China Challenges

Shanghai's "Obama Girl" Mystery

The Shanghaiist reports:

The secret is out and her fifteen minutes are up: yesterday, Global Voices and ESWN reported that Wang Zifei, more commonly known as the 'Obama girl' who sat behind the US President when he delivered his speech at Shanghai's town hall, was in fact an online hoax. The story behind her overnight transition to celebrity status: her boyfriend had actually paid 100,000RMB to hire a Beijing Internet promotional strategy company to take advantage of Obama's speech and create what became the ‘Obama girl.'

Who is (or was) the 'Obama girl', anyway?

Read more at the link.

Shanghai Rates Third in China for Public Services

The Shanghai Daily reports:

 

SHANGHAI has been ranked third in China for the efficiency of its public services in an index issued by Shanghai Jiao Tong University today, despite spending the most on the sector.

"The city needs to improve its investment efficiency in the future," said Chen Xian, a researcher and professor of the school's Antai College of Economics and Management.

The school began its public service research last year, measuring "inputs" and "outputs" of investment in 35 cities across China, rating them on criteria such as environmental protection, medical care, and government services.

Beijing earned the top spot with the second-largest investment and Shenzhen won second place with the third-largest investment.

Eastern advanced cities including Shanghai and Beijing occupied the first tier while most cities in the west of China lagged behind both in investment and efficiency.

"Apart from the gap between cities and rural areas, the inequality of public service among domestic cities is also very large," Chen said.

Shanghai shows poor performance in environmental protection, employment services and basic medical care.

Read more: http://www.shanghaidaily.com/sp/article/2009/200912/20091201/article_421286.htm#ixzz0YQRyyAON

China is "Blindly Expanding" Industries, Leading to Overcapacity

The Washington Post reports:

BEIJING -- China's stimulus spending has fueled massive overexpansion in industrial capacity that could drive a surge in low-priced exports amid weak global demand, possibly igniting a protectionist backlash abroad, a European business group warned Thursday.

Industries including steel, cement and plastics are "still blindly expanding" despite the worst global slump since the 1930s, the European Union Chamber of Commerce in China said in a report.

Investment in the first half jumped 40 percent from a year earlier, "so probably there is going to be big overcapacity around the corner," the group's president, Joerg Wuttke, said at a news conference.

What TCL's Foreign Foray says about China Inc Going Global

Yuxin He writes for the FT:

Yuxin He is a corporate analyst for Dragonomics Advisory and is a guest contributor to Dragonbeat blog this week.

Five years ago, a little-known electronics firm in Guangdong province – TCL – briefly became the world's biggest television maker.

Countless consultants announced the coming of age of China's global consumer-electronics champions, following Japanese firms like Sony and Panasonic in the 1970s, and Korean contenders like Samsung and LG in the 1990s.

Whatever happened to it?

TCL exploded onto the global stage when it took over the TV-making operations of French conglomerate Thomson. Shortly afterwards, it bought the mobile phone handset business of French telecommunications equipment maker Alcatel.

But the two high-profile acquisitions proved disastrous: losses from the enlarged TV and handset operations exceeded Rmb4bn in the first three years after the Thomson and Alcatel acquisitions – nearly triple TCL's combined profit in the three years immediately before the acquisitions.

TCL's European TV operations are now in liquidation; its North American business still strives to break even; and its handset gambit has shrivelled, leaving the firm as a contract manufacturer for low-end Alcatel phones sold in emerging markets.

Read more at the link.

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Only 20% Say What's Good for China's Economy Good for U.S.

A survey from Rasmussen says:

Twenty percent (20%) of Americans think what is good for China’s economy is good for the U.S. economy, as President Obama meets with Chinese leaders this week in an effort to ease economic tensions between the two nations.

A new Rasmussen Reports national telephone survey shows that 59% disagree. That’s down five points from a year ago, when 64% rejected the idea that what’s good for the Chinese economy is good for America’s.

China Selects 294 Solar Power Plants for Subsidy

Reuters reports:

China has identified 294 solar power projects with total generating capacity of 642 megawatts (MW) in its first pilot program.

Beijing has said it will subsidies at least half of the investment cost.

The capacity will be nearly 30 percent more than the minimum target Beijing set in July when it launched the unprecedented "golden sun" plan, which was part of China's drive to catch up in a global race to find alternatives to fossil fuels.

These projects were expected to cost around 20 billion yuan ($2.93 billion) and be ready for use in two or three years, the Ministry of Finance said in a release on its website (www.mof.gov.cn).

Of the projects, 232 with total generating capacity of 290 MW will be constructed by major industrial and commercial firms and the power output would be consumed by themselves.

Twenty-seven independent photovoltaic power generating projects, with total capacity of 46 MW, will be built in remote regions that have no power supply. The projects were expected to generate enough power to meet demand for more than 300,000 residents in the regions

Read more at the link.

"Made in China" becomes "Made in Egypt"

Channel News Asia reports:

PORT SAID - With cheap labour, investment incentives and unrestricted exports, one Chinese textile group has turned to Egypt as an ideal location to produce its ready-made garments, beating stiff competition at home.

The Chinese-owned Nile Textile Group has set up shop in the Port Said free zone, overlooking the north entrance of the Suez Canal, and developed an industrial estate now hiring 600 workers, 20 percent of which are Chinese and the rest Egyptian.

Cheap raw materials and favourable export conditions have given the company easy access to foreign markets.

It's a bargain for the Nile Textile Group, which imports 60 percent of its basic products tax free and then sends them outside Egypt, mainly to the United States.

Most of their cut-price clothes are now labelled "Made in Egypt" rather than "Made in China".

"Egyptian free zones allow for export all over the world with almost no restrictions," said Mohammed Abdel Samie, the industrial estate's administrative director.

Local salaries are low enough to compete with those of Chinese workers, even with a system of bonuses offered to the Egyptian workers at the end of each month.

"In the factories where salaries are fixed, we earn a maximum of 700 to 800 Egyptian pounds (around 130 to 150 US dollars) a month. In this company, it works out better for us," said factory manager Mansur al-Said.

In the neon-lit factories, Egyptian workers in headscarves work side by side with Chinese technicians in white blouses to the thumping sounds of the sewing machines.

Instructions are posted in Arabic and in Chinese.

Read more at the link.

Labor Mismatch in China

Bill Dodson writes on his This is China! blog:

A local Suzhou television news reported highlighted an odd disconnect in the local labor market: local factories are looking to hire, and the unemployed are looking for jobs. The report, in many ways, was more an infomercial for the company, its products, its working conditions and its labor requirements, which is likely how the issue became a news items at all. The news reported went to some labor markets and talked to young people who were looking for jobs. The interviewees were unaware there was a labor shortage. Perhaps these were the unemployable.

Read more at the link.

 

US Manufacturers Prefer Mexico Over China

CNN reports:

MEXICO CITY (CNNExpansion.com) -- Mexico did not have an extreme economic makeover, but the global recession was enough to defeat China as the number one place for American assembly-for-export factories, or maquiladoras.

"For many companies that want to export to the United States, like the maquiladoras, Mexico's exchange rate will be seen as a stable and permanent advantage and we are going to see much stronger investment flows associated to this industry," said Cesar Hernandez, general director of foreign trade at the Mexican Trade Ministry.

Mexico has become much more attractive, even Chinese companies are moving to the country to take advantage of the North American Free Trade Agreement (NAFTA) commercial and fiscal benefits and export to the United States, said different experts in foreign trade.

Read more at the link.

50% of New Expats Leave China Early

The China Daily reported recently:

Almost half of new expatriates leave China early because they have difficulty adjusting to the lifestyle, a consultancy firm said.

China Transition Institute (CTI) president David Israel-Rosen said most foreigners are unprepared for what life will be like when they arrive in China.

"It is moving from the West to the East," he said. "It is not like moving from Chicago to Denver."

"If you look at the literature, between 30 percent and 50 percent of expats go home early. The failure rates are astonishing."

Do Too Many Rules in China Erode the Rule of Law?

The WSJ reports:

It’s not a new revelation that China has a lot of rules.

Last year, there were rules for Beijing residents during the Olympics, and also rules for foreigners who came to town for the games (57 of them!)

This year, in Hubei province, a county government infamously ordered local officials to smoke locally produced cigarettes , while civil servants in the southwestern city of Kunming were ordered to learn 300 English sentences and 100 sentences in Lao, Burmese, Thai and Vietnamese, apparently to promote tourism in the region.

Today’s New York Times looks at some even more bizarre manifestations of rules run amok, such as an edict requiring schoolchildren to salute all passing vehicles on their way to and from school, and the Chongqing rule that “forced unmarried women to pass a chastity test before receiving compensation for farmland appropriated by the government.”

A potential side effect of so many seemingly arbitrary rules is that people may feel more inclined to skirt rules that they disagree with, or are simply too cumbersome to follow on a regular basis, fueling a culture of rule-bending and ignoring.

China's Miraculous Recovery, Too Good To Be True?

In the Atlantic, Jacobo Chiu writes:

When China announced that its economy grew 8.9% in the third quarter, you'd expect China-boosters to pour into the streets, acclaiming the nation as the world's new engine of economic growth. But instead of praise, experts are casting a skeptical eye on the Middle Kingdom's economic figures.

This is a major turnaround from the spring, when many pundits applauded Beijing's mammoth $586 billion stimulus package as a sign of the country's migration away from an export-intensive economy. Though a coterie of columnists (Fareed Zakaria, in particular) still fawns over China's response, others are wondering whether China's recovery plan is all wrong. Why? These skeptics say asset bubbles, social upheaval and slow growth all lie ahead.

• A Bubble Stimulus Zakaria, who recently declared China the real winner of the recession, lauds China's stimulus plan for concentrating the bulk of its funds on "investment for future growth: infrastructure and new technologies." However, in an op-ed piece for the Financial Times, Qin Xiao, chairman of the China Merchants Group, voices concern over Beijings huge liquidity injection. Qin says that while the plan has helped avoid the worst recession since the Great Depression, there are asset bubbles lurking ahead, specifically pointing out recent surges in China's stock and property markets. "I do not believe a quick steep bounce driven by fiscal fixed investment is a good thing for China," he says. While worried that tightening monetary policy would lead to a "second dip" in the economy, Qin believes it is still imperative China shift from a loose monetary policy to a neutral one.

• A Stimulus Revolt To The American's Michael Auslin, the asset bubble described by Qin Xiao above has manifested itself in the madness of China's affluent crowds. China's growing conspicuous consumption, he says, poses a sizable threat in "a country that has such uneven economic growth." Auslin, who recently attended a Chinese auction where a bottle of wine was sold for $93,000, expects the Chinese Communist Party to begin clamping down on the economic exuberance that has driven it forward, and, if not, social upheaval could still occur. "If the world's auction houses continue to crow over massive Chinese purchases, then being a contrarian may be the smartest move of all."

Mandarin Preferred

In Chinatown, Sound of the Future Is Mandarin

The Many Moods of Chairman Mao

China Expat says:

The men who have shaped history - Napoleon, Genghis Khan, et al - all had vision, endless energy, and indomitable will. We mere mortals like to believe they were two-dimensional overachievers. Had they felt, laughed, and cried as we do, they would have been far too busy being human to have been demigods. CCTV shows about Mao bolster this fallacy; all his character does is stroll about purposefully, calmly spouting wisdom.

But a read through Quan Yanchi's MAO ZEDONG: Man, Not God, proves that the Great Helmsman was as multi-faceted as any one of us "normal" humans.

Google's Future in China

By Sherman So at Asia Times Online:

HONG KONG - The sudden resignation of Lee Kai-fu from his position as head of Google China, where he led failing efforts by the world's dominant Internet search engine to catch mainland market leader Baidu, prompted widespread speculation over why he quit and what his new plans might be.

One near constant is that his departure, announced last month, is a major setback for the company. Whatever truth there is in that view, one point missing in the discussion is whether Lee, 47, was really a suitable person to run Google's operation in China today? Or can John Liu, who is assuming most of Lee's business and operational responsibilities, be a better candidate?

United States-based Google formally started its office in China in mid-2005.

The Impact of a Free Trade Pact between China and Taiwan

Channel News Asia reports:

TAIPEI - A proposed trade pact between Taiwan and China will see up to 80,000 Taiwanese lose their jobs or need additional training to stay in work, the government said on Friday.

"We aim to alleviate the impact through negotiations," a spokesman at the Council of Labour Affairs told AFP, asking not to be named. "We will try our best to help the unemployed and we will try to provide more subsidies to them."

The 80,000 estimate, which the government says is a worst-case scenario, comes as China-friendly President Ma Ying-jeou strives to conclude the trade agreement with the mainland.

Relations between the island and China have warmed considerably since Ma came to power last year, with the trade agreement the latest in a series of moves to bring the traditional rivals closer together.

Despite the job losses, Ma's administration has repeatedly argued the trade agreement will boost the flow of goods and personnel between the two sides, raising annual economic growth by more than one percentage point.

The 80,000 are concentrated in low-tech industries such as towel, footwear and underwear manufacturing, which are especially vulnerable to the planned trade Economic Cooperation Framework Agreement.

"The government will provide all means necessary to help the affected industries restructure," the Council of Labour Affairs spokesman said.

How To Deal With Piracy In China

Shaun Rein writes in Forbes:

At a recent World Media Summit in Beijing Rupert Murdoch, the chairman of News Corp., exhorted China to clamp down on copyright infringement. Murdoch is right that piracy is a huge problem in China. Pirated DVDs, fake Ralph Lauren shirts, and cracked software are everywhere. Pushing the Chinese government the way Murdoch did, however, is unlikely to have any meaningful effect.

Most Chinese believe they should have the same access to products the developed world has even when they can't afford them. Why should the West get ahead by having better technologies, the reasoning goes.

 

What can you do if your China operations are hit by piracy? Should you turn a blind eye and think of it as brand exposure? Should you spend money battling in Chinese courts? Here are some key thoughts to keep in mind:

First, China's piracy problem is not a matter of morality. More than anything, it is a matter of poverty.

Health Concerns: How I Survived China

James Fallows writes:

For a while I thought China was killing me. But that was unfair.

Through my wife's and my first year in Shanghai, I felt worse by the day. Tired, achy, surly, weak. And that’s not even counting the hospital stay with IV-drip antibiotics, after I naively drank bottled water in a Buddhist-run vegetarian restaurant—and on the way out saw a waiter filling the “Evian” bottles from a hose. Friends we’d known in our pre-China life did pitying double takes when they came to visit. Surely the ochre skies and suspect sanitation of China were to blame?

Actually, no. On a trip back to America, I learned that I felt sick because I was. Just before moving, I'd apparently developed an odd endocrine disorder that makes people tired, achy, surly, weak. No space for details, but: if your doctor tells you that very high blood-calcium levels may indicate an abnormal parathyroid gland, listen up! On a later U.S. trip, after we'd moved from Shanghai to Beijing, I had an operation that resolved the problem. I went back to China feeling better than I had in years.

But like most outsiders who have spent time there, I naturally wondered: now that I'd recovered, would smoky urban China start killing me for real? The health situation for ordinary Chinese people is obviously no joke. After stalling, the Chinese government recently accepted a World Bank estimate that some 750,000 of its people die prematurely each year just from air pollution. Alarming upsurges in birth defects and cancer rates are reported even in the state-controlled press.

Chinass NPLs: Another financial time-bomb?

Arthur Kroeber writes in the FT:

Is China’s credit binge a financial time-bomb waiting to blow the country’s much-vaunted economic miracle to smithereens?

Beijing has long bet that the problem of bad loans can be solved by pushing off the day of reckoning into the future, with rapid economic growth reducing the size of the problem.

So far that calculated bet has proved a sound one.

But the unprecedented expansion in bank credit this year, coupled with last month’s decision to roll over for another decade the bonds used to finance the first non-performing loan (NPL) workout of 1999, make it a good time to submit this policy to a stress-test.

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China: More Trade Tensions

Micheal Pettis writes:

While the G20 leaders make reassuring noises about international trade, I think the risk of rising trade tensions have not abated at all. As I see it, everything depends on whether or not domestic Chinese polices had any role in creating the global imbalances, and if they did, then we are still in the early stages of a difficult process of assigning the costs of the global adjustment through trade.

Beijing hates when anyone suggests that Chinese policies were partly at fault for the current global imbalances, and doesn’t even like people to use the phrase “global imbalances,” but like it or not, we have to figure out whether in fact Chinese policies mattered. As I see it, China’s consumption rate, the lowest ever recorded, and it’s trade surplus, the largest as a share of global GDP ever recorded, could not help but have been caused by policies – such as an undervalued currency regime, excessively low interest rates, sluggish wage growth, unraveling social safety nets, and manufacturing subsidies – that were almost wholly under domestic control.

According to my understanding of Chinese growth, it was policies that systematically forced households implicitly and explicitly to subsidize often-otherwise-unprofitable investment and manufacturing that led to wide and divergent growth rates between production and consumption, and of course the gap between the two is the savings rate. If that is true, the stimulus package is only likely to exacerbate the domestic imbalance.

China's Mr. Wu Keeps Talking

China's "Mr. Market Reform" is worried about the country's future. The NYT reports:

BY most measures, China's economic transformation has been a resounding success. Anyone who travels here can see it: the change in people’s living standards, the makeover of big cities — what has come to be called China's economic miracle.

But Mr. Wu sees the defects: a government prone to “meddling” in the marketplace; a widening income gap; inefficient monopolies; and crony capitalism.

His critique sharpened considerably after Jiang Zemin stepped down as president in 2003, and Mr. Wu's role was diminished.

In interviews, Mr. Wu says he feels compelled to speak out because conservatives and “old-style Maoists” have been gaining influence in the government since 2004. These groups, he said, are pressing for a return to central planning and placing blame for corruption and social inequality on the very market reforms he championed.

At the same time, Mr. Wu says, corrupt bureaucrats are pushing for the state to take a larger economic role so they can cash in on their positions through payoffs and bribes, as well as by steering business to allies.

“I’m not optimistic about the future,” Mr. Wu said. “The Maoists want to go back to central planning and the cronies want to get richer.”

China's Predatory Form of Capitalism

Pranab Bardhan writes at Yale Global:

Of course, it is well-known that some of the entrepreneurs are in fact friends or relatives of Party officials. ( An article in Der Spiegel, 27 February, 2007, reported a finding by the State Council of the Academy of Social Sciences and the Party’s Central University that of the 3320 Chinese citizens with a personal wealth of 100 million yuan or about $14 million, 2932 were children of high-ranking Party officials). Many SOE's are also controlled by powerful political families.

Thus there is a new political-managerial class, which over the last two decades has converted their positions of authority into wealth and power. The vibrancy of entrepreneurial ambitions combined with the arbitrariness of power in an authoritarian state has sometimes given rise to particularly corrupt or predatory forms of capitalism, unencumbered by the restraints of civil society institutions. Perhaps nowhere has the predation been as starkly evident as in land seizures both in cities and the countryside. In the real estate boom of recent years, for example, the commercial developers in cahoots with local officials have bulldozed old city neighborhoods, residents waking up in the morning to find that their house has been marked for demolition with the Chinese character “chai” – meaning raze – painted in white, with hardly any redress or adequate compensation available.

This corrupt or predatory form of capitalism has also some obvious global implications. When foreign companies try to invest in China or Chinese companies try to acquire holdings abroad the decision-making process can be vitiated by arbitrary political interference, underhand dealings, kickbacks and influence-peddling. Even in matters of foreign aid in Africa a recent New York Times report points to the opacity in the activities of politically well-connected Chinese foreign-aid contractors.

EU Chamber of Commerce: China closes doors to European businesses

Engaging China Blog says:

The lack of adequate IPR protection and the leakage of confidential information are hindering technology transfer to China and souring trade relations with European businesses.

So says the European Union Chamber of Commerce in China in the latest edition of its annual position paper on EU-China trade relations.

The paper lists a litany of issues that obstruct free trade, many of which will be well known to any western business that has been in China for any time.

The European Chamber bemoans that equal treatment for domestic and foreign companies is "conspicuously absent" in China's public procurement process. It argues that the 50:50 joint venture requirement that helped China get started on its economic development has passed its sell-by date and is now stifling foreign companies ambitions in China.

The paper touches on a familiar complaint among foreign businesses, namely that the enforcement of regulations on Chinese firms is often weaker than that on foreign firms, and the secretive way in which regulations are drafted seems designed to catch western businesses off guard. Consultation procedures are short, typically limited to selected persons or groups and characterised by a"disturbing lack of transparency".

In some sectors, China's technical regulations and certification procedures are being used to limit market access, and in certain cases to push foreign-invested companies out of certain markets altogether.

The services sector continues to be tough for foreign businesses to penetrate because of a "noticeable lack of reform and opening up".

People's Republic of China at 60

The FT gives the key political and economic moments in the history of the People's Republic since its founding on October 1, 1949

Usain Bolt Close to a $115 Million Sponsorship with Chinese Sports Company

ChinaStakes reports:

Even in a world inhabited by such other-worldly talents as Tiger Woods, Kaka, and Lebron James, the unearthly pace set by

Jamaica's Usain Bolt has knocked the world on its ear. And now his business interests may have a chance to do what his competitors on the track cannot, and that is, catch up.

 

Recently, Ajani Williams, CEO of AMG, Bolt's agent company, said Bolt may sign a sponsorship agreement with an unnamed Chinese firm in the next few weeks. "According to my optimistic estimation, this five-year contract will bring Bolt about $115 million."

Williams said his company has received letters of intent from a number of Chinese companies over the past eight months, and the big contract is one of the two most attractive ones.

BYD only sells 100 plug-in F3DM hybrids in eight months

The AutoBlogGreen says:

The BYD F3DM plug-in hybrid went on sale in China last December. In the first eight months that the car has been on sale, only 100 have been sold, according to a new report from Gasgoo. This is well below the company's original stated goal of selling 10,000 in the first year, although they do have another four months to turn things around. Gasgoo says BYD changed its sales estimate to 3,000 to 4,000 units in the first 12 months earlier this year. In June, the F3DM went on sale in Hong Kong.

While the plug-in F3DM hasn't sold as well as expected, BYD is still planning on offering the all-electric e6 in China later this year. Overall, BYD sold 176,795 vehicles in the first half of 2009, an increase of 176 percent compared to the first six months of 2008.

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Pollution in HK seen as Smoke Signals of Recovery

Earth Times reports:

Economists in Hong Kong have been cheered at the sight of thickening pollution in the city of 7 million, signalling a revival in China's financial fortunes, a news report said Friday. Around 80 per cent of air pollution in the former British colony is reckoned to come from smoke-belching factories in neighbouring southern China, also known as the world's workshop.

In the first quarter of 2009, pollution levels dropped significantly, according to the South China Morning Post, as factories trimmed production or were closed down due to the slump.

Now, according to a leading economist quoted by the newspaper, pollution is once again "reassuringly bad" as factories ramp up production to match a revival in global demand.

Goldman Sachs economist Michael Buchanan said pollution levels dropped "meaningfully" in the first quarter but were now above the levels for the same time in 2008.

Credit Card Defaults Jump 131% in China

The Shanghai Daily reports:

CREDIT card defaults in China in the second quarter more than doubled from a year earlier, but analysts said the risk for card issuers remains under control.

The value of credit card accounts in arrears six months or longer surged 131 percent to 5.77 billion yuan (US$845 million) as of the end of June, according to the People's Bank of China.

On a quarterly basis, defaults grew 16.2 percent.

"Credit card defaults grew in tandem with booming use of cards," said She Minhua, a Haitong Securities Co analyst. "However, the default rate in China is still low when compared with Western markets."

In China, defaults accounted for 3.1 percent of total outstanding credit card lending, up 0.7 percentage point from a year ago.

The figure in the United States, where plastic money originated, is about 7.5 percent.

"I think the default rate is still within control," She said. "We don't need to worry too much about it now."

Who's the Protectionist in China-U.S. Trade Dispute?

Bruce Einhorn at Businessweek says:

The Chinese government is trying to have it both ways in its current trade spat with the U.S. Following the news on Friday that the Obama Administration will impose new import tariffs on tires from China, Beijing announced it was launching investigations targeting U.S. poultry and American-made cars. At the same time, the government-run media reported without any apparent irony that the Chinese government was resolutely opposed to trade barriers. “China has always opposed protectionism and has demonstrated this stance with its actions since the outbreak of the global financial crisis,” said the Ministry of Commerce, as reported by the state-controlled Shanghai Daily.

So what does it mean to always oppose protectionism? Apparently it means you are allowed to tell local companies that they need to buy Made-in-China products rather than imports. My colleague Dexter Roberts in July wrote here about Beijing’s Buy Chinese policy. “Chinese officials have informally and sometimes formally made it very clear that Chinese products are to be favored when it comes to the stimulus package.” Consider this report regarding the fast-growing renewable energy industry in China. “A controversial ‘Buy Chinese’ policy could leave overseas manufacturers of wind turbines and other renewable energy technologies locked out of the bidding for new low-carbon projects undertaken as part of China’s $586bn economic stimulus package,” Yvonne Chan wrote on the BusinessGreen.com website in June. “The recently released edict states that ‘government investment projects should buy domestically made products unless [they] cannot be obtained in reasonable commercial conditions in China. As a result, developers of state-backed stimulus projects would have to seek permission from the government before buying foreign goods and services.”

Obama's Protectionist Wave

The WSJ reports:

The White House leaked word late Friday evening that the U.S. will impose a 35% tariff on imported Chinese tires used by millions of low-income Americans. We wonder if President Obama understands the political forces he's unleashing with this blatant protectionism.

Mr. Obama is setting a precedent in the tire case because he is applying a previously unused part of the trade law known as Section 421. This allows U.S. industries or unions to seek protection from "surges" of Chinese imports, with a lower burden of proof than normal antidumping or countervailing duty cases. President Bush nixed the four Section 421 petitions that reached his desk, citing the national economic interest. Domestic lobbies had lobbied Mr. Obama hard to reverse that pattern and set a new protectionist precedent.

Eleven Senators, including Sherrod Brown (D., Ohio) and Debbie Stabenow (D., Mich.), sent a letter to President Obama in July advocating the tariff on Chinese tires. "We firmly believe that providing this specific measure of relief would send a powerful message to the American people that you intend to keep your promise to enforce trade laws fully," they wrote.

Then there are companies that face competition from lower-cost Chinese imports and want to push their antitrade agenda forward. Take the Committee to Support U.S. Trade Laws, which lobbed a pro-tariff letter into the White House this month. The umbrella group includes the American Furniture Manufacturers Committee for Legal Trade; the California Fresh Garlic Producers Association; the U.S. Beekeepers; the Florida Fruit & Vegetable Association; and the Flower Growers of Puget Sound. "This case is being watched closely to see whether Section 421 is an effective law or a dead issue,"committee executive director David A. Hartquist wrote to Mr. Obama.

Why China's Chip Industry Won't Catch America's

Vivek Wadhwa at Businessweek says:

In the 1980s, the U.S. was consumed with fear that Japan would become the preeminent power in manufacturing and technology. Those fears never came to pass. Today the same fears are focused on China. The Middle Kingdom appears to be an even more daunting foe, with its enormous foreign reserves, fast-growing economy, oceans of scientists and engineers, and enormous subsidies to high-tech companies. How real is the China threat?

There is no doubt that China is making rapid strides in both infrastructure and technology, but U.S. anxiety of being overtaken by China appears to be misplaced. It takes more than money and might to achieve innovation. This is what I learned when researching the inflated estimates of engineering graduation rates in China and by analyzing its pharmaceutical industry. And this is one of the key findings in a new book titled Chips and Change: How Crisis Reshapes the Semiconductor Industry (MIT Press). Written by professors Clair Brown and Greg Linden of the University of California at Berkeley, the book provides a wealth of information about semiconductor development cycles as well as a fresh and informed look at some of China's key technological capabilities in those realms.

A few years ago, China seemed to be on track to dominate the global semiconductor industry in the same way it currently dominates the electronics manufacturing sector.

Will Obama Soon Be Kicking China Tires?

Dan Harris writes at the China Law Blog:

President Obama faces a September 17th deadline to determine whether to go along with the International Trade Commission's recommendation to impose high tariffs on low end Chinese tires. The US has the authority to impose these tariffs under section 421 of China's complicated WTO accession agreement. There were six similar cases during the Bush administration, although in no cases were tariffs implemented, including four separate cases where President Bush himself shot down the commission’s prescription.

This is the first China trade case for President Obama and it is therefore being watched very closely both in the United States and in China. Interestingly, the tire unions brought this case and the tire companies have been noticeably quiet, presumably in an effort to maintain their good standing in China as they try to capture a piece of the rapidly expanding Chinese tire market. It will be interesting to see how Obama plays this as he tries to avoid angering the Chinese before the September 20 G-20 meeting and before his November visit to China, while also trying to placate the unions, who supported him in the election.

Chinese factories face surprising labor shortage

AP reports:

XINTANG, China

During the first half of this year, Yang Zongfu's blue jean factory had few customers. Now, as his business picks up, he can't find enough workers.

Clutching a chalkboard with a long list of job openings, Yang joined about 30 other factory owners who have been spending their mornings at a street employment fair in the southern town of Xintang, the jean-manufacturing hub of China.

"I've been out here for two days and haven't found anyone," said Yang, as the scorching late morning sun beamed down on his sweaty, bald head.

The dearth of workers is a surprising turn in an economy where millions were laid off just months ago, and the government worried the jobless would riot. Back then, it was the workers roaming the streets looking for jobs.

The labor crunch is another sign that the Chinese economy -- the world's third largest -- is bouncing back from the global downturn, invigorated by government stimulus spending and a flood of cheap bank loans.

But experts say the shortage is also the result of a wariness among migrant workers -- whom the government discouraged from traveling to cities when jobs were scarce -- of returning before they are sure the economy has fully recovered.

China's economy has certainly begun to heat up, contributing to the increased demand for labor. The nation's economic growth hit 7.9 percent in the second quarter, up from 6.1 percent the previous quarter, the government said. Exports, retail sales and factory output also improved in July, according to official statistics.

Summer Break

China Challenges will be taking a much needed break until Sept. 7. Thank you for reading.

Shanghai Mayor Speaks about Bankers and Financiers

Bloomberg reports via Shanghaiist:

"Financiers have the least conscience in the world when it comes to making money... By saying that, I would have offended many bankers and financiers, but this is my personal experience."

— Han Zheng (韩正), mayor of Shanghai.

Han Zheng voiced his misgivings about bankers in a recent interview about fulfilling China's mandate on making Shanghai a world financial capital.

Rio Arrests Spook Foriegn Firms

The Australian reports:
THE arrest of the four Rio Tinto executives in China on allegations of bribery and industrial espionage has heightened fears among foreign companies operating in the country.

Lawyers and risk consultants operating in China have reported a surge in inquiries from clients worried that something similar might happen to their staff. One Beijing lawyer said that the incident had forced a number of Western companies to consider just how close they operated to an invisible line.

The Rio executives were arrested five weeks ago and Chinese state media initially said the men would be charged with stealing state secrets.

The four executives, who were leading Rio's negotiation of multibillion-dollar iron ore contracts with China, were accused of bribing officials at state-owned steel mills to gain market information, which would allegedly put China at a disadvantage in the iron-ore pricing negotiations.

The arrest warrant for the four men was downgraded two days ago to bribery and stealing commercial secrets in a move that was seen as an attempt by the Chinese to defuse a diplomatic row.

Even though the background to the Rio incident is highly specific, Western companies operating in China have been spooked by the accusations.

A "Loosening" of China's Labor Laws

Dan Harris writes at the China Law Blog:

Spoke with a reporter last week regarding China's labor laws. The conversation went sorta like this:

Reporter: I want your views on how enforcement of China's labor laws is holding up despite the economic downturn. I am also wondering how representative are the stories we've all heard of one bad-egg employee winning a huge lawsuit against a foreign company that is basically in full compliance with the labor laws, with every other employee running to join in.

My Response: All I can tell you is what we are seeing as one small law firm that represents exclusively foreign companies doing business in China.

1. I am definitely "feeling" a loosening of labor law enforcement by Chinese government officials and even employees. This starting happening when the economy turned and it really has not changed much despite press reports of China's economy holding up well. Having a job seems to be taking greater precedence and, with that, comes a concomitant decrease in labor law enforcement.

China's New Purchasing Powerhouse: Women

Shaun Rein writes:

China's overall retail sales rose 15% in the first half of this year, and that growth was driven in large part by women under the age of 35, buoyed by China's $586 billion stimulus package and a stock market that has risen around 80% since January. My firm, the China Market Research Group, recently surveyed female consumers in China, and 80% of them said they expected to spend more in the next six months than in the last six.

Women have become a major driving force behind China's economic growth--yet they remain little understood in the West as an influence on household budgets. Not only are they exerting influence on decision-making in their own homes; they're also making purchase decisions for their parents when they live in the same house or neighborhood.

Baoding becomes World's first 'Carbon Positive' City

Peter Ford writes:

Baoding, China

Yu Qun’s journey into a low-carbon future began with a bad case of smelly fish.

Scarcely had Mr. Yu been named mayor of this city 100 miles southwest of Beijing when fish in his region’s largest lake began dying by the thousands. He had only one option, he felt: to close several hundred factories whose pollution was to blame.

That cost his city nearly two percentage points in annual economic growth – the Holy Grail by which Chinese officials have long been measured. And it taught him a lesson.

“Polluting first and cleaning up later is very expensive,” says the boyish-looking mayor, a former college math teacher. “So we chose renewable energy to replace traditional industry.”

In three years, Yu has transformed Baoding from an automobile and textile town into the fastest-growing hub of solar, wind, and biomass energy-equipmentmakers in China. Baoding now has the highest growth rate of any city in Hebei Province. Its “Electricity Valley” industrial cluster – consciously modeled on Silicon Valley – has quadrupled its business.

Baoding is an ancient city, but its outskirts have an unsettled feel. Between serried ranks of high-rise apartment blocks and shiny new factories turning out wind turbines and solar-powered traffic lights, fields of corn and sunflowers still grow.

They will soon be memories, though, and memories are short when you are moving fast. “Ideal City – Since 2008,” boasts a billboard for a new residential complex.

China's Bubbles and Demographic Trends

By Brian Schwarz

In recent weeks, many experts have expressed growing concern about a bubble forming in China's stock and property markets. While investors love it when prices rise, many observers fail to realize the hidden and harmful impact it has on worker productivity, competitiveness, and demographic trends.

 

As part of Beijing's effort to stimulate the economy, Chinese banks made $1.08 trillion in loans in the first six months of 2009, triple the year-earlier level. While most of that was intended for new roads, bridges, and factories, an estimated 20 percent was put into stocks by business managers seeking quick profits.

 

Andy Xie, an independent economist based in Shanghai, recently warned in a blog post that Chinese stocks and properties are 50-100% overvalued. "The odds are that both will adjust in the fourth quarter (of 2009)," predicts Xie. “However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future."

 

Frank Gong, chief economist for China at JPMorgan Chase was quoted in Businessweek as saying, "Equity markets are supposed to do that." Gong and others argue it's unlikely the government will choke off credit, because no one wants to be blamed for slowing China's recovery.

 

Xie calls China's asset markets a giant Ponzi scheme and predicts they will collapse when the US dollar becomes stronger. He warns, "The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn't last."

 

When a bubble is formed, more resources are diverted and wasted. Xie says businessmen in China are reluctant to focus on real economic activities and are devoting time and energy to market speculation. This means China will have fewer globally competitive companies in the future. “Even though China has had three decades of high growth, few companies are globally competitive,” Xie says. “The serial bubble making in the Chinese economy may be the reason.”

 

The most serious damage that a property bubble inflicts is in changing demographics, says Xie. High property prices force many young couples to have fewer children. Even after property prices decline after a bubble bursts, this low birth rate culture cannot be changed. Many parts of Asia, such as Hong Kong, Japan, and South Korea, all went through property bubbles during their development. Xie concludes:

Their birth rates dropped during the bubbles and didn't recover afterwards despite government providing incentives. China's one-child policy alone will lead to a demographic catastrophe in two decades. The property bubble makes the trend irreversible: when the government abandons the one-child policy, there wouldn't be meaningful impact on birth rate. Within two decades Chinese population could be very old and declining. Of course, property prices would be very low and declining also.

Experts worry that China will become old before it becomes rich. Back in 2004, Richard Jackson and Neil Howe wrote a report about demographic trends entitled The Graying of the Middle Kingdom. They calculated that in 2004 the elderly — here defined as adults aged 60 and over — make up just 11 percent of the population. By 2040, however, the United Nations projects that the share will rise to 28 percent, a larger elder share than it projects for the United States.

In absolute numbers, the magnitude of China's coming age wave is staggering. By 2040, assuming current demographic trends continue, there will be 397 million Chinese elderly people, which is more than the total current population of France, Germany, Italy, Japan, and the United Kingdom combined.

Shut Out at Home, Americans Go to China

The NY Times reports:

BEIJING — Shanghai and Beijing are becoming new lands of opportunity for recent American college graduates who face unemployment nearing double digits at home.

China starts building "Three Gorges in the Air"

The China Daily reports:

JIUQUAN, Gansu: Construction started Saturday on China's first 10 million-kw wind power station in the far northwestern city of Jiuquan in Gansu Province. 

 

Meanwhile,  China to unveil 'new energy' plan
The vice head of the National Energy Administration said China will unveil a plan for developing "new energy" sources by the end of the year, Reuters reported, citing state media. Speaking to a forum in the southern city of Guangzhou, Sun Qin said the government would also release a guide to developing "new energy" sources such as wind, solar and nuclear, but provided no details. Sun said the plan would involve the development and utilization of clean coal technology. Coal currently provides more than 70% of China's power, but Beijing has said renewable energy will make up 10% of China's primary energy mix by 2010, and 15% by 2020.

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China Continues Its Long, Slow Climb to the Skies

By Brian Schwarz

China has taken another step forward in its mission to build its own commercial airplanes, but industry experts remain skeptical of Beijing's long-term objective of becoming less dependent on Boeing (BA) and Airbus (EADSY.PK) - made machines.

China's first domestically-developed regional ARJ21-700 jet successfully made a trial flight of 1,300 kilometers in July. It took the jet about two hours to fly from Shanghai to Xi'an, the capital of northwestern China's Shaanxi Province, according to the China Economic Review.

The ARJ-21 is short for "Advanced Regional Jet for the 21st Century". The plane is also the first regional jet that China has fully developed on its own. The first ARJ-21 jets are expected to be delivered to Chinese clients late next year. The ARJ21 regional jet is able to carry 70 to 110 passengers and shaping up as China's equivalent of the A300 from Airbus.

In the 1980s, McDonnell Douglas, which is part of Boeing, made about 30 MD-82 and a couple of MD-90 in China. Some critics claim the ARJ21 is a copy of similar models from Bombardier and Embraer built at the old MD plant in China.

The ARJ21 program is important to Beijing because helps China learn to develop a commercial aircraft to Western standards, to coordinate with many subcontractors, to establish an international marketing operation, and—crucially—to prove that it can support aircraft in service. Parts for the plane are made by 19 foreign manufacturers, including General Electric (GE), Honeywell (HON) and Parker Hannifin (PH).

China is moving forward in full-sized commercial aircraft as well. Aviation Industry Corp. of China (AVIC) announced in February it wanted "new blood" from overseas to help it compete. Local media quoted a Chinese aviation official describing the project as an "inspiration to the nation" similar to the country's manned space program. After a highly publicized global search for foreign managers to help it modernize, China's main military jet maker has hired six executives — all of them Chinese, according to a recent AP report.

The Chinese government created AVIC last November by merging its two biggest military aircraft companies.

China's entry into a market long dominated by Western players has stoked an outpouring of nationalist claims and raised concerns about aviation safety and trade protectionism. Boeing is a leading American exporter and has many friends in Washington.

It has been a difficult year for Boeing, which was forced to delay the first flight of its much-anticipated new 787 the Dreamliner for the fifth time in June. While the military side of Boeing's business has suffered a number of setbacks recently, the US-based company continues to have some well-running and profitable programs. Chief among them is the Boeing 737, of which more than 3,000 have been sold after launching 42 years ago, according to USA Today. With the world's best-selling jetliner, Boeing expects to turn 150 to 200 more of them a year off assembly lines for another decade.

Boeing realizes a new competitor is on the horizon. “There is no doubt that [China] will be someday in the commercial airline business,” Jim McNerney, Boeing's chairman and chief executive, was quoted as saying in April 2007. The former Boeing chief said he could envisage co-operating with Chinese partners, though said it would remain a “tough competitor” with its own developing product line-up.

A Chinese-made Airbus

Boeing and Airbus are using China as a production base. Earlier this year the first Airbus 320 stamped “Made in China” rolled out of the factory the European company opened in the northern Chinese city of Tianjin. It was the first time a major manufacturer has fully assembled an airliner in China. This has company employees in Europe worried they may soon be out work, says Andrea James of the Seattle-Post Intelligencer in a blog post.

Airbus says it plans to make four aircraft a month by the end of 2011. “Our Final Assembly Line (FAL) here in Tianjin and this first aircraft delivery outside Europe mark an important milestone in our strategic long-term partnership with China and the Chinese industry,” Tom Enders, Airbus president and CEO, said in a company statement. “This FAL is state of the art, second to none in the world. And so are the aircraft manufactured here in Tianjin.”

Airbus has been getting the bulk of China's new orders since 2004 and hopes to control 50% of the market by 2013. China has become the world's second largest aviation market after the US and is estimated to need 2,670 passenger planes in the next 20 years.

Boeing is also dependent on China. Last year, the company bought parts from 11 different Chinese suppliers for its 737, 747, 767 and 787 aircraft, the company's website says. Other Chinese-made parts on the 737 include the vertical tail fin, tail cone, sections of the fuselage and the exit doors over the wings. This reliance on outsourcing for key components has angered many of Boeing's rank and file and has been a source of labor union conflict.

The Challenges China Faces

When it comes to building jets, China's low-cost workforce is not all that significant an advantage. Many investors say China is losing its global competitiveness because wages are on the rise.

At same tine the yuan has already appreciated by approximately 20 percent against the dollar over the last two years, which makes imported technology and components cheaper to buy when priced in the American currency. Industry expertspredict as much as two-thirds of the airplane's components would be expected to come from outside the country.

Airlines do not buy airplanes based on cost alone. The price tag of an aircraft accounts for only 3% to 5% of the plane's total operating cost over its 20-year lifetime. Foreign certification is the key to the real prize of export sales. Expect a huge political fight if planes from China reach this stage. Analysts said that China can not rely exclusively on demand from its domestic sales in order to recoup development costs.

Martin Craigs, president of Aerospace Forum Asia in Hong Kong, was quoted in Businessweek as saying, "Building an aircraft is not even half the battle. Delivering it and supporting it over a lifetime is what really matters." In the past year, both Airbus and Boeing have suffered a number of delays that have worried clients and made shareholders flee.

There is also the issue of government support. Boeing and Airbus have been fighting it out in the WTO about government subsidies for a number of years. Boeing has claimed Airbus has an unfair advantage. With 100% government backing, some Western critics ask how can they not? It will never be "level" playing field with China's government support, they say.

Conclusion

Despite some well-publicized quality problems, the fact is China's industrial capacity continues to grow and improve in quality in many sectors, including aerospace. Time will tell if the ARJ21 is able to pass the quality test. Soon we will see if it is able to compete against existing players such as Bombardier and Embraer. This should give a clear indication on how they can compete in the full-size commercial aircraft business.

Some industry experts say that fears about China quickly taking orders away from Boeing and Airbus are overblown. It is likely to take China decades to develop a range of jets to mount a proper challenge to the Boeing-Airbus duopoly.

China's Future: Mixed Emotions

David at the Silk Road International blog writes:

I'm firmly ensconced on the fence when it comes to China and it's future—I love my family and my friends here but can't imaging a more amoral environment to work in.  I am so grateful to be here and to still have business in the current economy, but working here is dangerous, unhealthy and difficult.  I see the market growing incredibly but think that the bubble is scary-huge already.  8% GDP growth is amazing, but the current plan of government spending and exports isn’t sustainable.  So, knowing where I stand, you'll understand why I say it's rare that I find multiple articles that I think are really well written (in terms of perspective and research) and also immediately valuable for use in business and/or personal investment or planning.   The two links below are both.

Long time readers will also know that I doubt that the China is the next “superpower.”  But I do completely agree with and believe that China should and will be the largest economy on the planet—just getting 1.5 billion people to a respectable level of education and income will demand that it be so—the world just needs to get used to that.  But China is not there yet, as this FP article points out.  And there are many issues (increasing poverty, decreasing education) that have been getting worse not better in the last 20 years; hence my uncertainty about China’s future.  The combination of so many factors leads me to the conclusion that there are serious troubles ahead for China.  For the sake of my family and business (and other people too) I hope that I'm wrong.

Can China Manufacturers Make the Transition from Products to Services?

By Brian Schwarz

Although it might seem counter-intuitive, China's manufacturing sector has emerged strengthened by the global economic downturn and the world's factory is moving up fast on the services front as well. As I mentioned in a previous post, so says a recent report from PricewaterhouseCoopers (PwC) on the relative attractiveness of emerging markets for foreign investors.

China's manufacturing sector has shot up from 14th position in PwC's index in 2008 to become the fourth most attractive destination in 2009, beaten only by Malaysia, Chile and Bulgaria, which are all much smaller economies. Of the so-called BRIC countries -- Brazil, China, Russian and India -- China was the only one to improve its position.

This strength hides some deeper concerns in the sector. The fact is cost advantages at Chinese factories are disappearing as more companies search for ways to create value by adding services.

Citing a recent report from the American Chamber of Commerce in China, Richard Brubaker, founder and managing director of China Strategic Development Partners in Shanghai recently wrote this passage on his All Roads Lead to China blog:

Even with the current economic conditions, manufacturing in China has become more expensive. Companies reported that costs are still rising – up to 15 percent in 2008 compared to an increase of 10 percent in 2007 – particularly in compensation costs for management, support staff and blue-collar workers as well as raw materials. Although labor and raw materials costs have come down from the premium levels of last summer, they are expected to rise again once market conditions improve.

Following the path of IBM and others, the key question facing some Chinese companies can they transform themselves from sales-driven manufacturers to global service suppliers?

In early 2008, the Chinese government announced plans to invest in the service sector. This investment involved capital bailouts and tax breaks, covering everything from professional services though to IT outsourcing. “And they are encouraging business leaders to become familiar with service business so that they can penetrate the international market in services in a very serious way,” says Laurie Young, a former PricewaterhouseCoopers global marketing partner.

The combination of price pressures and competition brings “margin squeeze” back into the China vocabulary as profit margins begin to erode in many industries. Concerns about inflation are also now becoming more widespread as price pressures mount, says China watcher Jack Perkowski at his Managing the Dragon blog.

According to a recent article in the Wall Street Journal,

manufacturers in China face rising costs as some commodity prices grow, but economists say producers may not pass on the costs to consumers because of fierce competition.

Despite sluggish exports, China's manufacturing expanded in July at its fastest rate in a year as domestic demand, a recent survey showed, highlighting the importance of the central government's huge stimulus in driving the country's economic growth. Hong Kong brokerage CLSA Asia-Pacific Markets said China's monthly purchasing managers index, or PMI, rose to a 12-month high of 52.8 on a 100-point scale where numbers above 50 indicate an expansion. That was up from June's 51.8.

Young says Western companies will soon face a growing challenge from Chinese competitors in his fourth book, From Products to Services: Insight and Experience from Companies Which Have Embraced the Service Economy (Wiley).In a recent interview with China Knowledge@Wharton, Young noted a number of Western manufacturers, such as IBM and Unisys, have not made the transition from manufacturing to services successfully. China-based Lenovo, of course, bought IBM's struggling PC division in 2005.

As a manufacturing economy, many Chinese seem to approach services with a manufacturing mentality which doesn't help in enhancing service levels.

“In China, there's an awareness-raising process that's just beginning,” says Young. “But I think what you see here in China is a government that is serious about understanding the different dynamics of the service business – what are the strategies, and how do you run it?”

In March, Shandong-based manufacturer Haier announced that it was leaving direct manufacturing and concentrating on building the company's brand and service network.

China is seeing the beginning of a government-led move to raise awareness of what Young calls “the service opportunity.” Together, this spells an opportunity for Chinese companies to grow global service businesses, in addition to benefiting from an expanding domestic market.

Services, which today makeup between 70 to 80 percent of GDP in Western economies, took 25 years or so to develop. China’s transition is expected to be even faster. Young concludes,

Nowadays, with the dominance of the service sector in so many Western economies, manufacturing companies older than ten or twenty years have to ask if their traditional businesses are dead dogs, and whether they should be moving into services.

Microsoft launches case after Piracy swoop in Shanghai

The Shanghai Daily reports:

MICROSOFT Corp has taken legal action against three Shanghai companies over software piracy.

The move shows that Microsoft continues to widen its net to encompass not only IT giants, but small fry as well.

Representatives from a city computer retailer and its suppliers yesterday faced Shanghai No. 2 Intermediate People's Court, with Microsoft as the plaintiff.

Microsoft is seeking about 320,000 yuan (US$46,816) compensation from retailer Shanghai Changfeng Information Technology Co Ltd, its supplier Shanghai Chenyue Information Technology Co Ltd and Shanghai Ziyue Network Technology Co Ltd, which transported computers to the retailer.

Microsoft told the court that Changfeng had long installed pirated software in computers before selling them.

It entrusted an intellectual property institution to buy four compatible computers from Changfeng in a city computer market last October. Microsoft Windows XP Professional had been illegally installed in all four of them.

Microsoft said all defendants should bear legal responsibility for the copyright violation because it had no way of finding out which did the installations.

It demanded that all copyright infringement be halted.

"Microsoft has never authorized the defendants to install or duplicate the software," You Minjian, Microsoft's attorney, said in yesterday's court hearing.