ZTE said in March 2012 that it would curtail business in Iran following a report by Reuters that it sold Iran’s largest telecoms firm a powerful surveillance system capable of monitoring telephone and Internet communications. The company is now facing a U.S. criminal investigation over the issue.

“We’ve basically stopped. We have to continue to service the products we had sold before – we have no choice,” Hou Weigui said in an interview in Beijing. “We maintain communication with them to enable locals to carry out maintenance.”

Hou’s disclosure is the first public acknowledgement of how deeply the scrutiny has affected the company.

While he declined to give details on the amount of business ZTE had done in Iran before, Hou said the compensation it had to pay clients there for breaking contracts, and the fact that it had to halt some shipments even after equipment had been manufactured, were important reasons for the company’s first-ever annual loss in 2012, of 2.84 billion yuan ($460.1 million).

Losses in Europe were also a big factor in the poor performance in 2012, he said.

“UNFAIR”

“I think we’ve really been treated unjustly on this issue. Others are selling the same things, and we weren’t even selling the most,” Hou said. “Now we face these restrictions, and others in the industry aren’t facing any restrictions – they’re all still selling. This is a bit unfair.”

Hou said local rival Huawei Technologies Co Ltd was still doing business in Iran, but he declined to elaborate.

“We are not in a position to comment on what Huawei and others in the industry are doing. But in any case, they are still involved in the market. But we have stopped,” Hou said.

Huawei, in response to a Reuters query on Thursday, repeated a statement it issued in late 2011 that it would no longer seek new customers in Iran and would limit business activity with existing ones.

Hou also said that U.S. moves to restrict sales of Chinese information technology equipment, which affect both ZTE and Huawei, were not fair.

A new U.S. law signed by President Barack Obama in March restricts government purchases of Chinese information technology out of security concerns, and a Congressional committee last October recommended to the U.S. government that Huawei and ZTE should be kept from the U.S. market, and told U.S. companies to stop doing business with both firms.

Hou said ZTE had some communication with the U.S. government on the issues, but he was pessimistic about the possibility of the company being able to change perceptions among lawmakers or the public. In the meantime, ZTE would focus primarily on the handset business in the United States, he said.

“Relying on a company to solve this is far from enough. This is actually an issue of how the two governments approach bilateral trade in high-tech goods,” Hou said.

($1 = 6.1723 Chinese yuan)

(Additional reporting by Xiaoyi Shao and Anne Marie Roantree; Editing by Emily Kaiser and Ian Geoghegan)

Investors took fright this week over the potential impact of
the tax – which has been in place for almost two decades but
never strictly enforced – hammering shares of big property
development firms such as China Vanke, Poly Real
Estate, China State Construction Engineering
and China Resources Land.

Nervous homeowners have rushed to finalise sales, hoping to
cash in on apartments before the rules take hold, and there were
angry comments on microblogs, illustrating the level of
sensitivity to any attempts to cool prices in a country where so
many people have much of their wealth tied up in property.

But local governments, expected to act by the end of next
month on the plans announced on Friday – just days ahead of the
formal transfer of power to new leadership in the world’s
second-biggest economy – are likely to temper Beijing’s attempts
to take the steam out of rampant property speculation.

Chinese tend to park much of their wealth in bricks and
mortar as they have few other alternative investment options,
and the authorities are alive to the risk of destabilising the
Communist Party’s rule through mishandling the property markets.

While the State Council, China’s cabinet, wants to clamp
down on housing speculation – home prices in the 100 biggest
cities rose for a ninth straight month in February – it is
giving cities more leeway to take charge of local markets.

“The market always over-reacts when new rules are announced
because of uncertainties and misinterpretation,” He Qi, vice
chairman of the China Property Society in Beijing, told Reuters,
noting Beijing was handing responsibility for checking house
inflation to provincial governments which would, in turn,
oversee the cities under their jurisdiction.

“That means policies will be quite different in cities with
(housing) over-supply and those with short supply,” he added.

Real estate and credit experts predicted the measures -
which also include higher down payments on homes and increased
mortgage rates – would do little to harm the homebuilding
industry or dampen enthusiasm among those first-time buyers
Beijing is keen to encourage.

“We don’t see the new policy will have a particularly huge
impact on the industry,” Standard & Poor’s credit analyst Bei Fu
told Reuters. “It targets speculators, but the market recovery
since last year is driven by self-user demand.”

As long as China’s economy keeps growing at a steady clip -
outgoing Premier Wen Jiabao on Tuesday targeted 2013 GDP growth
of 7.5 percent – families would be able to
afford the added costs to buying a home.

PROPERTY SHARES EDGE UP

Shares in listed Chinese property companies nudged
up 0.6 percent on Tuesday after slumping more than 9 percent a
day earlier – their biggest drop in nearly five years. But the
new property policy was still the hot topic on social media,
with any strict implementation of the capital gains tax expected
to push up house prices.

“Ordinary people across the nation cried … governments,
developers and rich people laughed aloud,” wrote one Weibo
account under the name Raoshan Feihong.

Analysts expect the impact of the new policy to hit smaller
homebuilders harder than their bigger peers, further polarising
an industry that looks set for more consolidation.

“The new regulations will disproportionately affect smaller
players with lower margins, with projects targeting speculative
buyers or with high concentration in cities which are targeted
for stricter policy implementation,” Fitch Ratings said.

Kong Qingping, vice president at China State Construction
Engineering, the country’s biggest construction contractor, told
reporters on the sidelines of the National People’s Congress -
the annual 2-week gathering of parliament that began in Beijing
on Tuesday – that the new policy “will curb market demand, but
our company will have no problem.”

WAITING FOR DETAILS

While incoming Premier Li Keqiang has yet to declare the new
government’s stance on the property market, the effectiveness of
the latest measures will be determined by how local governments
interpret and implement them.

“It’s a Chinese practice that central government will keep
orders vague, giving local officials big room (to implement
them),” said Wei Yao, China economist at Societe Generale CIB,
suggesting some local authorities may be more lax than others in
enforcing the rules.

The 20 percent capital gains tax, for example, could be
waived or much reduced through loopholes in collection, Ting Lu,
chief China economist at Bank of America-Merrill Lynch, wrote in
a March 3 note. The tax has been largely ignored for years, with
buyers instead opting to pay 1-3 percent of the gross
transaction value.

Jia Kang, head of the finance ministry’s research
think-tank, predicted the capital gains tax could be a
short-lived policy, noting that people owning homes for more
than 5 years may be exempted.

“Many of the new rules need detailed explanations,” he said.

(Additional reporting by Xiaoyi Shao, Sally Huang and Jenny Su;
Editing by Ian Geoghegan)

President-in-waiting Xi Jinping and the next premier, Li Keqiang, were anointed on Thursday as the top leaders of the Communist Party, only the second time the party has managed a peaceful transition since it took power in 1949.

Xi, a “princeling” whose father was a top official, and Li, a policy wonk with a law background, inherit a China that is richer and more confident, and a far greater force in diplomacy and the global economy than when their predecessors Hu Jintao and Wen Jiabao took the helm 10 years ago.

Yet they also confront immense social, economic and political challenges, which if not managed skillfully could shake the party to its core.

If the new leadership lacks vision, said David Shambaugh, director of the China Policy program at George Washington University in the United States, then “I’ll be surprised if they have a 19th party congress,” referring to the just ended 18th conclave where the next generation of leaders were announced.

That might be a stark view, but many China experts agree the new leadership will need to be bold in reform if they want to keep their iron grip on a fast changing country.

TREATED LIKE CHILDREN

Thanks to the party’s success in overseeing rapid economic growth and lifting hundreds of millions out of poverty, Xi, Li and their deputies face a population more demanding and ready to rail against anything.

Ordinary Chinese have plenty to be upset about. Over 40 percent of the country’s rivers are severely polluted, by many estimates; China ranks near the bottom of some corruption indexes; and around 150 million migrant workers are denied welfare benefits in the cities in which they work because they have no residency rights there.

Those statistics illustrate one of the challenges of China’s rise. While growth has boosted incomes, the increased prosperity has led many people to be less willing to put up with the side-effects, and with what some see as a paternalistic approach by the leadership.

“Chinese people are really treated like children. You might listen to them a little bit but ultimately daddy knows best, what’s in your interests, and I don’t think that can hold much longer,” said Tony Saich, professor at the Harvard Kennedy School of Government.

China is more prosperous than a decade ago when Hu and Wen took charge, but the pursuit of prosperity has dramatically widened the gap between rich and poor, to the fury of many average citizens.

The United Nations says 13 percent of China’s 1.3 billion people still live on less than $1.25 a day. But the country also has 2.7 million U.S. dollar millionaires and 251 billionaires, according to the Hurun Report, a Shanghai-based luxury publishing house which compiles China’s Rich List.

Ordinary Chinese are especially fed up with the wealth accumulated by many party members.

The issue has never been as sensitive as it is now, in the wake of the scandal surrounding former Chongqing party boss Bo Xilai, who has been accused of corruption and abuse of power. Foreign media reports detailing the wealth amassed by the families of Wen and Xi have also sparked an outcry online.

In a speech after being introduced as the new party secretary-general, Xi said the party must tackle corruption. In his final work report last week, outgoing President Hu called it a “life or death” issue for the party.

GROWTH NOT ENOUGH

Both urban and rural Chinese are restive. The number of protests continue to rise, while China’s reintegration into the global economy over the last three decades has meant the country is getting swept along by – and indeed helping drive – technological revolution as it modernizes and invests half its national income every year in fixed assets, infrastructure and technology.

The ability of ordinary Chinese to send instant messages, write blog posts and take photographs of demonstrations over issues such as corruption and pollution puts further stress on a party determined to control the flow of information within China’s borders.

The thread that connects the good and the bad – increased prosperity and increased inequality, a growing middle class and outrageous corruption – is China’s relentless economic growth. Even that, in the view of many economists, is in question.

The need to restructure how China achieves its growth – by emphasizing consumption over investment and exports – would mean major policy changes such as loosening the dominance of state companies across many industries.

“At this juncture, if the (new leadership) doesn’t move quickly, the consequences will be clear and immediate,” said Daniel Rosen, an economist and head of the Rhodium Group, a New York-based consultancy.

“GDP growth will deteriorate within six to nine months, and that will have consequences. I don’t think they get even a one-year honeymoon.”

The party has earned its legitimacy with a broad swathe of the populace with rapid economic growth. However, growth has fallen for seven straight quarters, hitting 7.4 percent in the July-September period. Should growth falter further, discontent will rise.

Even though the economy appears to be picking up in the near term, analysts still expect growth to be closer to 5 percent than 10 percent by the end of this decade.

Some, both in and out of China, fear the government could then resort to nationalism and populism, already on display in Twitter-like microblog postings about territorial disputes in the East and South China Seas, to deflect attention.

TIPPING POINT

Ideally, to those pushing for political reform, the array of pressures will convince the party of the need for change, lest it become much harder later on.

Giving Chinese more of a voice could relieve some of their anger, even if they have little recourse to protect themselves from the arbitrary nature of unfettered political power.

The problem is that China’s new leaders have never shown a hint of desire for political reform. Quite the opposite, China’s leadership watched the Arab Spring and before that, the collapse of the Soviet Union, with alarm.

“Stability takes precedence over all else. Threats to stability will be nipped in the bud,” said a source with ties to the leadership, requesting anonymity to avoid repercussions.

Given the obsession with stability and the inclination to move cautiously, it could take a serious crisis to push China’s leaders to accelerate change.

In 1989, broad political and economic discontent combined with inspiration from dramatic change in the former Soviet Union and other parts of eastern Europe sparked student-led protests in Beijing that were crushed, but only after setting off heated debate at the top of the party about whether it should introduce serious political reform.

“They recognize the problems but to actually precipitate action something actually has to get to – if not the tipping point – then close to a tipping point,” said Damien Ma, an analyst at Eurasia Group.

“I’m not saying that you need a repeat of 1989 to get them to do something but there’s a critical mass of people who say they can buy some more time.”

In the end, the party’s survival instincts could end up leading to the changes needed to keep the country on course – and ensure the party remains in power.

That instinct and the need to adapt was summed up by Bo Yibo, father of the now disgraced Bo Xilai and one of a group of party officials who went from fighting as rebels during the country’s civil war to holding considerable power during the 1980s and 1990s, according to a source close to the Bo family.

“When you are the leader of a country with 1.3 billion people, you always have to stay one step ahead of them. Because if you don’t, you will be trampled, and you most certainly will never get back up,” the elder Bo once told the source.

(Additional reporting by Benjamin Kang Lim; Editing by Dean Yates)

The order has faced uncertainty due to a row between China
and the European Union over airline emissions charges.

European planemaker Airbus said in March China had blocked
the purchase of 35 long-haul A330s and 10 Airbus A380
superjumbos worth a total of $12 billion.

While Airbus did not name the airlines involved, industry
sources said the A380s were earmarked for Hong Kong Airlines, a
unit of the HNA Group, which also owns Hainan Airlines Co Ltd
.

Chen said the A380s were ordered when the market was good
and now the group had to consider the potential for a prolonged
period of global economic weakness.

“A380 is such a big aircraft, in these years, 10 of them,
who has such strength (to buy),” Chen told reporters on the
sidelines of the ruling Communist Party’s congress in Beijing.

HNA, which bought a 48 percent stake in France’s
second-largest airline Aigle Azur last month, was in talks with
Airbus over the A380 order and would announce the results later,
he said.

Hong Kong’s aviation regulator halted the expansion of Hong
Kong Airlines earlier this year following complaints about its
service standards and casting doubts about the carrier’s new
plane orders.

Chen said HNA would continue to order new aircraft next
year. “We have to buy new planes but whether we need to order
that many and that soon is another matter.”

The group will continue to expand overseas via acquisition,
he added.

Founded in 2000, HNA Group is involved in air
transportation, logistics, financial solutions, tourism, real
estate, retailing and airport management businesses.

At the end of 2011, it had total assets of $46 billion.

(Writing by Alison Leung; Editing by Mark Potter)

For the past few weeks, business people across the country have been preoccupied not with their companies’ operations, but with delivering thinly veiled bribes to the officials who grant them permits, sign off on the quality of their products or validate their tax bills.

The gift-giving ahead of the traditional Mid-Autumn Festival and National Day holiday, for which the country will virtually shut down for the week beginning on Monday, has created traffic jams and parking chaos outside many government agencies’ offices, according to residents of several cities.

Bearing gift cards, premium liquor, luxury products and even airline tickets, entrepreneurs visit the officials they need to maintain good relations with or expect to receive favors from, perpetuating a culture of corruption about which foreign businesses frequently complain.

“It’s the small potatoes that have the biggest appetites,” said Li, a woman who runs a retail business in Jinan, capital of the eastern province of Shandong. She declined to give her full name.

KEEPING SCORE

Since early September, Li has been busy delivering gift cards, in particular to the district-level officials who sign off on the permits she needs to stay in business.

For this year’s festival, she has had to hand out cards worth at least 5,000 yuan ($800) to each official she needs to keep happy. Before the Lunar New Year in the spring of each year, district officials expect double that, she said. Some also demand regular smaller gifts throughout the year.

“They all keep a record book of the reputations of gift-giving by people. If you’re not generous enough or didn’t perform well during a specific holiday, then word will spread fast,” said Li.

Such widespread corruption is nothing new; it has long been recognized as a problem, and the government has taken steps to crack down, especially on officials who are caught red-handed.

But the prevalence of holiday bribe-taking on the eve of the early-November Communist Party Congress – at which a new generation of top leaders will be anointed and ahead of which Beijing is particularly sensitive about issues like corruption – underscores the degree to which it is entrenched.

While the downfall of Bo Xilai – a one-time rising political star who was expelled from the Party on Friday on allegations including taking huge bribes – has embarrassed the Party and government, business people say such behavior is just the tip of the iceberg, with corruption extending down to country townships and city districts.

WATCHES A NO-NO

Beijing’s anti-corruption fight has had some impact.

With the Party’s reputation singed by a series of corruption scandals and rising public ire over them, it has imposed a “frugal working style” rule on civil servants effective October 1, barring them from spending public money on banquets or fancy cars, and from accepting expensive gifts.

But rather than stamp out bribe-taking, the main result has been a shift in the types of gifts given, away from luxury watches and flashy handbags and towards things like gift cards that can be passed on with a handshake or left discreetly in an office, according to several business people.

Those sensitivities were heightened when an official in Shaanxi province was fired a week ago for discipline violations after internet users collated photos of him wearing a number of luxury watches on various occasions, prompting a flurry of criticism online.

“Watches are not popular now, they’re too dangerous to wear,” said a businessman named Zhuang, an entrepreneur in Nantong in the eastern province of Jiangsu.

To get around that, in addition to gift cards, many people give gifts together with their receipts, so officials can return the gift for cash, he said.

But there is no option but to keep on giving.

“If I don’t make them happy, they will cause trouble for my company,” Zhuang said.

($1 = 6.2849 yuan)

(Additional reporting by Shanghai Newsroom; Editing by Robert Birsel)

Baidu and companies across the country are tapping a frenzy
of nationalist sentiment, launching patriotic promotional
campaigns as thousands take to the streets to protest against
the Japanese government’s purchase last week of some disputed
islands from a private owner, islands China claims as its own.

Be it to drive traffic to websites or garner customer
loyalty, companies have rushed to wave the Chinese flag to try
to cash in on the worst anti-Japan protests in decades
surrounding the islands, called the Senkaku by Japan and Diaoyu
by China.

Clicking on the image on the Baidu site takes users to a
special site () exclaiming “The Diaoyu
Islands are China’s!” and encouraging them to plant a virtual
red-and-yellow flag on the islands via a special Baidu map.

The tally as of mid-afternoon on Tuesday: 3 million and
counting.

Baidu is far from alone.

“Fine food belongs to the world; the Diaoyu Islands belong
to China!” online food retailer Etaoshi.com proclaimed in a
banner on its website.

The site of online retailer Dangdang.com opens up to a
full-page announcement that the company is handing out 1 million
free hand-held national flags with the books and other goods
bought on its site, and highlights posts by customers on social
media sites expressing their satisfaction at having received
them.

“I bought two books on Dangdang and got a free national flag
– wow, I’m thrilled!” user Gao Wena said in a posting on
Twitter-like site Sina Weibo.

WEAPON AND SHIELD

Bricks-and-mortar retailers are not to be left out.

The Silk Market, a Beijing institution selling fake designer
clothing and handbags, was adorned this week with a banner
declaring that it “boycotts Japanese goods”.

A photo shared by one user of Sina Weibo showed a
supermarket display for a local brand of toothpaste done up in
the shape of a cannon, with a Chinese flag atop it and a sign in
front proclaiming that the Diaoyu islands belong to China.

For some businesses, the flag is being wielded more as a
shield than a marketing weapon.

Some outlets of Japanese-style noodle chain Ajisen (China)
Holdings Ltd carried banners earlier this week saying
it was a Hong Kong company and was of the same ethnicity as its
customers.

“We are just as patriotic (as you)”, one banner read.

That did little, however, to ease investors’ worries over
the possible business impact from the protests, sending Ajisen’s
shares down by around 8 percent so far this week.

Many Japanese restaurants and shops across China have also
taken down or covered up their signs and hung up Chinese flags
to avoid becoming the target of rioters.

As for Baidu, its Beijing-based spokesman, Kaiser Kuo, said
its microsite was also aimed at keeping things under control.

“The purpose behind putting up the site was to encourage
people to express their patriotism in a more rational way, to
renounce violence,” Kuo said.

“Planting a digital flag to express your feelings on this
matter of the disputed islands is a much better alternative than
throwing stones or eggs or smashing cars.”

Hanlong, which already owns 17 percent of Sundance, wants
the company for its $4.7 billion Mbalam iron ore project on the
border of the republics of Congo and Cameroon in western Africa.
The region is seen as a major new source of iron ore that could
cut China’s dependence on Australia and Brazil.

“We have gotten approval from the National Development and
Reform Commission. It was approved on Monday,” a media officer
from Hanlong told Reuters on Wednesday.

With the approval from the top economic planner, Hanlong now
needs finance from China Development Bank to complete the deal
that was agreed a year ago, when the iron ore price outlook was
far more positive.

The deal’s lengthy delays had pointed to China’s reluctance
to make big bets on risky resources projects offshore amid
uncertainty over economic growth at home.

Iron ore prices are languishing near their lowest level in
more than two and a half years, hitting the share prices of
resource firms.

Hanlong is now seeking to negotiate a lower price for its
bid for Sundance, a separate Hanlong official said, now that its
share price has fallen over 40 percent from the agreed prices of
A$0.57 ($0.60) per share which valued the company at A$1.74
billion.

Sundance shares last traded at A$0.335 cents, before the
stock was placed on a trading halt on Tuesday.

The Hanlong official declined to be named because he was not
authorised to speak to the media.

Under the agreement, Hanlong must secure China Development
Bank’s blessings by Aug 31 to buy the shares it does not already
own.

Media reports in Australia on Wednesday said Hanlong had
reduced the deal to 50 cents a share and Sundance board was
expected to recommend the new offer. It was not immediately
clear whether the offer had been cut. A Sundance spokeswoman
declined to comment.

Australia’s Foreign Investment Review Board approved
Hanlong’s bid for Sundance in June.

The decision caps a tumultuous two years for Sundance. In
June 2010, the entire board of directors was killed in a plane
crash near the Mbalam project. A new board and management were
appointed before the Hanlong bid in July last year. On Tuesday,
a Hanlong executive, Calvin Zhu, pleaded guilty to insider
trading regarding the bid.

Chinese interest in snapping up Australian assets has
dropped sharply since last year, when Chinese takeovers of
Australian metals and mining assets peaked at 40 deals worth
$6.5 billion, according to Thomson Reuters data.

So far this year, bids have shrunk to $522 million, with
bankers and lawyers saying Chinese companies are not eager
participants in mine auctions any more.

The Mbalam project, which includes building a 510 km (320
mile) rail line and a deep water port, is expected to produce 35
million tonnes a year of iron ore.

This compares with a forecast 55 million tonnes this year
from Australia’s Fortescue Metals Group, the world’s
number four iron producer.

(Additional reporting by Su Dan in Beijing and Narayanan
Somasundaram in SYDNEY; Editing by Muralikumar Anantharaman)

Baosteel’s pricing decisions are generally regarded as a
bellwether for the industry. While demand generally weakens in
China’s hot summer months as construction projects slow,
sluggish economic growth and a fragile global economy are
putting particular pressure on the company this year.

China’s steel industry is expected to see low demand in July
and August until a seasonal pickup in September, and
expectations of more efforts by Beijing to boost the economy are
unlikely to provide an immediate boost to steel prices, analysts
say.

“The July-August period could see a bottoming out, given
demand remains tepid,” said Hu Zhengwu, an analyst with China
industry consultancy Custeel.com.

“It’ll take time for Beijing to approve and place money into
more infrastructure projects, while there may not be as many
construction projects as we had expected,” he added.

Shanghai-based Baosteel will slash hot-rolled coil prices by
200 yuan ($31) per tonne and cold-rolled coil prices by 260 yuan
($41) per tonne for August bookings.

The shaky global economy and slumping domestic growth are
hammering Chinese companies, leading to a series of profit
warnings by firms ranging from steelmakers to airlines.

Angang Steel Co Ltd estimated a net
loss of around 2 billion yuan ($309 million) in the first half
of 2012, mainly due to slumping steel prices.

More broadly, some analysts say that even if the economy
picks back up in the second half, it could take more time for
corporate earnings to rebound.

“A pick-up of actual GDP growth may come earlier than a
recovery of corporate earnings as inflation is slowing at a
faster-than-expected pace and such a trend may last until
October, which will keep dragging down their profits,” said Chen
Li, head of China equity strategy at UBS.

(Addtional reporting by Aileen Wang in Beijing; Editing by
Clarence Fernandez)

“You have to take it a bit slowly, rather than being too aggressive and making enemies everywhere,” says Wang, founder and chairman of Shanghai-based Spring Airlines, of the approach that has enabled him to successfully carve out a piece of the $56 billion-a-year Chinese airline industry.

Wang has come a long way since his start in 1981 running a tiny tourist agency in central Shanghai, beating the odds to build up not just one of the country’s most prominent travel agencies but also its biggest private budget carrier, with nearly 60 routes in China and seven overseas.

His tale underscores the challenges private Chinese companies face, even as Beijing pushes for them to play a bigger role in driving growth in the world’s second-largest economy.

For Wang, one of the biggest obstacles to expanding has been resistance to his opening new routes from state-owned airlines.

“Whenever we open a new route they get tense, and sometimes they take an unfriendly approach,” Wang said in an interview inside the mock-up airplane fuselage that staff at his spartan headquarters use to train new flight attendants.

“The approving authorities are also in a tough position – they’re afraid of the big companies.”

WORKING AT THE MARGINS

In some cases, aviation regulators have held up applications for prized routes for years on end, Wang said. He is still waiting for permission to fly to Taipei, for instance.

In others, they have given him only unenviable time slots, such as his Shanghai-Beijing route, for which his flights arrive in Beijing after midnight and leave again before 7 a.m.

And at times, officials squeezed between the lobbying by state carriers and a desire to offer passengers more options have suggested that Wang fly to his destination via a smaller city that is otherwise not served, adding to his costs.

Having learned from difficult experiences in the past – he was famously threatened with a 150,000 yuan ($23,500) fine in 2006 by a regulator in Shandong province for supposedly disrupting market order with promotional tickets selling for 1 yuan each – Wang now takes a more conciliatory approach.

“Whenever we want to fly somewhere new, we first get in touch with the big companies flying there, tell them we’re starting flights, explain that we have a different segment of the market … and ask for their support and guidance,” he said.

That strategy, and synergies between Wang’s travel agency and airline, have helped Spring stand out in a field littered with other private airlines that have tried and failed.

Spring Airlines, launched in 2005, made 470 million yuan ($73.8 million) in profit in 2010. It has not disclosed 2011 results because it is currently applying for an initial public offering (IPO) in Shanghai.

Wang’s experience is shared by many private and foreign companies in various industries, which face an uphill battle against dominant state-owned enterprises, or SOEs, but find ways to work around those obstacles, said Kent Kedl, managing director of Greater China and North Asia for Control Risks.

“There are some companies that are finding it profitable to be working at the edges. You don’t necessarily have to be in the scrum, in the center, to make money in China,” Kedl said.

IT’S ALL RELATIVE

As such, players such as Spring are unlikely to pose a serious threat to the likes of Air China (601111.SS: Quote, Profile, Research, Stock Buzz) (0753.HK: Quote, Profile, Research, Stock Buzz), China Southern (600029.SS: Quote, Profile, Research, Stock Buzz) (1055.HK: Quote, Profile, Research, Stock Buzz) and China Eastern Airlines (600115.SS: Quote, Profile, Research, Stock Buzz) (0670.HK: Quote, Profile, Research, Stock Buzz) anytime soon, industry players say.

“State-owned airlines have a longer history and are bigger in terms of capital size compared with privately owned airlines,” said Wang Jian, board secretary of Shanghai-based China Eastern. “In terms of routes, we don’t have direct competition (with Spring Airlines).”

China Southern did not respond to requests for comment; Air China declined to comment.

China has one of the world’s fastest growing aviation markets, although its top three state-owned airlines are currently suffering from a slowdown in the domestic economy and uncertainty overseas that is leading their parents to line up massive cash injections.

China Southern and Air China are set to receive a combined 3.05 billion yuan from their parent companies, while aid is also on the way for China Eastern.

And, in a sign of Chinese expansion in the aircraft manufacturing sector, Beijing city government-linked Superior Aviation is in talks to purchase bankrupt U.S. business jet maker Hawker Beechcraft.

Despite the hurdles for Spring to expand, which also include a dearth of trained pilots in China, Wang is optimistic about the company’s future growth.

The current economic slowdown is actually prompting many passengers to favor his low-cost tickets, he said, and he hopes that the company’s long-planned IPO can happen as early as this year, enabling him to expand his fleet beyond the 31 Airbus A320s he currently has in service.

He is also hopeful that the conditions for doing business as a private company will become easier over time, though experience leaves him with no illusions.

“Of course I want things to open up more,” he said. “But fairness is all relative.” ($1 = 6.3714 Chinese yuan)

(Additional reporting by Jane Lanhee Lee and Melanie Lee in Shanghai and Alison Leung in Hong Kong; Editing by Raju Gopalakrishnan)

“It’s really a strange feeling that you have to look for the central bank to inject money into the market, after for so many years a flood of liquidity had kept the central bank needing to drain money from the market nearly every week,” she said.

Ju and other Chinese traders who are finding it harder to borrow cheap money before holidays or the end of the month are at the sharp end of a big change in policymaking: the shift to a domestic-driven economy where interest rates are the main conduit of monetary policy.

For the People’s Bank of China (PBOC), it is focusing less on draining liquidity from the market – which has been a necessary result of its controlling the exchange rate over the past years – and working towards using tools like the repo market to signal its interest rate intentions.

The changes have been facilitated by an easing of heavy capital inflows, once a major problem for policymakers as they sought to protect the growth engine of exports.

Rather than being a temporary response, the steps taken by the PBOC could take on a permanence that suggests it has seized the opportunity of slower inflows to advance its policy restructuring.

“Major changes in the PBOC’s market activities are being unveiled as China shifts its economic focus to domestic consumption,” said economist Wang Haoyu at First Capital Securities in Shenzhen.

“The PBOC has made itself a supplier of money in its liquidity management, reversing a trend of having to drain money from the market all the time, among other changes.”

INJECTING CASH

Indeed, rather than absorbing funds, in 11 of the 16 full weeks so far this year, the PBOC injected cash into the market. In total, it has injected a net 363 billion yuan ($58 billion) so far this year.

The policy shift began after the global financial crisis, when Beijing began weaning the economy off its dependency on exports and promoting greater domestic spending. Like other changes in China, it’s a gradual move.

An early signal came in November 2010, when PBOC governor Zhou Xiaochuan said China would create “pools” to lock up excess funds, which could then be tapped in times of downturn.

The reserve requirement ratio (RRR) was ratcheted up nine times between November 2010 and July 2011 to a record high of 21.5 percent, draining around 3.5 trillion yuan from the banking system.

As the economy has slowed, the central bank has been less accommodating, cutting the RRR only twice to 20.5 percent and injecting less than 800 billion yuan.

That lack of easy money has kept China’s benchmark seven-day repo rate firmly above 3 percent since late 2010, compared with levels of less than 2 percent for years before that. The rate has moved between 3.3 to 3.8 percent this week.

It has also helped curtail inflation pressures and asset price bubbles by making the cost of borrowing for speculation more expensive.

“China has already started a process to adjust its economic structure, making it unnecessary to keep abundant liquidity in the system, which was seen as a must just a few years ago,” said a trader at a Chinese commercial bank in Shanghai.

In one big sign of that change, the PBOC late last year suspended weekly issues of central bank bills for the first time since it launched regular open market operations in 2003.

These bills had once been the main means to drain yuan released by its foreign exchange intervention to manage inflows from trade surpluses, foreign investment and speculative funds — a process known as sterilisation.

Because the bills release liquidity back into the market on their maturity, the PBOC has over the past several years needed to issue new ones just to keep the cash in the market in check, on top of issuing more to sterilise the forex inflows.

By finding an opportunity to stop issuing bills for a period, the central bank could be paving the way for itself to no longer need to issue them routinely in the future.

Close to 2.7 trillion yuan of the bills matured in 2011. This has fallen by more than two-thirds to 785 billion yuan this year, and at the moment, there are no bills set to mature in 2013. That marks a shift that will give it more control in conducting its market operations in the future.

A slowdown in inflows of foreign cash into the economy requiring sterilization has been helpful in freeing its hand.

Central bank data shows its foreign exchange assets fell over the last three months of 2011, the first such falls in nine years. Assets have risen again this year, but the 238 billion yuan increase in January and February was about one-third of the increase a year earlier.

Similarly, other data shows liquidity created by foreign currency purchases fell for the first time in four years at the end of 2011, and in February it was just 25.1 billion yuan, compared to 214.5 billion a year earlier.

THREE-STEP REFORM

Freed from having to constantly fend off excess liquidity in its open market operations, the central bank has been able to turn its attention towards guiding interbank interest rates.

For example, the central bank has signalled its position on market expectations for an interest rate cut to boost slowing growth by keeping the repo rate largely stable. So far this year, the 91-day repo rate has fallen only once by 2 basis points in mid-March. By holding out, it signalled to the market that it did not intend to cut rates.

And as policymakers strengthen their hold over domestic money markets, they are loosening their grip on the exchange rate.

Last month, China doubled the yuan’s trading band to 1 percent and permitted dollar short-selling for the first time, having earlier laid out the case for change.

Premier Wen Jiabao said in March that China would intensify reforms of its currency regime and allow the yuan to float more freely. PBOC governor Zhou also said conditions were ripe for the yuan’s exchange rate to float more widely.

Those comments followed a PBOC paper in February that outlined a three-step currency reform process: easing curbs on outbound investments over one to three years, relaxing controls on loans for foreign trade, and then opening its real estate, stock and bond markets over the next five to 10 years.

“The present time is a strategic opportunity for our country to open up the capital account,” the report said.

Traders said the PBOC’s increased repo market action is a pointer that it will try to guide interest rate expectations in a similar way to how the Federal Reserve and some other central banks in mature economies signal their intentions in their open market operations.

“If you’re short you have no choice but borrow at a rate guided by the central bank. If you’re flush with funds you can choose not to follow the central bank but look for whatever products have higher returns,” said a Chinese bank trader.

“The PBOC can now be more effective in imposing its intention on the interest rates, while letting the exchange rate move more freely, thanks to a slowdown in capital flows and its strategy to have a tight grip on cash flows by high RRR.”

(Editing by John Mair)