbook of China’s Insurance compiled by the regulator. Money losers included Allianz China Life Insurance Co., whose loss more than doubled from 2007 to 483 million yuan ($71.3 million).

Some foreign insurers are retreating: Canada’s Sun Life Financial Inc. on July 20 won regulatory approval to cut its stake in an eight-year-old venture to below 25 percent, which designates it as a local insurer. Sun Life Everbright Life Insurance Co., now a Chinese company after the Canadian firm sold half of its 50 percent stake to two local investors, lost 243 million yuan in 2008.

Foreign insurers are struggling due to a joint-venture requirement on life insurance, unequal treatment, and stricter regulations and solvency rules following the financial crisis, PricewaterhouseCoopers LLP said in a September report after a survey of 29 foreign companies including AIG.


“A number of foreign insurers feel trapped” as they are unable to grow at a pace that would accelerate profitability, the PwC report said. “At the same time they fear that if they leave the market the regulator would look unfavorably on any request to reenter at a later date.”

While it may take another few years to break even, Sun Life Everbright now is “well-positioned to capture more than a fair share” of China’s life insurance market after its restructuring, according to Dikran Ohannessian, president of Sun Life Financial Asia. Premium income is forecast to more than double this year from 2009’s, he said.

“It’s not fair to say the commitment has diminished,” Ohannessian said in an interview on Aug. 2. “The market is attractive, we are committed, and we want to grow the business.”

Biggest Earner

While foreign life insurers are now able to offer the same services that local rivals can, a constraint on overseas non- life insurers is the fact they still can’t write legally required business, including the compulsory third-party liability auto coverage.

In the total property insurance market -- which includes auto, commercial property, homeowner and cargo cover -- the share of foreign companies slid 0.1 percentage point in 2009 to 1.06 percent, according to data from the regulator. Foreign life insurers doubled their share to 5.2 percent last year from 2.6 percent in 2004. Only five of the 15 overseas property insurers were profitable in 2008, according to the yearbook.

The CIRC held discussions this year on opening up the compulsory business, the people said. The Ministry of Commerce, which leads China’s WTO negotiations, supports the liberalization although the nation isn’t obliged to do so under its WTO commitments, two of them said.

A press official at the regulator said no immediate comment was available.
China added almost 50 million vehicles in the six years since 2004, according to the China Association of Automobile Manufacturers, and overtook the U.S. as the largest auto market last year.

‘Crying Wolf’

Beijing-based PICC won’t object to the regulatory relaxation, Chairman Wu Yan said in an interview in Shanghai.

“We’ll follow any decision by the CIRC,” he said. “Foreign insurers have been here for many years and people have been crying wolf, but look at the market share.”

In the fight for new clients, overseas insurers “definitely aren’t as competent as local companies,” which have stronger ties with car dealers and more outlets in inland cities where most future growth is forecast, said Nan Sheng, a Shanghai-based analyst at UOB Kayhian Investment Co.

“If lots of foreign companies come into the market, there will be some pressure on policy acquisition costs” at local insurers, he said, referring to higher expenses on commissions and agents.


China seeks to widen gold market

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NEWS - China Law

Wednesday, 04 August 2010 15:39

China has moved to liberalise its gold market further, increasing the number of banks allowed to trade bullion internationally and announcing measures that will encourage development of gold-linked investment products.

The move by Beijing’s central bank comes as the country’s investors pour record amounts of money into gold, in a trend that is becoming a significant factor on global prices.

China is the world’s largest gold producer and the second-largest consumer, after India, but its domestic market remains constrained by limited investment products.

“This is a positive sign for the gold market,” said James Steel, precious metals strategist at HSBC in New York.

“The Chinese statement reaffirms the vigour of the emerging markets’ demand for retail physical bullion.”

Gold prices rose in London, partly on the back of China’s announcement, but also on signs of robust buying from India’s jewellery sector.

Spot bullion traded at $1,190 a troy ounce, up from a three-month low of less than $1,160 an ounce last week.

GFMS, the London-based precious metals consultancy, said recently that Chinese investors, who are building wealth at an unprecedented rate, were diversifying their assets into gold to “protect themselves against inflation”.

China said “the need to perfect foreign exchange policies in the gold market is clear.”

It called for better financing services for bullion, opening the door for Chinese banks to hedge their gold risk overseas.

The central bank also hinted at changes in taxes on bullion. But it failed to endorse gold as an investment and to suggest it planned to increase the size of its bullion reserves, one of the world’s largest.

The new gold guidelines are part of the gradual internationalisation of the Chinese banking system. Restrictions on some renminbi-denominated investment products in Hong Kong have been lifted recently, and renminbi cross-border settlement programmes have been expanded this year.


China Trade Unions to increase role at foreign firms

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NEWS - China IT/Telecom

Friday, 10 September 2010 16:26

Sept. 10 (Bloomberg) -- The All China Federation of Trade Unions will work to increase the power of workers unions to negotiate wages at private and foreign companies in the nation, the China Daily reported today, citing Guo Chen, deputy division chief of the capacity building department of the federation.

Strikes that affected production by Japanese automakers and suicides at Foxconn Technology Group’s factory in Shenzhen showed that their unions were "not efficient,” Guo was cited as saying. The democratic election of union leaders is a good way to ensure better functioning unions, the newspaper cited Guo as saying.

At the end of last year, 79 percent of overseas-funded companies in China had unions and 78.5 percent of private companies had unions, according to the report. The federation aims for 90 percent of China’s companies to have unions by 2012, the newspaper reported, citing Guo.


China’s property market: Marriages and mergers

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NEWS - China Trade

Monday, 16 January 2012 13:31

Could the arrival of the year of the dragon rescue the country’s beleaguered property developers? As Chinese new year approaches later this month, tens of thousands of couples are preparing to marry under what is considered an auspicious sign. To win over a bride in a country undersupplied with women, it helps a lot if the aspiring groom first proves his worth by buying a home.
China’s developers need all the help they can get. Keen to cool overheating residential-property markets, the central government has restricted purchases of multiple homes, demanded larger down-payments and curtailed opportunities for speculators to “flip”, or quickly sell on, properties. It has curbed developers’ access to bank lending and cut off credit from new trust companies. It is also encouraging the use of property taxes like those introduced in Shanghai and Chongqing last year. The government remains committed to policies of this ilk.
Taken together, these measures have splashed cold water on the market. Price growth has been slowing since early 2010. Analysis by Soufun Holdings, the country’s largest property website, suggests that prices fell during December 2011 in 60 of the 100 cities it monitors. Land prices are falling fast, too. A recent survey of leading developers by Standard Chartered indicates that land prices are a third off their peaks of late 2010. There are also reports of land auctions run by local governments—a prime source of assets for developers and of funding for local exchequers—failing across the country. All of which presages an overdue consolidation of the industry.

One harbinger of the bloodshed to come is a row that erupted in Shanghai just after Christmas. SOHO China, a big developer, announced that it would buy a 50% stake in prime property near the city’s Bund promenade. It agreed to pay roughly 1 billion yuan ($158m) to Greentown China Holdings and nearly 3 billion yuan to Shanghai Zendai Property, two smaller developers. This outraged Fosun International, a conglomerate that owns the other half of the property, which claimed it had the right of first refusal and is now threatening legal action.
The row is revealing for several reasons, and not only because such public brawls are unusual in China. It serves as a good example of past excess: the property in dispute became the city’s most expensive when, in 2010, Shanghai Zendai paid 9.2 billion yuan for it in an auction. That the two smaller firms agreed to sell their crown jewel hints at the liquidity squeeze now facing weaker developers. And the squabble between the bigger players shows that there are cash-rich developers primed to take advantage of the tumult.
The scope for consolidation is huge. There are over 30,000 property developers in China. Many of these are small local firms that cannot command the access to credit, economies of scale or geographic diversification that big firms can. Analysts at Citibank estimate that the biggest 100 or so firms control only a quarter of the sector, with the next 500 firms commanding perhaps 10% to 15% more. But consolidation is gathering pace.
The obvious losers from this process will be firms that are heavily leveraged. HSBC estimates that the average gearing for leading listed developers rose from 47% in 2010 to 56% last year (before tightening measures hit home). That average masks wide variations, however: China Overseas Land & Investment (COLI), a state-run goliath, has a leverage ratio of only 36%, whereas Shimao, a smaller rival, has one of 77%. Analysts from Standard & Poor’s, a ratings agency, have run stress tests on the balance-sheets of leading developers and conclude that a 30% drop in contract sales from 2011 levels could push many weaker firms to the brink.
What about the winners? Conventional wisdom maintains that the big listed developers will best the unlisted developers, which are seen as having murky accounts and weak access to capital markets. Not necessarily, argues Andrew Lawrence of Barclays Capital. He sees an analogy with Britain’s frothy property market in the 1960s, when it was the flashy listed firms that overloaded their balance-sheets with debt, whereas the unlisted firms stayed trim and came out on top. He thinks much the same may happen in China.
Another bit of conventional wisdom holds that property developers focused on booming provincial cities will do much better than those with eyes on the biggest “Tier-1” markets like Beijing and Shanghai. One reason to think so is that the edicts issued by the federal government to curb market fervour are enforced with vigour only in the largest cities.
But it is just possible that the downturn could lead to a reversal of fortunes. Markets outside the big cities are often very thin, with few secondary buyers and little investment from other parts of the country. A sharp drop in prices and confidence could lead to a frightening freefall. Privately built housing in peripheral markets is also more vulnerable to cannibalisation by the vast amount of subsidised “social housing” being built by the government.
Pointing to Beijing’s speedy rebound from an earlier property downturn in 2008, analysts at Citibank argue that the leading markets may have a natural floor for prices even in the worst environment. If so, firms like China Resources, Longfor and COLI, which are well positioned in the big cities, may weather the storm better. This is especially true if there is a flight to quality. As the number of defaults and failed projects increases, buyers (who typically pay for homes before they are built) may well favour bigger developers with strong brands and stronger balance-sheets.
In any contraction, big and diversified firms that have little debt and access to cheap capital will come out on top. On that basis, the biggest winners of the coming shake-out are likely to be firms that are state-owned or that have strong links to the government. The likes of COLI and Poly Real Estate Group enjoy official patronage and access to subsidised credit. Of the 20 biggest developers, as measured by yuan sales, ten are wholly or partially controlled by state entities. That share will rise.


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