The Chinese Challenge
June 27, 2005
By
PAUL KRUGMANFifteen years ago, when Japanese companies were busily buying up chunks of corporate America, I was one of those urging Americans not to panic. You might therefore expect me to offer similar soothing words now that the Chinese are doing the same thing. But the Chinese challenge - highlighted by the bids for Maytag and Unocal - looks a lot more serious than the Japanese challenge ever did.
There's nothing shocking per se about the fact that Chinese buyers are now seeking control over some American companies. After all, there's no natural law that says Americans will always be in charge. Power usually ends up in the hands of those who hold the purse strings. America, which imports far more than it exports, has been living for years on borrowed funds, and lately China has been buying many of our I.O.U.'s.
Until now, the Chinese have mainly invested in U.S. government bonds. But bonds yield neither a high rate of return nor control over how the money is spent. The only reason for China to acquire lots of U.S. bonds is for protection against currency speculators - and at this point China's reserves of dollars are so large that a speculative attack on the dollar looks far more likely than a speculative attack on the yuan.
So it was predictable that, sooner or later, the Chinese would stop buying so many dollar bonds. Either they would stop buying American I.O.U.'s altogether, causing a plunge in the dollar, or they would stop being satisfied with the role of passive financiers, and demand the power that comes with ownership. And we should be relieved that at least for now the Chinese aren't dumping their dollars; they're using them to buy American companies.
Yet there are two reasons that Chinese investment in America seems different from Japanese investment 15 years ago.
One difference is that, judging from early indications, the Chinese won't squander their money as badly as the Japanese did.
The Japanese, back in the day, tended to go for prestige investments - Rockefeller Center, movie studios - that transferred lots of money to the American sellers, but never generated much return for the buyers. The result was, in effect, a subsidy to the United States.
The Chinese seem shrewder than that. Although Maytag is a piece of American business history, it isn't a prestige buy for Haier, the Chinese appliance manufacturer. Instead, it's a reasonable way to acquire a brand name and a distribution network to serve Haier's growing manufacturing capability.
That doesn't mean that America will lose from the deal. Maytag's stockholders will gain, and the company will probably shed fewer American workers under Chinese ownership than it would have otherwise. Still, the deal won't be as one-sided as the deals with the Japanese often were.
The more important difference from Japan's investment is that China, unlike Japan, really does seem to be emerging as America's strategic rival and a competitor for scarce resources - which makes last week's other big Chinese offer more than just a business proposition.
The China National Offshore Oil Corporation, a company that is 70 percent owned by the Chinese government, is seeking to acquire control of Unocal, an energy company with global reach. In particular, Unocal has a history - oddly ignored in much reporting on the Chinese offer - of doing business with problematic regimes in difficult places, including the Burmese junta and the Taliban. One indication of Unocal's reach: Zalmay Khalilzad, who was U.S. ambassador to Afghanistan for 18 months and was just confirmed as ambassador to Iraq, was a Unocal consultant.
Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices.
If it were up to me, I'd block the Chinese bid for Unocal. But it would be a lot easier to take that position if the United States weren't so dependent on China right now, not just to buy our I.O.U.'s, but to help us deal with North Korea now that our military is bogged down in Iraq.
E-mail: krugman@nytimes.com
China Economy Rising at Pace to Rival U.S.
June 28, 2005
By
KEITH BRADSHERGUANGZHOU, China, June 26 - A line of Chinese-made cars began rolling onto a ship here Friday, bound for Europe. The cars, made at a gleaming new
Honda factory on the outskirts of this sprawling city near Hong Kong, signal the latest move by China to follow Japan and South Korea in building itself into a global competitor in one of the cornerstones of the industrial economy.
China's debut as an auto exporter, small as it may be for now, foretells a broader challenge to a half-century of American economic and political ascendance. The nation's manufacturing companies are building wealth at a remarkable rate, using some of that money to buy assets abroad. And China has been scouring the world to acquire energy resources, with the bid to buy an American oil company only the latest overture.
Indeed, fierce domestic competition and a faster accumulation of financial assets are laying the groundwork for the arc of China's rise to be far greater than Japan's.
"It's going to be like the Arabs in the 70's and the Japanese in the 80's - we were worried they'd buy everything," said William Belchere, the chief Asia economist for Macquarie Securities in Hong Kong. But unlike those previous challenges, which soon faded, "longer term," he added, China will "be a much bigger force."
China's economy has risen rapidly with foreign expertise and investment. The Guangzhou airport here has a terminal designed by an American company, boarding gates supplied by a Danish company, and an air traffic control tower engineered by a company from Singapore.
The resulting bilateral corporate tango - in contrast to the confrontations reminiscent of the 1980's and early 1990's when Japanese capital poured into the United States - means that China has many American corporate comrades, who have a stake in helping generate its growth.
China, economists and Asia experts say, does not face some of the inherent limitations that ultimately stymied Japan and led to economic stagnation there over the last 14 years. With its giant population, China is developing a large and diverse economy, creating an almost Darwinian competition for a domestic market that has extremely low-cost companies ready to export inexpensive goods around the globe.
"The economy is much more flexible, adaptable than Japan's," said Liang Hong, an economist in Hong Kong for
Goldman Sachs. "Being a continental economy is an advantage because it has competition within."
To be sure, China is still at an earlier stage of development than was Japan when its economic rise became a national obsession in the United States. In the 1980's and early 1990's, Japanese companies claimed a sizable chunk of the American car market and purchased Rockefeller Center and the Pebble Beach golf course.
The bid by the China National Offshore Oil Corporation for
Unocal has raised worries among some politicians in Washington. That $18.5 billion bid comes as America's trade deficit with China is ratcheting ever higher and the dollar is getting support from rising inflows of Chinese capital, which also helps support low interest rates.
More disconcerting to others in Washington is China's growing ability to finance any political and military ambitions. China has missiles with nuclear weapons that intelligence experts describe as already able to hit not just Hawaii but probably California. Beijing also remains chilly toward American entreaties to put more pressure on North Korea to abandon its nuclear weapons program.
In contrast, Japan's military dependence on the United States made it more willing to accept a steep appreciation in the yen in 1985 that hobbled Japanese exporters. So far, China has put off Bush administration demands to let its yuan appreciate.
But China's economic rise also faces many obstacles. Its banks have huge portfolios of nonperforming loans that have not yet become a crippling problem because of rapid growth, but that could, as in Japan, make a recession someday even harder to combat.
Banks suffering from fraud and political pressures have frequently made poor decisions on which borrowers should receive loans, so that China requires more investment for each dollar of economic growth than many rivals. Xu Xiaonian, an economist at the China Europe International Business School in Shanghai, said that China and Japan shared weak traditions of corporate governance, shareholder rights and the rule of law, and this has hurt efficiency.
"Efficiency rules the game and will decide who wins the game, and not how fast a country grows," he said.
China also has a one-party political system that has not changed nearly as quickly as its economy over the last quarter-century, and a population that will soon start to age rapidly because of the "one child" policy. The Asian Development Bank forecasts that from 2015 to 2030, China's labor force will drop to 813 million from 842 million, as India's rises.
The big question is how smoothly China will make the transition from central planning to capitalism.
One of the best places to see the scope of China's challenge to the West, including China's economic strengths and its political weaknesses, is here in Guangzhou, a city of 12.2 million that is often compared to Los Angeles.
At the new Honda factory, a tall fence of yellow wire mesh encloses a long section of the assembly line, where white robots poke and crane their long, vulture-like heads into gray, half-completed car bodies to perform 2,100 of the 3,000 welds needed to assemble each car.
Workers in white uniforms and gray caps complete the rest of the welds, working as quickly as workers in American factories - but earning roughly $1.50 an hour in wages and benefits, compared with $55 an hour for
General Motors and
Ford factories in the United States.
"Our export activities are based on the synergy of China's competitive advantage and Honda's global network," said Atsuyoshi Hyogo, the chairman of the Honda subsidiary here.
As G.M. and Ford struggle with high health care costs for unionized work forces with an average age of nearly 50 in the United States, most of the Honda workers here appear to be in their 20's. They are unlikely to go to the doctor very often and when they do, doctors here charge less than $5 for an office visit and administering a few stitches.
At a long hall in downtown Guangzhou, it quickly becomes apparent why the Honda workers are young and the pay is low. Rows of young men and women sit in plastic chairs watching two huge television screens covered with Chinese characters and numbers. While it resembles an off-track betting parlor in Hong Kong, 100 miles down the Pearl River, this is really the city's main government-run employment center.
Some of the employers are hiring dozens of workers at a time, but one of the columns on each screen shows a requirement that would be illegal to list in the United States: the age range for acceptable applicants, most often 20 to 35.
The official average unemployment rate in China's cities is 4.2 percent. But that excludes China's vast army of rural adults with little or no work to do, an army estimated as high as 150 million people. Millions move to the cities each year, an immense migration that slowed increases in Chinese industrial wages until the last year or two, when the Chinese economy has grown so rapidly that employers have begun bidding up workers' wages anyway.
The plight of these migrants seems to be improving, and as it improves they may become even more attractive job applicants for multinationals looking for workers.
"People who came here looking for jobs used to be dirty and wearing bad clothes, but now they are coming in suits and ties," said Zhang Jieming, the director of the Guangzhou Bureau of Labor and Social Security.
One question is how China can retain the political stability it has shown for most of the last three decades while moving toward more democratic processes that the Communist Party has long claimed as its goal. A neighborhood election here on Saturday suggested that the path to political pluralism may be long.
Gathered in a junior high school classroom were 45 representatives elected by 5,400 neighborhood residents. Only the representatives, not the general public, were allowed to vote for the next level of government, a seven-member council.
Liu Yonghong, the director of the council and a Communist Party member, was re-elected, 44 to 1, defeating a nonparty member. Chen Xuangu, the deputy director and also a party member, turned back his opponent, also not a party member, by 40 to 5.
The winners may not be in a hurry for change.
"If we have stability," said Li Weijie, the director general of the municipal bureau of civil affairs, "we can have successful development."
WSJ : Meet China Inc.: Topping Japan Inc. of 1980s
Corporate China Shows Muscle As Host of Global Bids Emerge, Marking Only Start of Deal Flow
By HENNY SENDER Staff Reporter June 24, 2005
Four years ago, Goldman Sachs Group was trying to help PetroChina, a Chinese energy company, buy the Indonesian assets of Devon Energy. "At the time, nobody thought we were serious," recalls Johan Levin, co-head of mergers and acquisitions for Goldman Sachs in Hong Kong. Today, by contrast, "the first people on any buy list will be Chinese."
In the past week, as two Chinese bids have emerged for companies in the U.S., one in manufacturing and one in energy, everyone is taking Chinese interest seriously. There will be many more such expressions of interest to come. While there are echoes of Japan Inc. of the 1980s in these offers, Chinese bids for companies and assets both in the U.S. and globally will be far more substantial and sophisticated.
Corporate China's quest for natural resources and manufacturing know-how, brands, distribution and technology is backed by massive, low-cost credit lines from domestic banks, particularly China Development Bank. Funding isn't a problem. The war chest China Inc. brings to bear in acquisitions could lead to higher-than-expected bidding wars on some fronts, as some feel is the case concerning Cnooc's $18.5 billion bid for U.S. oil company Unocal.
"There is so much money in China," says Fred Hu, a managing director with Goldman Sachs Group in Hong Kong and Beijing. "It isn't only Ex-Im Bank or Development Bank. All the commercial banks in China have a big capacity to fund deals and are quite interested in providing support to increase their own clout." Any revaluation of the Chinese currency against the dollar would make U.S. targets even less costly for Chinese acquirers.
In the late 1980s, Japan's buying binge in the U.S. quickly became a contentious issue between the two countries. Chinese companies, recognizing their own weaknesses, are soliciting the help of some of the most sophisticated players around, many of them in the U.S. Many Chinese companies are turning to such U.S. private-equity funds as Texas Pacific Group, Bain Capital and Blackstone Group to help them both acquire and manage their prey.
For Wall Street, two recent offers -- Qingdao Haier's bid for Maytag and Cnooc's bid for Unocal -- mark just the beginning of China deal flow.
Huawei Technologies, China's answer to Cisco Systems and other leading telecommunications-equipment makers, is considering a bid for Britain's Marconi. Shanghai Automotive Industry, a leading auto maker in China, may follow its purchase of South Korea's Ssanyong Motor -- with core strengths in sport-utility vehicles and limousines -- by acquiring automotive-design boutiques in Italy and Germany to strengthen its capabilities both at home and abroad.
Citic Resources Holdings -- armed with a check for nearly $1 billion from China Development Bank -- is trying to do a deal for control of Thailand company Thai Petrochemical Industry. Aluminum Corp. of China, meanwhile, has a $1 billion line of credit from Export-Import Bank of China to acquire aluminum companies and assets.
Right behind China, with less capital but equally powerful allies, are Indian companies propelled by the same logic and needs. Indian manufacturing companies, often with powerful investors such as Temasek Holdings, an investment arm of the Singapore government, or Warburg Pincus, a U.S. private-equity company, are beginning to look at or buy everything from troubled textile companies in the U.S. (in the case of Welspun India) to a bus company in Spain (a target of Tata Motors).
While resources companies in particular are carrying out state policy, and all deals need official approval, it would be a mistake to think that Beijing is totally orchestrating their global march.
Their drive "is consistent with government policy to secure long-term supplies. But China is too chaotic and fragmented to think that there is one central coordinator. China does not have a single ministry like Japan's Ministry of Economics, Trade and Industry," Mr. Hu says. "A lot of what is happening is a bottoms-up phenomenon with companies under pressure from their shareholders to grow, and since they are cash-rich, to deploy that cash efficiently."
Until recently, bids by Chinese companies for international assets were in a different, smaller league than today. "In the past, China was less particular and perhaps less price-sensitive," Mr. Levin adds. Chinese buyers were confined to mediocre assets and companies. When they showed up, they had to pay more than other bidders, since they were perceived to lack credibility.
"There are a lot of what I call the 'silk purse deals,' in which multinational companies sold divisions which weren't profitable, and in many cases Chinese companies were the only logical buyers of these dog divisions," says Jack Lange, a lawyer with Paul, Weiss, Rifkind, Wharton & Garrison in Hong Kong. "Their owners could not make them profitable, but the Chinese use them to help jump-start their own international presence."
Today, the market is no longer demanding a China premium. At the same time, the Chinese have recruited allies to give them even greater credibility. Indeed, the China tag is fast losing its stigma status. Chinese companies have considerable strengths that make their offers more compelling than those of other bidders. For a start, they can acquire U.S. industrial companies (paying for them with low-cost capital available from local banks) and take them to lower-cost production bases in China. They can then make the economics of their takeover work even better by introducing their acquisitions to the growing China market.
Chinese companies are moving up the value-added chain. "Services will be an increasingly important part of the story," says Thomas Britt, a Hong Kong securities lawyer for Debevoise & Plimpton.
Chinese information-technology services companies are looking beyond their own borders in the same way that their Indian counterparts are. Consider CDC, a Chinese company that trades on Nasdaq under the ticker symbol CHINA. It has acquired Ross Systems, an Atlanta software company and Pivotal, a Vancouver-listed software company. Some of its top executives are returnees from the U.S., and Mr. Britt is one of its board members. "In these companies, the people themselves have direct experience of the U.S. and can be a bridge," he says.
The Chinese don't always succeed. China Minmetals is in talks with Canadian metals company Noranda on possible joint activities after its failed bid to buy Noranda itself.
Outsourced All the Way
June 21, 2005
By
MATT RICHTELSAN FRANCISCO, June 20 - Philip Chigos and Mary Domenico are busy building a children's pajama business. They are refining patterns, picking fabrics and turning the basement of their two-bedroom apartment into an office.
Then there is the critical step of finding the right seamstresses in China.
Instead of looking for garment workers in this city, they plan to have their wares manufactured by low-cost workers overseas. In doing so, they've become micro-outsourcers, adopting a tactic of major American corporations, which are increasingly sending production work abroad.
A growing number of mom-and-pop operations, outsourcing experts say, are braving a host of potential complications and turning to places like Sri Lanka, China, Mexico and Eastern Europe to make clothes, jewelry, trinkets and even software programs.
"We'd love it to say 'made in the U.S.A.' and use American textiles and production," Mr. Chigos said of his product. But, he said, the cost of that would be 4 to 10 times what was planned. "We didn't want to sell our pajamas for $120."
The ability of Mr. Chigos, 26, and Ms. Domenico, 25, to reach across borders has as much to do with technology as it does with the globalization of the labor market.
Computers, the Internet and modern telecommunications already make it possible for start-ups to market their goods to customers anywhere in the country. That infrastructure also enables even the smallest entrepreneurs to find workers tens of thousands of miles away in countries they will never visit and in factories they will never inspect.
They can communicate with those factories cheaply via e-mail and phone, transmit images and design specifications and track inventory.
"It's easier to find people out there on the other side, to monitor them and keep in touch with them," said Ashok Deo Bardhan, an economist at the Haas School of Business at the University of California, Berkeley, whose field is outsourcing.
One result of easy access to cheap manufacturing, he said, is that more American entrepreneurs may be able to turn an idea into a product. The situation "vastly increases the scope of inventors and designers in the West," Mr. Bardhan said.
Just how much work American companies, big and small, send offshore is difficult to measure, and experts have differing views of the effect of outsourcing on economic growth and job loss.
But even as that debate simmers, many of the smallest entrepreneurs are quickly turning to low-cost labor abroad to get their businesses off the ground. Thousands of Web sites have sprung up recently hawking factories in places like Bursa, Turkey, to potential customers like Mr. Chigos.
Outsourcing is "happening at every level, from manufacturing of steel to make cars to software to computer chips to a little lady who make scarves," said Ally Young, who researches outsourcing trends for Gartner, a market research firm. Any job can be sent overseas, she added, "if it can be digitized and you don't need face-to-face interaction, like a haircut."
Even that constraint may be disappearing. Ben Trowbridge, a Dallas consultant to major American companies that hire offshore labor, said that he recently received a request from a psychologist who wanted to hire counselors in India to make follow-up phone calls to his patients.
Offshoring for small entrepreneurs, however, can be rough. Taking advantage of cheap labor means having to navigate language and time-zone differences, complex import regulations and shipping fees and unanticipated problems like the Asian bird flu. And, of course, there are always nagging worries about workmanship and anxiety among some entrepreneurs that the factory they engaged may be a brutal sweatshop.
Beverly A. Lengquist, a real estate agent in Santa Cruz, Calif., ran into many of those problems when she hired a factory in Sri Lanka in 2004 to sew 8,000 decorative cloth covers for water bottles.
After encouragement from friends who liked her cute designs, Ms. Lengquist, 42, turned to the Internet to find a manufacturer.
She searched on
Google for terms like "overseas fulfillment" and "manufacturing" and quickly found many prospective partners in Indonesia, Bali and Sri Lanka. She settled on a Sri Lankan company, she said, because it worked with big American textile firms and came highly recommended by an acquaintance with manufacturing experience.
She initially negotiated with the factory owner by e-mail and then met him when he was visiting New York; he promised that he could fill the order quickly. Ms. Lengquist, a horse owner, needed to have the 8,000 bottle holders (which she calls "Bcozies") to sell at the Kentucky Derby in May 2004.
But unexpected problems quickly arose. For instance, the holders were decorated with marabou feathers. But United States customs would not allow feathers originating in Asia to be imported because of the Avian flu. So Ms. Lengquist had to buy the feathers in the United States and ship them to Sri Lanka.
To pay her Sri Lankan manufacturer, she wired the company $13,000, an amount she thought covered shipping costs as well as manufacturing. Then the shipper demanded $4,000 more, which she ultimately paid, but that was not the only problem. When she opened the shipment of holders on her kitchen floor, she found that half of them were too small to fit around water bottles.
Frustrated by the problems, Ms. Lengquist has since decided to use a manufacturing company in Ohio instead. The Sri Lankan company could not be reached for comment.
"The problem had to do with language and culture," Ms. Lengquist said. The manufacturer, she said, did try hard to accommodate her requests, but "just didn't understand the water bottle concept."
She has sold nearly all the holders, which are priced from $10 to $20, through her Web site,
bcozy.com, or through retailers. Demand remains strong. She said she recently received an order for 150,000, but she said she could not fulfill an order of that size and the purchaser - whom she declined to name - could not agree on a price.
For some small entrepreneurs like Todd J. Collins, 32, the operator of
Irealtymanager.com, a Web site that focuses on property management, outsourcing has been relatively easy. In 2001, Mr. Collins, who is based in Washington, came up with an idea to sell software that would help apartment owners manage their properties.
He turned to Macrotech, a company in Bridgeport, Conn., that hires computer scientists and engineers in Bucharest, Romania, and in Pune, India, a city near Mumbai.
The head of the Bucharest office, Alex Anitei, 27, said that for three years he had worked for many entrepreneurs like Mr. Collins, doing piecemeal software work, including projects as small as building online address books.
E-mail, instant messaging and Internet-based phone services, Mr. Anitei said, allow him to stay in constant contact with clients on other continents. He said he and his staff of six programmers, who work in a three-room apartment in Bucharest, charge hourly rates of $15 to $25 - one-third to one-15th the cost of American software counterparts.
Still, Manish Chowdhary, the president of Macrotech, said the use of offshore labor was not always efficient for the smallest businesses. The big cost savings from outsourcing, he said, are realized over time and by placing large manufacturing orders; if the project is very small, the time and expense of finding an overseas contractor and setting up communications simply may not be justifiable.
Mr. Chigos and Ms. Domenico, though, see foreign workers as crucial to their nascent enterprise. Without them, they said, they would not be able to sell their pajamas for less than $50.
Mr. Chigos, a former commercial real estate agent, found information on the Internet about a trade show for overseas manufacturers that took place in Las Vegas in February. At that conference, he found eight prospective manufacturers, seven in China and one in Mexico, that could make the pajamas designed by Ms. Domenico, a 2001 graduate of the Rhode Island School of Design.
He and Ms. Domenico have sent designs to six of the companies, including the Suqian Pajama Clothes-making Company and the China Worldbest Group Company, and are waiting to receive samples and final price quotes.
Ms. Domenico said she was not sure of the location of Suqian City, which is in Jiangsu Province. "I feel like I'm supposed to know that," she said, laughing.
Once the business is up and running, they hope to hire a freight management company in Richmond, Calif., to receive the shipments, check the merchandise's quality, then send it along to customers. Their business is a virtual one; they have no manufacturing, storefront or warehouse. They plan to market the clothes on the Internet and through boutique retailers.
"With the technology available today, we'll never touch the product," Mr. Chigos said.
Both, however, are concerned about the pitfalls of dealing with a far-flung manufacturer. In her youth, Ms. Domenico did volunteer work for Amnesty International, and she worries that the couple may wind up working with a sweatshop. "It's my biggest fear," she said.
"People in the U.S. won't work for 50 cents an hour," Mr. Chigos countered. "We also recognize that there are people around the world who are happy to work for 50 cents."
IBM Aims Big Push Into Supply - Chain Consulting
June 23, 2005 By REUTERS
SAN FRANCISCO (Reuters) - IBM, the world's largest computer maker and technical consultant, said it will introduce a new consulting practice on Thursday to help corporate customers more effectively manage global logistics.
Bob Moffat, the IBM executive who has wrung billions of dollars in cost-savings out of IBM's own operations in recent years, said the company is seeking to package up consulting services, software automation technology and its own expertise in global computer logistics as set of services for customers.
Moffat, 48, a fast-rising IBM executive, has been tapped to lead the new supply-chain consulting practice -- which economists estimate represents as much a $3 trillion global market in which companies procure goods and services.
IBM sees supply-chain services as potentially its most promising new growth area -- a market segment which research firm IDC estimates to be worth $23.5 billion. As supply chains go global, they become more complex, harder to run. Costs of managing them have risen about 10 percent a year, Moffat said.
``It is obvious to me that 'supply-chain' is moving up the strategic agenda of CEOs,'' Moffat said in a phone interview.
Of the $3 trillion, about $750 billion goes to outside service providers who help companies run internal logistics.
LOW-COST LOGISTICS AS SERVICE
In part, Moffat is selling his own experience in driving down costs for IBM in recent years. He is credited inside IBM with helping make cost reductions that saved $5 billion to $6 billion in 2002 and $7 billion in both 2003 and last year.
``This is really a case of IBM putting a price tag on stuff it does internally that also probably has appeal outside the organization,'' said Bruce Richardson an analyst with Boston-based AMR Research, a supply-chain research firm.
``It's an appealing message: Here's how we took billions of dollars of costs out of our supply chain,'' Richardson said.
This is not traditional outsourcing work, which is still a big business for IBM in which it manages technology or business operations on behalf of other companies. Instead, Moffat sees supply-chain work as something its customers will want to keep close control over but use IBM as trusted outside advisor.
IBM eyes the role of ``global trade orchestrator,'' he said.
``Customers don't really want to outsource their supply-chain operations. But they do want to improve them,'' said Frank Dzubeck, an analyst with Communication Networks Architects in Washington, D.C.
IBM ON THE LOADING DOCK
It is a market which IBM believes puts the company into competition with global logistics providers such as FedEx Corp., United Parcel Service Inc., DHL Worldwide Express and other transport companies, not to mention traditional consulting rivals such as Accenture Ltd..
IBM said its strengths include the 19,000 people Moffat now manages as senior vice president in charge of integrating the computer company's own global supply chain for procuring products and services in the 160 countries in which it operates.
IBM has another 8,500 staff already working in supply-chain consulting, many of whom help customers set up SAP AG software for managing global business operations.
It has set up a wholly owned business in China for handling low-cost procurement of materials for its customers, and plans to offer such services in other low-cost regions such as Eastern Europe, Latin America and India, it said.
``We are pretty sure only IBM knows how to do this range of things and that is going to set us apart,'' Moffat says.
International Business Machines Corp. of Armonk, New York, a roughly $90 billion company, sees half its business from providing computer or business services.
IBM has been pushing in recent years beyond simply selling hardware, software and technical services into what it calls Business Process Transformation Services (BPTS). This refers to provision of corporate customers with payroll processing, human resource and customer service-center support operations.
Supply-chain consulting is seen as an additional opportunity. Basic business consulting, logistics services and supply chain management all figure in.
``In each of these cases, there is an opportunity for IBM to either run these services or provide (consulting)'' for customers,'' Moffat said.
Greenspan: Punishing Chinese Imports Doomed to Fail
By REUTERS
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan warned on Thursday that any congressional bid to impose punitive curbs on Chinese imports with the aim of protecting U.S. jobs was doomed to failure.
In prepared testimony for delivery to the Senate Finance Committee, Greenspan said stiffer duties on Chinese imports would simply shift the source of U.S. imports to other low-cost suppliers.
``A policy to dismantle the global trading system, in a misguided effort to protect jobs from competition, would redound to the eventual detriment of all U.S. job-seekers, as well as millions of American consumers,'' he said.
Greenspan said the sooner China adopted a more flexible currency, the better it would be for it and for the global economy -- a position that the administration of U.S. President Bush has advocated for the past two years.
Greenspan was appearing in front of the committee along with Treasury Secretary John Snow, who similarly said that trying to compel China to adopt a more flexible currency through imposing tariffs on its imports would be counterproductive.
Snow Warns Congress Against China Sanctions
WASHINGTON (Reuters) - U.S. Treasury Secretary John Snow said on Thursday he believes China is ready to move to a more flexible exchange rate right away, but warned Congress steps to pressure Beijing through sanctions would backfire.
``Action on any of the punitive legislative proposals before Congress now would be counterproductive to our efforts at this time,'' Snow said in testimony prepared for the Senate Finance Committee.
Snow and Federal Reserve Chairman Alan Greenspan were set to speak to lawmakers on U.S. economic relations with China amid mounting congressional concern that Beijing's policy of pegging its currency is hurting U.S. exporters.
Sen. Charles Schumer, a New York Democrat, Sen. Lindsey Graham, a South Carolina Republican, and Rep. Phil English, a Pennsylvania Republican, have introduced measures that would threaten China with higher tariffs if it does not introduce greater currency flexibility.
Snow renewed the administration's insistence that diplomatic pressure has led to incremental but meaningful steps by Chinese authorities that have laid the groundwork for currency flexibility.
``This financial diplomacy has yielded important results,'' he said.
At the same time, the treasury secretary called China's policy of pegging its currency, the yuan, to the dollar ``highly distortionary'' and said it poses risks for China and its neighbors.
He told lawmakers that failure by Beijing to make ``substantial alteration'' to its currency policies would likely lead to China's designation as a currency manipulator under U.S. law, which in turn would lead to the possibility of sanctions.
``China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions,'' Snow said.
U.S. - China Economic Relations June 23, 2005
Testimony of Chairman Greenspan on China : http://www.federalreserve.gov/boarddocs/testimony/2005/20050623/default.htm
John W. Snow, Secretary, U.S. Department of the Treasury : http://www.senate.gov/~finance/hearings/statements/jstest062305.pdf
Tokyo World's Costliest City; NYC Is 13th
By EMILY WINTER
The Associated PressMonday, June 20, 2005; 4:51 PM
LONDON -- Japan's Tokyo and Osaka are the world's most expensive cities with London in third place, according to a survey released Monday. New York, the most costly of American cities, placed 13th.
The annual report released in London Monday ranked cities based on the comparative cost of more than 200 items including housing, public and private transport, food, clothing and entertainment.
For example researchers for Mercer Human Resource Consulting found a bus ride in London cost $3.66 compared to 51 cents in Prague, $1.83 in Dublin and $1.76 in Paris.
Surveys are conducted in 144 cities around the globe every March. All cities are compared to New York, which is automatically given a ranking of 100, Tokyo in comparison scored 135.
South America was home to the least expensive cities, with Asuncion, Paraguay the cheapest of all surveyed cities.
The Mercer group put the relative expensiveness of Tokyo at No. 1, followed by Osaka then London down to the strength of the pound and the yen against the U.S. dollar and cited the high cost of housing and transport as a major factor in London's cost of living.
"Many of the U.S. cities surveyed have fallen in the rankings due to the weakening of the dollar against the Euro, Canadian dollar and Asian Pacific currencies," Mercer research manager Marie-Laurence Sepede said.
Because China pegs its currency to the U.S. dollar its cities ratings were also affected by the dollar's depreciation and were lower in the rankings than the previous year.
The report also found the cost of living divide between the world's cheapest and most expensive cities was narrowing.
Top 25 cities (with last year's ranking):
1. Tokyo, Japan (1)
2. Osaka, Japan (4)
3. London, Britain (2)
4. Moscow, Russia (3)
5. Seoul, South Korea (7)
6. Geneva, Switzerland (6)
7. Zurich, Switzerland (9)
8. Copenhagen, Denmark (8)
9. Hong Kong, Hong Kong (5)
10. Oslo, Norway (15)
11. Milan, Italy (14)
12. Paris, France (17)
13. New York City, United States (12)
14. Dublin, Ireland (14)
15. St. Petersburg, Russia (10)
16. Vienna, Austria (19)
17. Rome, Italy (21)
18. Stockholm, Sweden (22)
19. Beijing, China (11)
20. Sydney, Australia (20)
21. Helsinki, Finland (23)
22. Douala, Cameroon (25)
23. Istanbul, Turkey (18)
24. Amsterdam, Netherlands (26), Budapest, Hungary (34) (Amsterdam and Budapest ranked equally).
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On the Net:
http://www.mercerhr.com
鐵礦價漲七成 重鋼馬鋼轉嫁難
2005年2月25日
【明報專訊】日本最大鋼鐵廠新日本製鐵日前已接受巴西礦商CVRD調高下一年度鐵礦石售價71.5%，CVRD亦宣布南韓浦項鋼鐵也同意調升2005年鐵礦石售價71.5%，遠高於市場預期的40%至50%。鑑於鐵礦海上貿易基本上由CVRD、力奧力拓、BHP Billion等數家巨頭所壟斷，這漲幅將成為鐵礦售價的重要指標。較多生產建築用長材的公司，例如
重慶鋼鐵(1053)、
馬鞍山鋼鐵(0323)等，轉嫁成本能力較弱，盈利下降風險較高。鞍鋼(0347)則以高附加值的板材為主，所受影響較小。
今年每股盈利最少跌三成
目前中國主要的鋼廠仍在與供應商洽談鐵礦價格，預料到3月才有結果，但新日本製鐵和浦項鋼鐵的議價結果，相信會成為重要指標，意味中國鋼廠也頗有可能承受高達70%的入口鐵礦價格升幅。以1.6噸鐵礦石生產1噸鋼鐵計算，假設其他成本不變，每噸鋼鐵成本最少上升250元至300元人民幣。
宏觀而言，國際鋼鐵價格仍然高於內地鋼鐵價格，內地鋼廠仍有一定提價空間以減輕成本上漲的影響。不過，再細分的話，則要視乎各鋼廠的產品結構和成本結構而定。受宏觀調控影響，建築用長材的需求已經出現放緩，而且長材價格偏弱並非中國特有。根據CRU指數顯示(見圖)，板材指數走勢一直反覆向上，長材指數則自去年3、4月間見頂後，未能再創新高，時間上與中國推出宏觀調控的措施合。
此外，近日有內地傳媒報道，中國正考慮取消鋼坯和長材的出口退稅，一旦落實，一方面會影響出口長材公司的利潤，而且也會令部分公司選擇增加長材的內銷比重，令內地長材價格受壓。重慶鋼鐵和馬鞍山鋼鐵都是較多生產長材的公司，未必有能力將成本上漲的壓力全數轉嫁予客戶。以2005年預期市盈率計算，重鋼和馬鋼分別為6.4倍和6.2倍，表面上並不昂貴。不過，據中銀國際測算，假設這兩家公司完全無法轉嫁70%的鐵礦成本升幅，重鋼和馬鋼今年的每股盈利可跌45.2%和29.7%，潛在風險不低。
鞍鋼主力板材 潛在風險較小
以生產板材為主的企業則仍然處於較有利位置，例如上海寶鋼剛剛宣布，在第1季價格的基礎上，熱軋產品和冷軋產品分別每噸上調400元及500元人民幣，電鍍鋅和熱鍍鋅則每噸上調500元人民幣，基本上足夠抵消鐵礦石加價的影響。如無意外，鞍鋼稍後也會跟隨寶鋼加價，減輕鐵礦石成本增加的影響。中銀國際估計，假設其他條件不變，鐵礦石成本增加70%，鞍鋼今年每股盈利將下降12.3%，但由於板材價格表現堅挺，估計實際影響會更小。雖然鞍鋼的2005年預期市盈率達8.2倍(已考慮供股因素)，比重鋼及馬鋼為高，但考慮潛在的盈利下跌風險後，鞍鋼仍然是三隻主要鋼鐵股之中較具投資價值的一家。
王弦高
京信受惠中移聯通資本開支增
2005年4月1日
【明報專訊】中國移動(0941)和聯通(0762)都已先後公布2004年業績，兩家公司都不約而同調高了今年GSM網絡資本開支預算，中移動的調高幅度更遠超市場預期，有利電訊器材供應商爭取更多訂單。作為內地主要無線覆蓋方案供應商之一的京信通信(2342)，可望從中受惠。
大部分料用於無線覆蓋方案
由於上客量持續強勁增長，中移動較早前在業績發布時宣布，將2005及2006年的2G網絡資本開支預算大幅調高47%及35%，分別上升至78億美元和65億美元。
網絡使用率偏高的聯通，也預計今年GSM網絡的資本開支約75.9億元人民幣，較2004年上升18.6%。
在3G發牌時間仍未明朗的情下，兩大電訊商大增2G網絡的資本開支預算，對電訊器材供應商無疑是好消息，避免了類似小靈通器材供應商UT斯達康，因為小靈通推廣放緩而出現盈利斷層的情。
內地2G網絡的核心骨幹網，基本上已覆蓋所有主要地區，所以麥格里證券認為，電訊商的資本開支會有較大部分用於無線覆蓋方案上，以改善網絡質素，這方面正是京信通信的強項。如果不計算外資公司，京信是內地最大的無線覆蓋方案供應商。據吳玉欽證券估計，該公司在綜合無線覆蓋方案的市場佔有率達25%。京信尚未公布去年全年業績，去年上半年的營業額達4.46億元，增長33.6%，純利則增長36.3%至1.18億元。
伙中移動測試3G
中線而言，該公司的增長潛力主要仍然會來自內地對3G器材和相關服務的強大需求。雖然中國尚未發出3G牌照，但京信已經開始與各大電訊商研究合作機會，並與中移動在一些大城市進行3G的測試。
信息產業部一旦正式發出牌照，京信可望很快從主要電訊商手中取得部分3G網絡覆蓋的相關合約。
此外，相對於已經十分成熟的2G技術，3G器材及服務的毛利率會較高。雖然目前內地的主要電訊商都不願透露投資3G服務所需的資本開支，但根據市場上一些粗略估計，市場規模可能高達2000億元人民幣。
現在有關當局正在考慮如何重組內地電訊行業，謠言滿天飛，一些投資者對選擇投資哪一家電訊商感到無所適從，電訊器材設備供應商的前景相對明朗得多。綜合內地傳媒的報道，中國最少會發出三張3G牌照，意味市場上一定會多一家新的移動電話服務營運商。
此外，聯通現在主要把資源投放在CDMA業務上，GSM業務只維持必要的投資，所以網絡使用率一直偏高，超過95%。如果聯通最終把GSM業務出售，買家把業務做好的動機會較強，頗有可能增加資本開支，對京信亦屬有利。
內地主要電訊器材供應之一的中興通訊(0763)，2005年及2006年的預期市盈率分別為19.1倍及16倍，京信同期的預期市盈率則僅為10.1倍和8.5倍。
儘管兩者的規模及業務範圍有一定的分別，但估值差距仍然太大，這個巨大的溢價相信與中興通訊有很多機構投資者持有有關。不過，一旦中國政府落實3G牌照的發放，以京信偏低的估值，有頗大向上重估的空間，上升潛力應優於中興通訊。
王弦高
德林今年盈利料改善 可低吸
2005年4月8日
【明報專訊】毛絨玩具生產商
德林國際(1126)日前公布2004年全年業績，受原材料價格上漲、內地民工荒及為一個已申請破產的客戶撥備等因素拖累，純利大跌56%，至5293萬元。雖然該公司的歷史市盈率達15倍，但不計算一次過的特殊項目，實質市盈率約11.2倍，接近過去兩年的平均數10.8倍。而且公司維持派息金額在2003年的水平，股息率逾7厘，反映管理層有信心盈利將會復蘇，現價可以趁低收集。
德林盈利大跌的其中一個主要原因，是要為一名美國客戶作出逾2200萬元壞帳及存貨撥備所致。據報章報道，該客戶為美國玩具市場推廣公司Applause，目前正在申請破產保護令，Applause的行政總裁Bob Solomon已於去年8月自殺身亡。遇到這種特殊情，德林只好慨嘆倒霉。如果今年沒有出現類似情形，已可以令純利反彈約42%。
去年受累客戶破產撥備
另一個導致盈利倒退的重要原因，是內地出現民工荒。據管理層表示，該公司的上海廠房，由於人手不足，去年第2季的設備使用率曾低至60%﹔此外，工人不足令原有員工需要加班，加班費也相應增加。公司估計，設備使用率每下跌10個百分點，便會令集團的邊際利潤下跌1個百分點。
德林去年下半年的毛利率，由2003年同期的25.8%，跌至22.4%。不計算一次過撥備的特殊項目，營運開支急升74%至2.2億元。
民工荒令設備使用率低
德林已針對內地沿岸城市勞工短缺的問題採取了一系列措施，例如在中國西部招聘員工，並重新調配內地9個廠房的資源及人手，去年下半年的情已漸見改善。例如，上海廠房的設備使用率去年底已回升至80%以上。管理層進一步指出，今年第1季的設備使用率已回復至92%，與2003年的95%相去不遠。預料設備使用率的顯著改善，將有助減低邊際利潤的壓力。此外，該公司在越南的廠房已經完成試產，並在去年第4季開始正式投產。當地的勞工成本比內地低40%，相信有助集團控制整體勞工成本，並減輕內地民工荒帶來的負面影響。
雖然盈利大幅倒退，但德林維持2004全年派息每股0.09元，與2003年的金額一樣，反映管理層對公司前景仍具信心。德林周三中午公布令人失望的業績，但當日股價收市時並沒有跌破去年底的低位1.19元，昨日更反彈逾4%，顯示達7.2厘的股息率為股價帶來很強的支持，再大跌的風險有限。
此外，截至去年底，德林仍持有1.81億元的淨現金，財務狀十分健全。該公司的純利率，由2003年的12.9%，急跌至2004年的6.4%(不包括約2200萬元的一次性撥備)。保守假設德林今年的營業額增長10%(2004年的增長為24%)，如果純利率回升至8%，已足以支持盈利反彈至1.02億元。屆時的預期市盈率約為8.2倍，低於過去兩年的平均數10.8倍，帶來不俗的潛在上升空間。
王弦高
美力時市盈率派息吸引
美力時市盈率派息吸引
2005年6月24日
【明報專訊】麥當勞的其中一個玩具供應商
崇高國際(0209)，日前因涉及收受非法回佣，導致部分公司高層被廉署拘捕。不排除有關事件可能令同樣向麥當勞供應玩具的美力時(1005)受惠。縱使不考慮可能額外多接麥當勞訂單的因素，以該公司目前7.8倍的預期市盈率及高達8.5厘的股息率，也具備不俗吸引力。
美力時於1994在主板上市時，主要從事製造及銷售禮品和精品的業務，該公司於1999年曾經出現嚴重的資金周轉不靈，成為負資產公司，生產線一度停頓，股份更曾長期停牌。美力時在2000年重組其股本和債務結構，並由現任主席鄭榕彬入主該公司，股份才恢復買賣，業務也逐漸重拾正軌。
換股債已行使 攤薄風險消除
大約兩年前，筆者也曾介紹這家公司，但當時鑑於大股東手上有很多具攤薄效應的可換股債券尚未行使，所以並沒有向各位推薦。過去兩年，有關的可換股債券已經全數行使，完全消除了這方面的風險。該公司的高股息率也吸引了一些機構投資者垂青，其中Arisaig Greater China Fund Limited已持有約5.09%股份。
2004年的年報顯示，美力時最大的客戶佔其收入約89%。雖然年報沒有透露客戶名稱，但據報章報道，該客戶為麥當勞，各位在麥當勞換領一些塑膠製小玩具時，有可能是美力時的產品。麥當勞一向注重形象和商譽，不會隨便向玩具商採購玩具，現在崇高國際包括主席在內的高層被捕，公司運作很難完全不受影響，而且麥當勞可能要求採購商把訂單轉向其他公司，美力時或許會因此受惠。
購美玩具業務 增盈利動力
縱使撇除可能受惠於來自麥當勞的新訂單，該公司今年初以6630萬元，完成收購在美國從事孩童玩具設計、製造及銷售的Shelcore，除了可為業務帶來新的增長動力，也可降低過分依賴麥當勞訂單的風險。雖然Shelcore在2003年曾錄得1720萬元虧損，但主要涉及一次性項目，而且現任主席當初接手美力時的時候也是一個爛攤子，所以管理層已經有充足經驗重整有問題的公司，並恢復盈利能力。
該公司與其他工業股一樣，同樣面對原材料成本上升的壓力，增幅更達50%，但毛利率仍在可控制範圍內，由2003年的36.7%跌至去年的31.6%，因營業額上升，純利仍能錄得約15%增長，主要受惠於越南廠房較低廉的勞動力，該公司約有六成產能位於該地，勞工成本一般比內地低40%。
總括而言，該公司約7.8倍的預期市盈率及高達8.5厘的股息率，現價仍然甚具吸引力。當然，一定有挑剔的投資者會問，如果出現類似崇高的事件怎麼辦﹖不過，如果一些著名基金股，例如
創維(0751)及
泰興光學(0389)都會出亂子的話，這些風險根本防不勝防，只能靠控制投資金額以管理風險。
王弦高
Washington Post : China's Unyielding Banking Crisis
Corruption and Cronyism Often Thwart Efforts to Eradicate Bad Debts
By Peter S. Goodman Washington Post Foreign Service Monday, June 6, 2005; A01
CHENGDU, China -- As he rose through the ranks at China's largest lender, Zhang Guilin helped build the bad debt crisis plaguing his country's banks, the gravest threat to this fast-growing economy. Zhang directed funds to cronies and political allies, authorities here say, adding to a national toll of bad loans estimated at $500 billion.
Five years ago, Zhang was given a job as head of the local office of a new government-formed company charged with cleaning up the very financial mess he helped create. The new company took over the bad debts at his old bank and tried to recover what it could by selling off the properties pledged as collateral.
This asset-recovery company was supposed to help nurture a new era in China's financial system. Instead, the campaign to fix China's banks is foundering on the same cronyism and corruption that created the debt crisis.
According to those familiar with a state corruption probe, Zhang sold many of the assets under his control, including an apartment complex and hotel on a Chinese resort island and a 30-story office tower in the center of this city, to friends and relatives at sweetheart prices, justifying the deals by using an auction company owned by a long-time associate.
As China continues its transition from communism toward an increasingly freewheeling capitalism, central government officials are consumed with eradicating bad debts and building healthy banks, with foreign money slated to play a major role. Over the next two years, China plans to raise tens of billions of dollars to help write off bad debts by selling shares in its largest state lenders on stock markets in New York and Hong Kong.
But the story of Zhang Guilin highlights the risks confronting foreign investors as they jockey for a piece of these deals. It shows how endemic inside-dealing remains in a Chinese banking culture that has long run on personal relationships, the ease with which brazen corruption can evade the scrutiny of regulators and the difficulty of assessing the net worth of any financial institution in China.
"A lot of the management people have been taken directly from the banks," said Yu Nanping, a banking expert at East China Normal University in Shanghai. "They are disposing a lot of the bad loans they created before, and they are covering up a lot of corruption cases."
Zhang headed the Sichuan branch of Huarong, one of four state-owned asset management companies created to restructure deadbeat borrowers and sell off collateral to erase bad debts. These companies were patterned after the Resolution Trust Corp., the company created in the United States after the savings and loan debacle of the 1980s, which left taxpayers on the hook for an estimated $180 billion.
China's state banks transferred nearly $170 billion in bad loans to the asset management companies in 1999 and 2000, then added $50 billion last year. Last month Zhang's old bank, the Industrial and Commercial Bank of China, signed an agreement that will transfer $30 billion more in bad loans to Huarong. By the end of 2004, the four firms had collectively written off or sold assets worth about $80 billion, according to state figures. They recovered only 20 percent of the face value of their loans. The state audit office recently disclosed 38 cases of embezzlement and fraud at the asset management companies, involving more than $800 million.
Zhang is now jailed at the Public Security Bureau in Chengdu, according to sources familiar with the probe. Officials at Huarong and ICBC declined to speak publicly. This account is based on documents filed in Sichuan and Hainan provinces, interviews with four current and past officials at ICBC, real estate developers, auction companies and two sources familiar with the corruption probe.
Zhang grew up on the muddy banks of the Yangtze River, in a city called Wanxian. His parents scratched out a living at a market stall. After graduating from high school in 1963, he took a job at what was then the nation's only bank, the People's Bank of China.
In 1984, as the government split off new banks, Zhang took a position at the freshly minted Industrial and Commercial Bank of China. The next year, he became the head of the Wanxian special region office, which supervised branches in an area of nearly 9 million people.
Zhang's office had no computers, no air conditioning and primitive toilets. He earned about $12 per month. But Zhang parlayed his position into an ascendant career. He regularly tapped bank funds to entertain associates, dining with the Wanxian mayor and party secretary, former colleagues say, and he lent to the local factories they favored.
On several occasions, colleagues and angry managers at factories who failed to secure credit wrote letters to provincial officials accusing Zhang of taking kickbacks, according to three former colleagues and a source familiar with the corruption probe. Each time, Zhang enlisted the support of local officials to scotch any investigation.
In 1992, Zhang engineered a transfer to Yibin, farther up the Yangtze. It was at best a lateral move. Yibin was much smaller than Wanxian. But it was also closer to the provincial capital, Chengdu, and it gave Zhang direct responsibility for approving more loans.
Local governments were then tapping state banks for capital to invest in real estate deals. In 1993, Zhang handed a firm controlled by the Yibin city government about $33 million for projects around the country.
Zhang "didn't care how many projects there were, and there was no collateral," a former colleague said.
Reports of kickbacks again brought Zhang cross-wise with supervisors, but useful friends snuffed out trouble. Among his most important guardians was Xie Shijie, a former Sichuan province party secretary, former bank officials said. Zhang ensured that a steady diet of credit kept flowing to a loss-making factory run by the party secretary's son. Xie has retired from public office and did not respond to messages.
This relationship played a critical role in elevating Zhang to vice-chief of the ICBC branch for Sichuan province, a post he assumed in 1998. The job brought him to Chengdu, famed for its spicy food and teahouses. Two years later, Beijing created Huarong, the asset management company, and hired Zhang to run its Sichuan branch.
All over China during that time, previously unthinkable fortunes were being made by anyone with access to property. Zhang, then five years away from the mandatory retirement age of 60, recognized that this was his last opportunity to enter the ranks of the rich, say his former colleagues. He was then making only $200 a month, though the bank provided an apartment and a chauffeured Audi sedan.
As investigators craft a criminal case against Zhang, two projects on the resort island of Hainan in the South China Sea are occupying a prime position in the probe. Americans best know Hainan as the scene of a stand-off between Beijing and the Bush administration over the fate of a U.S. reconnaissance plane that crash-landed there in 2001. Within China, it is synonymous with a disastrous early 1990s real estate bubble that left half-built skeletons towering lifelessly over the sea.
In the Hainan city of Sanya, a $5 million loan from ICBC built the Golden Bay Garden, a complex of 12 eight-story apartment towers set on a bay. That loan went bad, and the property was transferred to Huarong's Sichuan branch. Four years ago, Huarong sold the property for a mere $1 million to Sanya Southeast Real Estate, a company controlled by one of Zhang's long-time associates. That was less than half of its real value, sources familiar with the probe said. A few weeks later, Sanya Southeast flipped the property to another developer for more than $2 million, doubling its money.
In 2003, Huarong sold another failed Hainan property, the Shuhai Hotel, to a company controlled by another long-time associate of Zhang's, according to sources familiar with the probe. Though the project was worth about $6 million, Huarong sold it for only $60,000.
Investigators are also probing Zhang's handling of a 30-story office tower in the center of Chengdu called Tianyi Plaza. The original developer, Cai Wenbing, said in an interview that he struck an agreement with ICBC to jointly develop the property in 1993, but the bank failed to deliver its promised $10 million. Documents confirm Cai's account, revealing that the bank then extended him a loan for the money and promised he would never have to repay it. But when Zhang took over Huarong, he disregarded that promise, suing Tianyi Group at the Third Civil Court of the Sichuan High People's Court seeking the return of the loan and persuading a judge to halt construction.
The following January, Huarong sold Tianyi Plaza to the lawyer representing the bank, Zhang Xuefeng, for only $4 million, which was a fraction of its worth, Cai said.
In April 2002, the Sichuan court ruled in Huarong's favor. Cai an appealed. He said that later that spring, he got a call from Huarong's lawyer seeking settlement talks.
According to Cai, the lawyer boasted: "We succeeded because we bribed the judge," adding that after buying Tianyi Plaza from Huarong for $4 million, he had immediately sold it to another developer for $9 million. "He said, 'We'll give you [about $600,000] and we'll give you a passport and you go to America and shut your mouth,' " Cai said.
The lawyer has fled Chengdu, according to sources familiar with the probe. The judge declined to comment. The case is tied up in court.
Zhang retired from Huarong last fall. But by then, the investigation that now has him behind bars was already underway. On February 5, state security agents found him at one of his seven Chengdu area residences and took him away.
