China became the world's largest auto market in 2009 and reports predict the emerging markets of China, India and Brazil will lead global auto sales in 2010. Foreign auto makers such as GM, Ford, VW, BMW and Toyota have all been increasing their output capacity (esp. their luxury brands)in preparation for the growing Chinese market. Additionally, over the last year, Chinese domestic auto makers are acquiring foreign brands and technology to bolster their own capabilities. In 2010, as foreign auto makers target a luxury auto market in China, Chinese auto makers will likely make push into overseas markets for economy and green cars.

China's Push to go Green

China gets a lot of criticism for being the largest greenhouse gas emitter in the world (United States is second). However, few people know that China is also the world leader in the growth of its renewable energy sector. China hopes to generate 30% of its energy consumption from renewable resources by 2050. This push can been seen in a variety of different governmental measures.

First, Chinese government recently consolidated the energy industry and are pushing for the increase of hydro-electric, wind, solar and nuclear energy plants. China is in the mist of developing a wind farm with the potential for 40GW of power output. In fact the project is so large that is deemed the Three Gorges of the Land. China is also planning on starting construction on 10 new nuclear power plants each year to increase the power output.

Second, China is providing numerous incentives for firms with green energy technology. These incentives take form in tax breaks, lowered capital requirements, subsidies and other preferential treatments. The auto industry is where these incentives are most evident. Auto makers, both domestic and foreign, are encouraged to develop alternative energy cars.

Lastly, China is pushing its domestic industry to decrease pollution. Many of the environmental rules but in place for the Beijing Olympics are being phased in to become permanent. China has set tighter regulations on maximum emissions from coal power plants and close down many of the non-efficient ones.

China is in many ways still a developing country, so it is going to pollute heavily. However, it is encouraging to see that it is taking a step in the right direction. Also the opportunities for firms involved in renewable energy is endless and should consider China a great market.

Recently, trade disputes between China and the U.S. have grown in intensity. This is partially due to the global economic downturn. Countries are starting to look for ways to protect their domestic industries.

Earlier this month, in an effort to protect its domestic tire industry, the U.S. announced that it will impose tariffs on Chinese tire imports for the next 3 years: 35% for the 1st year, 30% for the 2nd year, and 25% for the 3rd year. However, this move may be more detrimental than helpful to the U.S. economy overall.

The United Steelworks Union claims that 5,000 jobs have been lost since 2004, due to the outsourcing of tire manufacturing. They claim that the new tariff would bring more jobs back to the U.S. It would be great if we can generate more jobs in the U.S. as a result of the tariff, but it is more likely that the tire manufacturers will just look to other countries to source their tires. The tariff is likely to help out Mexico more than the U.S. Additionally, as the tire prices increase, it is the American consumer that is hurt.

In a response to the U.S. tire tariffs, China has announced that it is looking into anti-dumping charges against U.S. imports of chicken products and auto parts. China also announced that it will extend anti-dumping duties of between 6% to 84% on U.S. imports of polyvinyl chloride (commonly known as PVC). The two countries are also involved in disputes over steel pipes, music and movies.

No matter what our opinion is on free trade, we can all agree that in this delicate economic climate, a trade war with China will not benefit anyone.

The Rio Tinto story in China has gotten a lot of press recently. For those of you who have not followed the story, on July 5, China detained 4 Rio Tinto employees, including its chief executive in Shanghai, Stern Hu, on suspicions of espionage. Then on August 12, the employees were formally arrested on suspicions of commercial bribery and trade secrets infringement (substantially less serious then espionage). The investigation is still ongoing, but has cause Rio Tinto to pull all of its employees out of the Shanghai office. Some people believe that the Chinese government's actions is partially an reaction to Rio Tinto's failure to close a $19.5 billion business deal with Aluminum Corporation of China.

This is a prime example of how the Chinese government uses its enforcement powers as a negotiating tool. It is highly likely that the Rio Tinto employees may have been involved in various degrees of bribery to gain unfair advantages or access to state trade secrets, but this conduct happens in China on a regular basis at different levels of the government. Corruption is a huge issue in China and, unfortunately, it is part of doing business there. The government often seriously cracks down on these activities when it suits their purposes or when the act is too egregious to ignore. The Rio Tinto case may be a combination of both of these factors. As a businessman in China, it is important to be especially sensitive when it comes to dealing with government officials. You must both know how to grease the gears, but also know what line not to cross.

Recently I was asked about the kind of investment opportunities in China and which industries should see China as a target market. China's Ministry of Commerce provides a catalogue of industries that it deems as either encouraged, restricted, or prohibited. Those companies that are in the encouraged industries listing would likely have a relatively easier time establishing a presence in China. MOFCOM lists the following as encouraged high technology industries:

Electronics and Information

1. Computer and Computer Peripheral Equipments
2. