Beijing's affordable housing projects -- which account for 10 percent of the government's huge $585 billion stimulus package, a key to propping up the crucial property market -- is making fans
of low income wage earners, but has some developers seething.

Some developers see the government's role in the market as interference in market forces that are distorting prices.

"This market is monopolised, there is no fair competition," Feng Lun, the chairman of Beijing Vantone Real Estate Co, told the Reuters China Investment Summit.

"The government is increasingly controlling property prices," said Feng. "Whatever price they want that's where the price is."

The government's affordable housing is pulling prices down around the country, according to Feng.

The government's motives are rooted in simple math.

Investment in residential housing made up about 10 percent of gross domestic product before the property boom turned to bust in 2008, roughly the same as the country's huge export sector.

But critics complain the government is going beyond the tax cuts and easing of rules on mortgages to boost the sector, and indirectly encouraging large state-run firms to invest in property with the easy credit available from state banks.

As China Inc shops for assets almost everywhere across the planet, some people know what they want. Others are just hurrying to grab some company that's become undervalued during the global financial crisis.
 
At the Reuters China Investment Summit in Hong Kong, we asked one of JPMorgan's top deal advisers -- Brian Gu, head of M&A for Greater China -- if he had any suggestions for cash-rich Chinese. His answer was simple: First, be confident.
 
    "For any M&A, they need the confidence that they aren't getting into anything that's messy. They have to demonstrate strong integration and a capability to absorb those assets," said Gu, a biochemist-turned investment banker.
 
    "A lot of companies want to make minority investments because they just don't have the confidence to handle a full-blown integration." Instead, he said, companies are taking a phased approach -- buy 20 percent, send some representatives to get to know the managers and then make the decision later on whether to buy the whole company.
 
    In fact, not many Chinese overseas acquirers have shown much confidence, including Lenovo -- whose chairman once said that it may take years to see whether the purchase of IBM's PC business would succeed -- and China Minsheng Banking Corp. Minsheng bought a minority stake in UCBH and the shares of the American company sank during the financial crisis.
 
    Gu was unenthusiastic about Chinese companies buying into distressed assets. "With distressed transactions, it's easier to see them buying into simpler assets, such as natural resources or large capital equipment assets", he said, adding he believes China Inc knows how to value and operate natural resources better than other, more complicated businesses.
 
    "(Chinese companies) don't have to be involved in turning around a distressed company. That's why you see a lot of action in those sectors rather than making bold moves where you buy big operations that involve hundreds of thousands of employees."
 
    Just months ago, a little-known Chinese company called Tengzhong surprised markets with its plan to buy GM's troubled Hummer unit. The deal is now still subject to final agreement between Tengzhong and GM as well as Beijing's approval.
 
    Now, the question for Tengzhong -- is it confident it can succeed with Hummer where GM has already failed?

Photo Caption: Brian Gu, JP Morgan's head of M&A for Greater China, speaking at the Reuters China Investment Summit.

It's becoming increasingly common to blame Chinese stocks for recent volatility in global markets.

In some places, numbers do back up why China and other markets are increasingly moving in tandem.

According to Brown Brothers Harriman, the correlation based on percentage change between Shanghai stocks and the S&P 500 index has risen to 18 percent in the last three months. This compares with year-to-date correlation of 9 percent and 4.5 percent in the past two years.

The correlation between the front month copper futures and the Shanghai composite has risen to above 30 percent in the past three months from 27.4 percent since January and 16.5 percent over the past two years.

Over the two past years, the correlation between the euro/dollar exchange rate and the Shanghai Composite is 12 percent, same as the year to date. In the most recent 3 months the correlation has risen to just above 21 percent, its highest since Q2 2007. The highest over the past decade was recorded in Aug 2005 with a correlation of about 40 percent.

The yen's correlation with the Chinese equity market is not statistically significant. Over the past two years, the correlation is about 4 percent and year to date it has fallen to a little more than 2 percent, but in the past three months has risen to about 5.5 percent.

Foreign companies in China, which has the world's biggest online community, have faced allegations of bowing to censorship rules in their hunt for market access. To be careful, they usually avoid questions on the subject altogether or deflect them with humour.

"I don't think I am the expert to comment on this," Shirley Yu-Tsui, a vice president of strategy for IBM greater China, said at the Reuters China Investment Summit.

"All I know is my children complain they can not get on Facebook," she said.

The subject is very serious, as companies such as Google and Yahoo have had their executives called to face angry congressional questioning in the United States to explain their business practices in China.

"I don't think they would come to IBM for that," said Yu-Tsui when asked what IBM would do if asked to help monitor traffic on China's Internet.

China backed down only last month from a plan to pre-install the controversial "Green Dam" Internet filtering software on all personal computers sold in the country.

Photo Caption: Shirley Yu-Tsui, a vice president of strategy for IBM greater China. REUTERS/Christina Hu

Electronics is a tough business, with most manufacturers
working tirelessly on what they hope will be the next big thing,
even as they survive on razor thin profit margins.

Lenovo, the world's No. 4 PC brand, hopes it's on
the brink of such a blockbuster, although CFO Wong Wai Ming was coy
about disclosing any details.

"I would like to think we are the only people to think of
that product," Wong said at the Reuters China Investment Summit,
discussing the ongoing convergence between small web-linked PCs
and smartphones that increasingly resemble mini computers.

He said three years ago the cellphone and PC were distinct
markets, but with the advent of the netbook -- a low cost PC
designed to access the Internet -- the convergence between the
two products is coming, and soon, by some accounts.

"We obviously believe we can probably come up with a product,
whatever you call it, that will give the best customer experience
in using that gadget," said Wong.

Lenovo's larger rivals all offer smartphones or have
announced plans to do so, most recently Dell through a
tie-up with China Mobile.

"We have been actively spending a lot of research money and
product development money in coming up with a product," Wong
said.

Stay tuned.

China's banking system could take a cue from children and
neighborhood social groups to strengthen lending rules and
ensure that credit flows to where it is needed most.

The country's banks lent a whopping record 7.37 trillion yuan
($1.08 trillion) in the first half of the year, but regulators
worry that a significant portion is not flowing into the real
economy and smaller firms where funds are needed the most.

"If you give children money without strings attached, they
won't value it," Yang Zaiping, the executive vice president of
the China Banking Association, said at the Reuters China Investment
Summit.

Yang was making a point about firming up banks' credit policy
to ensure that borrowers understand the importance of maintaining
their credit-worthiness.

The executive said a traditional Chinese network of neighbors
and old ladies that watched after neighborhood safety and other
local issues could be copied to help channel funds into small and
medium-sized companies, a long-standing problem in China.

"Old ladies know a lot about the neighborhood," he said.

Yang said banks could lend to a group of small companies, and
as long as all repaid their loans, then interest rates would
remain low. But if only one borrower were to default, all would be
punished, putting more responsibility on all borrowers to ensure
each loan remains active.

The U.S. rejection of the $18.5 billion bid by China’s top offshore oil company, CNOOC Ltd, for  Unocal in 2005 was not a move worthy of a world power such as the United States, asserts a Chinese academic with the government’s top economic planning agency.

“If you are weak, then I can understand,” said Chen Dongqi, deputy director of the Academy of
Macro-Economic Research under the National Development and Reform Commission (NDRC).

“The United States is a strong country. What is it afraid of?” he said at the Reuters China Investment Summit.

“There is a problem there.”

Chen was responding to a question about rising protectionism in China, and criticism that Beijing had blocked Coca-Cola Co from buying China’s Huiyuan Juice.

Chen also said that blaming China for global climate change was also off the mark, as climate is affected by hundreds of years of human activity, not just a few decades.

“China’s economy has been growing for only 30 years,” he said. “I don’t believe a few years of fast economic growth from one country is responsible for climate change.”

Photo caption: Chen Dongqi, vice-head of the macro-economic institute under the National Development and Reform Commission (NDRC), speaks during the Reuters China Investment Summit in Beijing. REUTERS/Christina Hu

Chinese banking regulators should monitor more closely the lending activities of underground banks, where interest rates react more quickly to changing economic conditions than do rigid state-set interest rates.

“Historically, these interest rates change more rapidly to changes in market liquidity,” Gao Shanwen, Essence Securities’ chief economist, said at the Reuters China Investment Summit.

“They are an important barometer that should be monitored more closely,” he said.

According to market lore, some of these illegal banks are formed by bank employees or others with access to bank funds, which are then lent outside of official channels, said Gao.

Such banks flourish along China’s east coast, where there are a multitude of private firms that need cash to run their operations but have traditionally been shunned by the country’s large state-run banks, which prefer making loans to large state-run firms.

Monitoring the illegal lending, which plays an important role in China’s largely state-run banking system, would be relatively easy, because there are established brokers, who regularly advertise their services through mass distribution of cell phone alerts.

Photo Caption: Gao Shanwen, chief economist at Essence Securities, speaking at the Reuters China Investment Summit in Beijing. REUTERS/Christina Hu

By Michael Wei

Don’t count on a recent spike in home loans to greatly improve earnings at Chinese banks. That’s because they are still a relatively small part of overall lending.

“It is not expected to have a huge impact on banks’ overall earnings,” Gao Shanwen, Essence Securities’ chief economist said at the Reuters China Investment Summit, speaking about the rise in mortgage lending. Mortages make up only about 10 percent of total lending at present.

New lending in China has surged in recent months, and some of that has gone into the recovering housing market. Mortgages are considered quality loans in China because of their longer term
and relatively higher margins.

Gao said that such loans are one of the key areas that
commercial banks have been pushing during a lending surge in the first half of the year under a loose monetary policy.

Photo Caption: Gao Shanwen, chief economist at Essence Securities, attends the Reuters China Investment Summit in Beijing. REUTERS/Christina Hu

Chinese mining companies are expanding overseas because they are cost-effective and willing to work in dangerous and risky areas where others are unwilling to go, Yang Junmin, vice general
manager of Beijing Sinodrill, asserted at the Reuters China Investment Summit.

Some critics accuse Beijing of supporting corrupt regimes in Africa, the Middle East and Latin American, where Chinese companies are investing aggressively to secure access to raw materials to fuel the country’s rapid economic growth.

“If we could find an African company to do the work, nobody would need a Chinese company,” Yang said. “Africans are very impressed with the work we do there.”

“It’s a simple matter of economics,” he said, pointing out that Chinese companies are also willing to take on risks of working in countries such as Afghanistan.

Sinodrill still relies on the domestic market for 80 percent of its exploration and drilling services, but the contribution from Australia, Southeast Asia, Africa and the Americas is growing fast.

The company also has a lower cost structure than foreign companies looking to penetrate the Chinese market.

“Foreign drilling teams who come to China to work need at least one trip back to their home country every two months,” he said. “Their costs are very high.”

Photo Caption: Yang Junmin, vice-general manager of Beijing Sinodrill, speaks during the Reuters China Investment Summit. REUTERS/Christina Hu