China has finally given a green light for Disneyland to build a theme park in Shanghai. Negotiations that started when Bill Clinton was in the White House have concluded just before President Barack Obama is due to visit. The approval looks like a coup for Walt Disney Co, but it will take all of Mickey’s magic to prevent the park from becoming another government-financed loss maker.

Disney’s last theme park in the region was anything but a hit. Hong Kong Disneyland was created in 2005 in an effort to boost employment in the epidemic-stricken region, but attendance numbers have fallen short of target. This hits the Hong Kong government harder than Disney, because the former not only took an initial 57 percent equity stake in the venture, but also spent $1.75 billion building related infrastructure like a metro line and ferry piers.

Shanghai Disneyland is likely to be financed in the same way. Estimates for the park’s price tag are around $4 billion. The government and a group of Chinese companies will contribute about 60 percent of equity, with Disney paying for the rest. The Shanghai government is also likely to pay for the roads leading to the park.

The Hong Kong park has been a disappointment for a number of reasons, some of which might equally be relevant in Shanghai. It is the smallest Disneyland in the world, so it is crowded and not worth visiting for a second day. Culturally, locals identify more with the Ocean Park, which features pandas and sharks and is cheaper. Hong Kong Disneyland’s public image has also taken a hit from a bout of food poisoning and accusations that it has exaggerated visitor numbers.

The Shanghai park will be 3-4 times bigger than the one in Hong Kong, making space for more visitors. But this will also increase the cost of relocating current residents. Some locals are busy adding a second floor to their homes so they can demand more compensation when they move out.

Shanghai has twice Hong Kong’s population, but average income is only about a quarter that of its wealthier neighbour, so it’s far from clear how many visitors will be able to afford a ticket that will cost the equivalent of two days of earnings for a college graduate. Then there is the possibility that the Shanghai park will divert visitors from Hong Kong.

There is also a risk of a culture backlash. Chinese children are less familiar with Disney characters than their counterparts in, say, Japan, home to Disney’s most successful overseas theme park. That said, the Chinese have so far appeared to be receptive to the American cultural icon: Mickey Mouse Clubhouse appears on national TVs and Disney has opened a chain of language schools in Shanghai.

China’s decision to relent after ten years says a lot about its changed priorities. Before, the government was concerned about the economy overheating, but now growth has become the top priority. While it is probably better to build a theme park than more empty highways, a second Disneyland might prove to be one too many.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. —

When it comes to protecting intellectual property in China, the United States often feels that its pleas are falling on deaf ears. Its best hope is that China recognizes that copyright protection is in its own interests. To achieve that, Washington needs to push for changes from within.

After a fruitless decade of lobbying China on intellectual property, Washington has reached for the microphone. This week, the U.S. Chamber of Commerce launched a high-profile international forum on intellectual property in Guangzhou, capital of Guangdong Province and best known as both China’s manufacturing hub and the global centre for intellectual property theft.

Guangdong understands it cannot hold on to both titles forever. Its reforming leader Wang Yang has vowed to build an innovative Guangdong, but he and his deputies understandably do not want to be criticized in public. The U.S. delegation included high-ranking officials such as Commerce Secretary Gary Locke, but the very man they hoped to engage with didn’t show up.

Foreign pressure can help, but changes rarely happen in public. First, both parties need to agree on what they are trying to achieve. As a manufacturer for the rest of the world, China has historically seen little upside in protecting copyright. The United States needs to convince Beijing that, if it wants to develop its own products, then protecting copyright is important.

Huawei Technologies, the telecom equipment maker based in Guangdong, could be a good partner in this. In 2003, Cisco sued Huawei for copyright violations, but dropped the suit after Huawei agreed to stop selling some products. Now, Huawei has emerged as a strong protector of copyright. Last year the company filed the largest number of patents in the world.

Song Liuping, Huawei’s chief legal officer, advocates increasing the penalty for IP theft, a view shared by Americans. But he thinks the problem is not the lack of an adequate legal system or even lax enforcement, but the absence of a culture in China that values designs, patents, and copyrights.

China is likely to act when it feels others are trampling on its rights. A Chinese group recently complained that Google’s planned online library of digitised books might violate Chinese authors’ copyrights. The more China feels that its own interests are at stake, the more serious it will get. When every new movie or software program can be copied for nothing, it is impossible to develop a film business or software industry.

It is better to back Chinese movie stars and technology entrepreneurs rather than American politicians to drive this message home in China.

— At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit — and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow — or shrink less than — exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China’s trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

In the same way, one cannot just look at China’s large imports number and jump to the conclusion that China is a big end-user of the world’s goods. China’s imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.

On average, net exports contributed 1.4 percentage points to annual GDP growth between 1979 and 2007, according to the Statistics Bureau, much less than the contribution from the other two drivers — consumption and investment.

The transition to a more balanced trade account will take time. In particular, it will need a push from foreign exchange reforms, as the currently undervalued yuan encourages exports and discourages imports. China allowed the yuan to rise gradually for a few years after 2005, but has re-pegged it to the dollar since the start of the credit crisis.

It will take time before Beijing is confident enough to remove some of the export incentives, or at least not pile them up as it has done in response to the crisis. A more equalised trade account will probably not hurt China’s overall growth that much, but will help in making the world economy more balanced.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

It is hard to be very optimistic about China’s proposed stock market for start-up companies. After all, similar attempts in other countries have a decidedly mixed track record. Why would China, where small private companies face an uphill battle against state-owned firms, be any exception?

Nevertheless, there are reasons to believe that the start-up market, set to debut in October, offers better potential than previous efforts in Singapore, Germany and Hong Kong.

The country has a big reservoir of fast-growing small companies with real profits. In the past, they have opted for listing on foreign exchanges such as the Nasdaq. Though they were attracted by the prestige of a foreign listing, they also faced a home market that favors size over quality.

Indeed, China, home of internet stars such as Baidu and Sina, is the second-largest foreign supplier of companies to the Nasdaq.

But the exodus has almost ground to a halt. Beijing has tightened its grip on foreign listings because it wants to keep the best growth companies at home. Only companies which already have overseas structures can list their shares abroad, but even then they have to jump through a lot of regulatory hoops.

Obtaining a domestic listing will become much easier, as Beijing has ambitious plans to float hundreds of companies on the new market each year. Maintenance fees are lower and disclosure requirements are less stringent when listing at home.

And companies will not necessarily need to compromise on valuations, since Chinese equities routinely trade at a premium to their foreign counterparts because there is a lot of liquidity chasing a limited pool of stocks.

Although institutional participation is likely to be limited because the small size of most start-up companies, the new market is expected to draw in a large amount of retail investors who favor more volatile small-caps.

No wonder that about 150 companies have already lined up to list on the new market. With a potential universe of 50,000 private companies nationwide, there will be no shortage of new supply in the next few years.

Chinese stock market regulators are wary of the lack of success by Western countries in creating markets capable of funding early-stage companies. Easdaq, Europe’s answer to the Nasdaq, rumbled along for years before finally disappearing. Germany’s Neuer Markt, launched during the dot-com boom, soared and then collapsed along with the rest of the stock market bubble.

In an effort to make a good start, the regulator has picked companies with the best track record of sales and profit growth for the first batch of listings. Most of them already qualify to list on the market for small-and medium-size companies, which is also part of the Shenzhen Stock Exchange.

The first 13 companies to go public almost look a bit too old-fashioned, with leading positions in markets such as railway transport electricity systems, lithium batteries, and medical devices. However, being boring is actually better than being too adventurous at this stage.

China has set the standards for listing on the new market much higher than Hong Kong’s growth enterprise market to avoid overly speculative companies. Like the Nasdaq, China requires companies to have a three-year operating record and a history of profitability.

Yet while it is good to set the bar high, it is even more important to keep it there by de-listing companies promptly if they fail to comply with listing rules.

One of the major reasons that the mainland market has a lot of moribund companies is because the regulator does not force de-listing. American exchanges de-list hundreds of companies a year.

