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How Indonesian Companies Can Survive a Falling Rupiah

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Concerns Grow Over Severe Slump in Rice Prices

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Economists skeptical about Ministry’s plan for 1,000 supermarkets

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Glaxo Executives Accused of Breaking Chinese Law

A corporate culture of giving to health providers is tricky in China; drug firm executives are charged with bribes, said to raise health care costs(Reuters) - British drugmaker GlaxoSmithKline said on Monday some of its executives in China appeared to have broken the law in a bribery scandal, as it promised changes in its business model that would lower the cost of medicine in the country. GSK is the latest in a string of multinationals to be targeted by Chinese authorities over alleged corruption, price-fixing and quality controls. Chinese police visited the Shanghai office of another British drugmaker, AstraZeneca, a company spokeswoman said on Monday.

The police came on Friday and took away a sales representative for questioning, she added. GSK's head of emerging markets, Abbas Hussain, said the company had zero tolerance for employees who broke the law. "Certain senior executives of GSK China, who know our systems well, appear to have acted outside of our processes and controls, which breaches Chinese law," he said in a statement. Hussain, sent to China last week to lead GSK's response to the crisis, held a meeting with the Ministry of Public Security at which he also promised to review GSK's business model. "Savings made as a result of proposed changes to our operational model will be passed on in the form of price reductions, ensuring our medicines are more affordable to Chinese patients," Hussain added.

The company gave no details on the changes or the extent of price cuts. GSK supplies key products such as vaccines in China, as well as drugs for lung disease and cancer. Chinese police last week accused GSK of bribing officials and doctors to boost sales and raise the price of its medicines.

They said GSK transferred up to 3 billion yuan ($489 million) to 700 travel agencies and consultancies over six years to facilitate the bribes. Four senior Chinese executives from GSK have been detained. Britain's biggest drugmaker has said it was deeply concerned by the allegations, which it called "shameful". Last week, Chinese authorities also visited the Shanghai office of Belgian drugmaker UCB and the latest visit to AstraZeneca shows Chinese authorities are spreading their net. AstraZeneca said it believed the case involving its employee was a local police matter. "We believe that this investigation relates to an individual case and while we have not yet received an update from the Public Security Bureau, we have no reason to believe it's related to any other investigations," the spokeswoman said. CHIEF EXECUTIVE TO SPEAK ON WEDNESDAY In a statement, China's Ministry of Public Security said GSK's Hussain apologized for the scandal during the meeting. He was dispatched to China last week by Chief Executive Andrew Witty, along with two other senior executives. Witty will detail what action the drugmaker is taking in response to the bribery allegations when he presents quarterly results on Wednesday, sources said. GSK's intention to cut the price of its medicines in China would be in line with how other foreign companies have responded to pressure from Beijing. European food groups Nestle and Danone said they would cut infant milk formula prices in China after Beijing launched an inquiry into the industry. "In China, when the government criticizes people, they tend to bow down and apologies very quickly because they are scared of the authority of the central government to do tremendous harm to their business - whether it be for arresting executives very quickly or through auditing," said Shaun Rein, managing director of the Shanghai-based China Market Research Group. GSK also had a fresh setback in another important emerging market on Monday when it abandoned a scheme to increase its stake in GSK Consumer Nigeria, its consumer healthcare business in the country, following opposition from minority shareholders. CULTURE OF PAYMENTS China has long been known for a culture in which drug companies make payments to doctors, since physicians rely on rewards for writing prescriptions to offset meager salaries.

Those practices, however, are increasingly at odds with a crackdown on corruption under President Xi Jinping, leaving companies struggling to toe the line while not losing business in a highly competitive market. Chinese state media has aired interviews with one of the detained GSK executives who has said travel agencies were used to arrange conferences, some of which were never held, to allocate money that could then be used for bribes. One of the agencies at the center of the scandal has been identified by state media as Shanghai Linjiang International Travel Agency.

The New York Times said documents it obtained showed that in the last three years at least six other global pharmaceutical firms, including Merck, Novartis, Roche and Sanofi, had used that agency to make arrangements for events and conferences.

The records included invoices for hotel bookings, travel visas and airline tickets to Chinese cities, and to Australia, Italy, Japan, Korea and the United States. It said the documents contained no indication of wrongdoing.

Roche said it used Shanghai Linjiang International Travel Agency among others but that once the allegations surfaced it immediately stopped working with it and began a review of its business with the agency. Merck also said it had used the agency in the past and would no longer do so.

The other drug companies could not immediately be reached for comment by Reuters.

The travel agency's business has been suspended, China's official Xinhua news agency reported last Thursday.  

Chinese Checkers

With rising wages, tight credit and bubbles, China’s growth model is hitting a turning point – investors hunt for signs of economic and political reform Klemens von Metternich famously said when France sneezes, Europe catches a cold.

That was long before the global economy was inextricably interdependent, before China emerged out of its isolation to become an engine of global growth.

Today, GDP figures released in Beijing take only minutes to cause tremors in international stock markets. With billions of dollars invested in the China growth story, the world’s stake in the Chinese economy is not very much less than that of its leaders in Zhongnanhai. Reports that China’s manufacturing index contracted for the first time in seven months saw markets tumble.

Then a market-friendly speech by China’s new premier Li Keqiang buoyed up spirits. He called for reducing red tape by freeing 33 per cent items from China’s License Raj. He declared, “The market is the creator of social wealth and the wellspring of self-sustaining economic development.” This was music to the ear of investors.

The implicit admission is that public-sector investment and export driven growth that had long propelled China has run its course. Is market reform finally coming? The situation today is more urgent than when a booming world economy could happily absorb the gushing torrent of China’s exports. Not only is demand for Chinese products shrinking in a recession-bound Europe and slowly-growing US, China’s domestic factors are less favourable for relying on the old policy.

The government controls interest rates and its artificially low exchange rates and energy prices have distorted the economy, resulting in a huge misallocation of capital.Meanwhile, its greying population and rising wages are now putting downward pressure on exports. Investment in infrastructure and housing do not create the kind of consumer demand needed to replace falling demand overseas. A recent IMF report on China noted that “expanding agriculture and services including investing in healthcare, education and financial services are likely to be more important instead of building more factories to supply steel, cement and appliances for foreign consumers.” The kind of investment that China needs to make, the IMF economists pointed out, “will be possible only through financial sector reform, making liberalisation of this sector an urgent issue.” Li has proposed giving private businesses a larger role in investment decisions and setting prices. He promised to liberalise bank lending policy, to encourage private investment in finance, energy, railways, telecom and other spheres.

The government also held out the promise of opening finance, healthcare, logistics and other sectors to foreign investment. China’s growth model has reached a turning point, but reforming it is not just a matter of readjusting the economy. It touches on the fundamentals of a one-party state. It is not surprising that despite incessant talk of the need to rebalance the economy, there has been little progress.

Reforms would mean curbing the power and privileges of state-owned enterprises run by China’s Red Princes and families. But the alternative, as outlined by the IMF report, is not attractive either. “If existing trends continue, valuable resources could be wasted at a time when China’s ability to finance investment is facing constraints due to dwindling land, labour, and government resources and becoming more reliant on liquidity expansion, with attendant risks of financial instability and asset bubbles.” Put another way, doing nothing is a sure recipe for popular discontent and instability. Yet, China has a record of biting the bullet and undertaking painful reforms when survival is at stake. Growing discontent over economic disparity, air pollution, concerns about food security and unemployment (7 million students will graduate this month) might just push the government into translating words into action. And even a modest opening to the private sector could energise foreign investment and create a worldwide impact.   The author is director of publications at the Yale Center for the Study of Globalization and editor of YaleGlobal Online.

T-Mobile increases network speeds for iPhones in three new areas

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China Protests: Japanese Firms Suspend Some Operations

Protests over tiny islands in the East China Sea are disrupting trade relations between China and Japan, respectively the world’s second and third largest economies. In response to violent protests, including alleged arson of some Japanese retailers, major firms, including Panasonic, Honda, Canon, Mazda and others are temporarily suspending operations, reports BBC News.

Toyota is continuing operations. “Calls for boycotts of Japanese businesses and products have been spreading in the streets and on the internet,” the BBC News article reports. “The disputed islands, known as Diaoyu in China and Senkaku in Japan, are uninhabited but resource-rich.” The article suggests that anger surged after the Japanese government moved to purchase three of the islands from a Japanese businessman. Protests and plant closures could disrupt global markets; US officials are calling for calm and restraint. Multinational firms are not keen to invest in nations where violent protests are quick to erupt. – YaleGlobal Some of Japan's biggest firms have suspended operations at Chinese factories; safety concerns grow amid violent anti-Japan protestsBBC News, 21 September 2012Rights:BBC © 2012

The New Barons of Bordeaux

CAMPIAN, BORDEAUX: Deep in the Bordeaux countryside, Chateau du Grand Moueys is a sprawling 170-hectare expanse of vineyards and forest. At its center, a neo-gothic castle with turrets and crenellated walls, bring to mind a medieval world of knights and romance. Seated within the chateau’s genteelly dilapidated dining room, the estate’s new owner, 49-year-old Chinese entrepreneur Zhang Jin Shan, chomps forlornly, on a croissant and contemplates how to revive the vineyard. Globalization has created new challenges for the French wine industry. Once secure in their supremacy, French vineyards now must compete with less expensive New World wines, at a time of declining demand from austerity-parched developed markets. I ask Zhang how he’s been enjoying the local French food. “Hai xing,” he replies with a shrug, using a Chinese phrase that signifies faintest approval. “I’ve got used to it.” Aline Moineau, the chateau’s longstanding manager, purses her lips tightly. Zhang doesn’t appear to notice and perks up talking about a luxurious 50-seat Chinese restaurant, the piece-de-resistance of the high-end hotel and spa that he plans for the premises. A clash of culture is obvious, feeding into larger resentments across Europe at China’s rising clout. I ask if a French restaurant would make more sense in a chateau? “No,” he answers emphatically. “In France there are many French restaurants, but very few Chinese ones.

The guests in my hotel will mostly be Chinese, and the fact that they can find good food here will be attractive for them.” “But perhaps they would want to try French food?” interjects Moineau. “Please, let Mr. Zhang talk with the journalist first, and ask your questions later,” snaps Sophie, the Chinese woman who serves as Zhang’s French interpreter.

The clash of culture is obvious, one that feeds into larger resentments across Europe at China’s rising clout and investments in the economically floundering continent. On the one hand, Europe welcomes Chinese riding to the rescue of distressed assets, but investors are focused on making profits. Inevitably Chinese consumers are influencing trends in taste, a development that’s not always to the liking of locals. Chinese investments in Europe are still small but growing at a heightened pace. In 2011 the Chinese invested $10 billion in the crisis-hit region, triple the amount of a year earlier, according to a study by economic consultancy Rhodium Group and the Chinese bank CICC. Chinese investors have been buying car companies, solar-panel producers and chemical plants among other acquisitions, prompting the European Council on Foreign Relations, a think tank, to publish a report titled “The Scramble for Europe,” drawing parallels between the European colonization of Africa in the 19th century and China’s current activity in Europe. While such declarations may be overblown, rocketing figures for wine consumption in the Chinese mainland, combined with the reputation enjoyed by Bordeaux wines have made owning a vineyard, or two, an increasingly attractive proposition. China is not a traditional wine-drinking nation. Still, in 2011 it surpassed the United Kingdom to become the fifth largest consumer of wine by volume, according to the International Wine and Spirits Research group.

The mainland’s wine market has experienced more than 20 percent growth every year since 2006, and around 20 percent of Bordeaux’s exports are now destined for China. China, not traditional wine-drinking nation, surpassed the UK to become fifth largest consumer of wine. Purchases by Chinese in Bordeaux began in 2008, when a trading company from Qingdao bought Chateau Latour Laguens, a 30-hectare vineyard. By 2011, more prestigious estates like Chateau Laulan Ducos, classified as a Cru Bourgeois, began passing into Chinese hands. Another significant acquisition in 2011 was the €10 million deal whereby COFCO, a state-owned oil and food giant, became owner of Chateau Viaud. During the Bordeaux en primeur tastings in 2011, when thousands of wine professionals from across the world travelled to the region to assess the year’s offerings, the estates offered vintage reports in three languages – French, English and Chinese. Bordeaux winemakers also recently published a recipe book pairing wines with Chinese dishes, suggesting, for example, a Saint-Emillon for pig’s feet. When Zhang bought Chateau du Grand Moueys earlier this year, it had been languishing on the market for five years.

The previous owners, the aristocratic Bomer family from Germany, had been hard pressed to find takers for the Chateau’s €12 million price tag. Although the final price is undisclosed, Zhang’s French staff say he paid a “fair price.” Karine Lemaitre, Chateau du Grand Moueys’ oenologue in charge of wine production, is excited about the possibilities of Zhang’s investment. But although Lemaitre is eager to experiment, she recognizes the challenges of foreign ownership – the biggest being the inability to communicate directly with Zhang.

The only French he can muster is a barely recognizable, if enthusiastic,  “oui!” Much is lost in translation, the local staff complain about the linguistic abilities of his translator and, as a result, decisions are delayed.  Zhang may be a newcomer to the world of French wines, but is not new to beverages. As head of the Ningxiahong group, he’s China’s emperor of goji berry drinks. Goji, a small red berry, has a long history of medicinal uses in China. Ningxiahong produces 30 million bottles of goji alcohol annually. Like many Chinese entrepreneurs of his generation, he’s a self-made man. He was born in 1963, a few years before the start of the Cultural Revolution, in an obscure town in one of China’s poorest provinces, Ningxia. His mother tilled the fields, while his father worked with the local railways. Chinese acquisitions of French vineyards have thus far been small or middling estates. Zhang didn’t attend university. Instead, armed with a technical diploma he landed an accounting job with a state-owned enterprise in 1983. By 1996 he’d made the leap to running a baijiu factory and making the popular Chinese spirit. In 2000, he bought Ningxiahong, a company active in real estate, printing, catering and travel, in addition to the goji business. Zhang has witnessed the opportunities that come with change. He’s dismissive about the wine produced at Chateau du Grand Moueys: The quality is mediocre, the packaging “low class.” A Paris-based designer has been pressed into service to redesign the bottles, adding red corks and gold lettering. Lemaitre, the oenologue, notes that similar redesigns are underway at other estates owned by Chinese in the region: “There is some kind of bandwagon effect. Everyone wants a certain kind of packaging and has the same plans. Buy a vineyard with a nice chateau, divert all the wine produced to China, and set up a hotel on the estate.” Chinese acquisitions of French vineyards have thus far been small or middling estates.

The mighty Grand Cru, the most prestigious of wine classifications, has eluded investors from the mainland.

To put the investments in perspective, only an estimated 20 estates out of about 9000 in Bordeaux are in Chinese hands. But Zhang dreams big and has plans to acquire a Grand Cru label “like Chateau Lafite” within the next decade. “When I was a child, I couldn’t even dream of going to a city like Beijing,” he chuckles. He waves his hand at the chateau’s airy interiors. “All this,” he says, “It makes me feel like a prince.” It’s not yet clear how profitable these Chinese investments will be, going forward.

Regardless, red and gold bottling, luxury Chinese restaurants in the countryside, and millions of bottles of French wine consumed by Chinese people as they dig into a supper of chicken feet a la mode, are bound to transform the hallowed French landscape of Bordeaux as much as its trading fortunes.