Beijing has finally given the green light to the market for start-up companies after 10 years in preparation because it understands that small private companies, the most vibrant sector of the economy, will be the drivers of China’s next stage of growth. It also does not want to wait until the market gets too hot as then will be more speculative behavior.

Most of these markets suffer because they cannot attract a sufficient number of long-term institutional investors, so they end up as either illiquid or relying on much more speculative retail investors. This will be an even bigger problem in the retail-driven Chinese market.

Although the start-up market is necessary to provide some much-needed funding for small enterprises, Beijing should avoid getting too ambitious. There were initial talks about bringing as many as 500 companies public a year. But at that speed, disclosure and approval standards will inevitably be compromised.

The low success rate of markets for start-up companies has underscored the importance of not getting carried away. Early investors will walk away at the first sign of disappointment, and the markets are rarely granted a second chance. China should concentrate on getting off to a good start and build it up its new market slowly.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

(Editing by David Evans)

The U.S.-China tire dispute threatens to spill into other sectors and squeeze Chinese exporters’ already razor-thin margins further. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.

But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.

In addition, selling to large buyers such as Wal-Mart creates volumes large enough to compensate for weak margins. Moreover, Chinese exporters get all sorts of export rebates and local government incentives which help to lower their costs.

But as the tire spat has illustrated, Washington can slap punitive duties on Chinese imports simply by pointing to a significant increase in imports from China. By imposing penalties in this case, President Obama has opened the door for a slew of similar complaints against Chinese goods. It will only be a matter of time before other countries, worried about where those displaced Chinese exports might end up, start to follow suit.

That’s why Chinese policy makers need to get more serious about stimulating domestic spending. It is time for Beijing to revamp a system built over the past three decades that explicitly and implicitly favours exports and to encourage manufacturers to prioritise selling to the domestic market.

A good first step would be to reduce some of the export incentives China offers to certain industries. These effectively subsidise foreign consumers at the expense of domestic customers. For example, Chinese tyre-makers get a tax rebate of about 9 percent on the value of the products they sell abroad. That’s why tyre makers can afford to price exported tyres more cheaply than ones sold at home, according to Xu Qiyuan, a researcher at China’s Social Science Academy.

To date, however, China’s response to the credit crunch has been to boost incentives to prop up export markets. Beijing raised export rebates on 3,802 items from April 1. Textile exporters also got an increase in their rebate to 16 percent from 15 percent. This activity is not illegitimate and many countries subsidise exports. But the U.S. enforcement action shows that this policy may have practical limits.

China needs more than just a change of heart on subsidies. Longer term, Beijing needs to foster the development of a healthy credit culture for suppliers so they can get paid on time, and to improve China’s transportation infrastructure in order to reduce the cost of moving goods around the country, and most importantly, to break down local protectionism that discriminates against suppliers from other provinces. It may seem odd but China needs to create a single internal market.

Despite all the talk about Chinese consumers being unwilling to spend due to a lack of a social safety net, one important reason that they don’t buy much at home is because prices are often too high . When “frugal” Chinese consumers go to Hong Kong or London, they immediately become big spenders, splashing out thousands of dollars on clothing, cosmetics, bags and watches. The irony is that a lot of the things they buy are actually made in China, but are simply not available there, or cost much more.

Moreover, the lack of a single market hampers foreign companies seeking to sell to China. Although foreign executives might fancy China as a giant market with 1.3 billion customers, the reality is that it is extremely fragmented, so economies of scale are hard to achieve. Transporting goods from one province to another can incur hefty tolls levied by local governments keen to raise local revenue and make it harder for companies to break into their local markets.

The credit problem also needs to be addressed. Big Chinese retailers only pay for goods on delivery. An exporter, by contrast, gets a letter of credit when the order is placed, and this can be cashed in to finance production.

China’s rebalancing away from export dependence has barely begun, and it will take a long time to change attitudes. But now would be a good time to make a start. The recent trade disputes over Chinese tyres and toys should serve as warning shots. China’s leaders must start to make the domestic market more friendly to suppliers and consumers.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest businesspeople and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?

Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google searches that lead to pornographic sites. It has drawn strong support from investors.

Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics Inc., Legend Group, New Oriental Education and venture firm WI Harper Group.

They believe that as China embraces a start-up culture, Lee’s business, which is a mix of venture capital and development lab, will be well positioned to capitalize.

Lee’s plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year with funding from his venture, whiling hiring new people to make up for the loss. However, it looks like his company, called Innovation Works, has yet to line up ideas or engineers.

This kind of “incubator” model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded. Lee and his backers believe that China’s market is more favorable, as it is at a crucial point regarding “cloud computing” and mobile technology, and there is a strong need for early-stage funding.

The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base.

Investors are attracted by Lee’s reputation as the single largest magnet for talent in China. Lee, who grew up in the United States, has won a loyal following from Chinese students through his numerous coaching books, public speeches and blogs, although critics say he has spent too much time promoting his personal brand.

An expert in speech recognition technology, he founded Microsoft’s China research lab in the late 1990s. When he left to join Google, Microsoft sued him for violating a promise not to join a competitor.

Nimbler local rival Baidu now dominates China’s search market with 75.7 percent in terms of total search queries, dwarfing Google’s 19.8 percent share, according to iResearch. At Google, Lee was caught between the Beijing authorities who insist that foreign web companies censor the Internet and his U.S. bosses who demanded he drum up more business in China.

He has wanted to break away from his corporate role to start his own company for a decade, but it looks as if he is stuck in the corporate mindset. Lee is adopting an almost a planned economy approach to an industry that has always relied on markets to determine who is the fittest to survive. Indeed, he is even promising to tailor-make companies for interested foreign investors.

A factory model lowers the risk for investors as they will enjoy more control, but that also means less incentive and ownership for entrepreneurs, since their roles are reduced to that of employees. Why would young people take their ideas to Lee rather than make a go of it themselves?

Unlike Silicon Valley, China does not have an ecosystem where start-up companies can easily find angel investors. Even though China is a hotspot for venture capital, with $50 billion chasing mid- to late-stage projects, less than $1 billion in total is earmarked for early-stage projects.

Lee prides himself on his doggedness in chasing after talent. One year while at Google he made offers to graduates, only one of which was initially rejected. He called the student, found out that his girlfriend thought Google was a bit of a start-up, then asked for his girlfriend’s number and called her up. That year he achieved a 100 percent offer acceptance rate.

Nevertheless, it remains to be seen whether Lee can retain his ability to attract and inspire the best young people now that he is no longer at Google. He needs a lot of them to make his dream come true.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

]]> http://blogs.reuters.com/great-debate/2009/09/11/ex-google-china-chiefs-dream-factory/feed/ http://blogs.reuters.com/great-debate/2009/09/04/china-finds-tricky-export-niche-amid-global-slump/ http://blogs.reuters.com/great-debate/2009/09/04/china-finds-tricky-export-niche-amid-global-slump/#comments Fri, 04 Sep 2009 18:29:44 +0000 Wei Gu http://blogs.reuters.com/great-debate/?p=5193 – Wei Gu is a Reuters columnist. The opinions expressed are her own —

As exports of manufactured goods slow, China has found a new niche — exporting its construction boom.

With many countries in the world adopting stimulus plans to drive demand, China has been scrambling for these public spending dollars. And it is well placed to do so.

Infrastructure investment has powered Chinese growth in the past three decades. The nation has deep experience in building roads and bridges quickly and cheaply.

Moreover, it isn’t just construction expertise China is offering to clinch the deal. Its state-controlled banks such as the Industrial & Commercial Bank of China (ICBC) and Bank of China are eager to throw in some cheap loans too.

China’s big advantages are the scale of its companies — 51 of the world’s largest 225 contractors hail from China — and its substantial capital reserves, which allow its banks to provide long-term, low-cost credit for projects abroad.

The surge in construction revenue from overseas looks remarkable against a 22 percent drop in total exports during the first half.

Services revenue from overseas amounted to $32.2 billion, up 52 percent from last year, outpacing the average growth of 30 percent over the past few years. Chinese companies signed new contracts worth $64.6 billion, an increase of 38 percent from last year.

Chinese construction companies were the biggest beneficiaries. China Railway Construction said the value of newly entered overseas contracts surged 98 percent in the first half, representing one fifth of the total new contracts signed.

Support from the highest authority in China has helped seal deals abroad. In February, witnessed by President Hu Jintao and King Abdullah, China Railway signed a $1.78 billion contract to build the first phase of a special railway for Muslin pilgrims in Saudi Arabia.

It marks the first time that Saudi Arabia, one of the biggest oil exporters to China, gave the country a major public works agreement, although Huawei, a private Chinese telecommunications company, is already a main supplier there.

The success of Chinese contractors is not limited to emerging countries. China’s Gezhouba Group is involved in Australian mining projects. An aircraft technology company has got a big contract for wind power projects in the United States. And a Chinese contractor won a bid to build the Hamilton Bridge in New York.

Winning the services contract opens the door to other export opportunities. Just as IBM and Hewlett Packard promote system integration services to sell more of their hardware, when a Chinese contractor builds a bridge abroad, it is also likely to source the great majority of the materials from China.

Every dollar increase of contracted work will lead to a 4.9 dollars increase in the gross domestic product, according to the Ministry of Commerce. Taking that into consideration, overseas contracted work and related equipment exports accounted for more than 7 percent of total GDP last year. (Total exports were about a third of GDP)

Services exports have started to move the needle. Without the services jump, China’s export decline during the first half would have been two percentage points more. Service exports have helped create 450,000 jobs domestically during the first half, said the government.

The benefit of exporting migrant workers to lower the unemployment rate might not be big — every year China only exports about 150,000, or less than 1 percent of the new workers it adds — but the habit of importing Chinese labour for projects can cause a lot of friction.

The most recent and serious case was in Algeria, a country where seven out of every 10 adults under 30 are unemployed. About 100 locals and Chinese workers fought with knives and bludgeons. Russia, which has been hit hard by lower oil prices, is coming up with ways which make it harder for Chinese contractors to bid for deals.

Although China likes to stress the complementary nature of its relationship with other emerging countries, the reality is developing countries directly compete against each other because their competitive advantages, namely low wages, are similar.

Beijing has seen some backlash from its largest export markets, namely Europe and America. As China steps up its investment activities overseas, the drive to export more people and services to Africa and Latin America could cause headaches if pursued too aggressively.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. –

Just as Chinese stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.

Fears about a policy shift towards tighter liquidity are blamed for the 22 percent decline in the Shanghai market from its August peak. But those fears are largely overblown. Beijing might be talking about boosting domestic consumption, but structural reforms take time and there is little the authorities can do other than continuing to reinflate the economy in the short run.

There are encouraging signs that corporate profits — the fundamental basis for share prices — are on the turn.

Chinese companies’ earnings for the past quarter rose 36 percent compared with the previous three months, helped by strong results from banks and property firms. Companies also offered a more optimistic outlook, propelling a string of earnings upgrades.

The purchasing managers’ index, released on Tuesday, confirms that China’s manufacturing sector is keeping up its steady recovery.

Stocks are now trading at about 20 times forecast profits for next year. This is higher than the rest of the region, but Chinese companies enjoy higher growth rates: earnings are projected to grow by 20 per cent this year.

And compared with historical valuations, which range from the low teens to as much as 50 times earnings, current prices do not look excessive.

Premier Wen Jiabao this week tried to ease concerns when he said China’s economy was at a crucial juncture in its recovery and the government would not change its policy direction. But investors are taking their cue from the rising chorus of alarm sent by lower-level government officials, academics, and law-makers.

China’s parliament, usually a rubber-stamp organization, was unusually vocal in its late August session about the need to balance short-term relief with long-term development and structural reforms.

Meanwhile, the banking supervision commission has been cracking down on bank loans that make their way into stocks and property. In an effort to rein in excessive lending, it has also made it harder for banks to pass capital adequacy tests.

But even if Chinese banks stop lending in the second half — China’s largest bank ICBC even reduced its loan book in August — the swath of loans made in the first half will continue to work their way through the system during the rest of the year.

New lending in the first half amounted to an eye-popping 50 percent of gross domestic product on an annualized basis. Even if the ratio slumps to 10 percent in the second half, on average new loans as a percentage of GDP this year will still be double the 15 percent annual growth rate of the past three years.

In addition, as the flood of short-term bills — which banks accepted from companies to boost their lending volumes — start to mature, banks are diverting the cash into long-term loans tied to real projects that should help the economy in the coming months.

China’s monetary fine-tuning still looks marginal, even with July’s abrupt credit slowdown and a similarly subdued number expected for August. That’s because rising foreign capital inflows will offset some of the drop in bank credit.

Technical indicators also suggest the stock market has fallen too far. Chinese stocks had more than doubled between October and August and were ripe for a correction. Trading volumes have fallen substantially since the recent peak.

It is hard to call the bottom. But one thing that looks certain is that China’s companies and economy have proven to be stronger than many expected.

Lou Jiwei, chairman of China’s sovereign fund, said over the weekend that both China and America are dealing with past bubbles by creating new ones. Given how growth-minded Chinese policymakers are, it would be a mistake to bet on Beijing undermining the economy and the stock market by tightening too early.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. —

The People’s Bank of China’s ambitious plan to settle foreign trades in yuan has been given the cold shoulder by companies both at home and abroad. The failure of this experiment shows the difficulties China faces in internationalising its currency.

Launched by the PBOC with a fanfare almost two months ago, the pilot scheme has so far seen only thin volumes of yuan trade settlement. Guangdong province, the country’s export hub, was supposed to be the cornerstone of the plan, but local officials said they found few willing counterparties.

This should not have come as a surprise. Foreign importers either have little access to the yuan, are reluctant to part with it, or do not want to commit future payment in a currency that is expected to appreciate. More surprisingly, domestic exporters, who would benefit from lower currency risks, are put off by the logistical headache of receiving domestic currency for their exports.

These concerns aside, there is a more fundamental reason why the yuan is not catching on. The Triffin Dilemma, named after the Belgian-American economist who rose to prominence in the 1960s, stipulates that it is hard for a country running a large trade surplus to demand that others buy goods using its own currency.

The world now suffers from an oversupply of the manufactured goods that are China’s specialty. Thus it is hard for China’s millions of small exporters to demand that Wal-Mart pays them in yuan, or for thousands of small Chinese steel mills to persuade Rio Tinto and BHP Billiton to accept the Chinese currency.

Only exporters in countries such as Indonesia, which has a limited amount of foreign reserves, have an incentive to sell goods such as timber to China in exchange for yuan, which can be used to buy imports from China later. But given the lack of convertibility of the yuan, it is probably not worth going through the hassle.

It is understandable that the PBOC, which counts fighting inflation as a main task, wants to push some yuan offshore in order to address the problem of domestic oversupply of the currency. But others may have different ideas. China’s Ministry of Finance, for example, has championed for the use of a pan-Asia currency. The Ministry of Commerce may not deem now the best time for struggling Chinese exporters to demand that buyers take on their currency risks.

It also appears that the PBOC had not worked out some of the logistics before launching the pilot scheme. Exporters had problems navigating customs under the new scheme, as well as claiming export tax rebates if they didn’t have foreign currency receipts.

The PBOC this week hosted a web conference with the bureaus of finance, commerce, customs, tax and banking regulation to iron out the kinks and unveil some new incentives. One of them is allowing yuan earned from exports to stay abroad to encourage more use of it outside China, instead of it having to be repatriated immediately. But by loosening capital controls on trade settled in yuan, the PBOC faces heightened risks of money laundering as exporters can overstate the value of their goods to get the Chinese currency offshore.

As China’s economy rebalances over time, the prospects of currency appreciation subside, and Chinese companies start to have more negotiating power, there might be more interest in using yuan as a settlement currency. But this remains a long shot for the PBOC.

Japan, which has fewer capital controls as well as a more developed domestic bond market than China, has been pushing the yen abroad for 20 years. Even so, the currency is still rarely used to settle international trade. The PBOC is facing a long struggle to realise its master plan.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

If market performance is anything to go by, Taiwan is the biggest beneficiary of China’s economic stimulus.

Because of Taiwan’s heavy dependence on exports to Western consumers, it was assumed there was little Beijing could do about its downturn. But Beijing has gone out of its way to take care of the recession-hit island. This year, it sent several procurement missions to Taiwan to buy billions of dollars of goods, even though Taiwan’s trade surplus with China is already approaching as much as a fifth of its economy.

China might be pursuing its unification agenda. After all, it has vowed to bring the island under its rule, by force if necessary. But money is a lot better than missiles. The whole point of inter-dependency is that there will be less chance of confrontation. Taiwan could use more investment, particularly in properties and infrastructure, while China is looking for new areas in which to invest its excess liquidity.

In the short run, increased purchases from Taiwan may come at Korea and Japan’s expense. For example, computer maker Lenovo <0992.HK> is increasing its orders from Taiwan companies, probably also because Taiwanese firms are happy to stay as contract manufacturers.

But in the long run, warmer cross-strait ties not only  benefit Taiwan and are a positive for China, but also are a very bullish development for the region, which should lead to lower risk premiums in Asia.

The wall of Chinese money has pushed Taiwan stocks up almost 50 percent this year, making it the second best performing market in the world after China itself and followed a decade of underperformance. Taiwanese stocks are currently valued at 26 times of 2009 earnings — a premium versus the rest of the region.

Taiwan has seen a $250 billion retail capital outflow since 1996, but the trend reversed in the second half of last year with a $17 billion capital inflow after President Ma Ying-jeou took office in May and signed trade deals to open up tourism and transport sectors to China.

Gross domestic product rose 20.7 percent in the April-June period on a seasonally adjusted, annualised basis. Export orders to China stood out as the destination with the strongest growth momentum. This eased the pain in Taiwan, where GDP in the first quarter had plunged by a record 10 percent.

The first major deal since cross-strait relations started to thaw — China Mobile’s purchase of 12 percent of telecom operator Far EasTone — is an example of cash-rich Chinese firms scooping up Taiwanese assets for both commercial and political reasons.

China Mobile said that it hoped to learn from Taiwan’s experience with third-generation technology. A $529 million acquisition may appear to some a very expensive way of learning, but Chinese buyers know that valuations at home are even higher.

State-owned companies are eager to respond to government initiatives because establishing a foothold in Taiwan and playing a private-sector ambassadorial role will help them gain political clout in Beijing.

Investors are pinning their hopes on more mainland money flowing into the 100 sectors in Taiwan that are open to Chinese investment. They are also eyeing a landmark agreement that promises to open the two sides’ banking markets to each other.

While Taiwan has suffered from over-banking, lending in China is still a good business, and Taiwanese firms will have an advantage lending to fellow Taiwanese firms in China. The signing of that agreement has been delayed though — a sign that while deals such as direct flights between Taiwan and the mainland can be done, deeper breakthroughs will be harder.

As more Chinese investment flows into Taiwan, there will be a bigger risk of a backlash. Fearing that Beijing might withdraw all its investments if things do not work out as planned, Taiwan has scrutinised every goodwill gesture from China.

Most recently Taiwan irked Beijing by testing prefab houses — donated by China to house typhoon victims — for toxic materials. And previously, it rejected a pair of pandas whose name if said together meant “unification”.

China’s economy is ten times bigger, so there will always be concerns that Taiwan should not be too dependent on China. But that concern is overblown. It will be hard for China to pull out all its foreign direct investment at once. Moreover, Taiwanese firms are already exerting a big influence in certain sectors in China, such as electronics components and retail.

Taiwan backed itself into a corner in the past decade. It is time for a change. For China, the peace dividend it gets from Taiwan will be worth a lot more than the returns it makes on U.S. Treasuries. So it is probably a reliable bet that goodwill will continue to flow before Beijing even thinks about withdrawing.

– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —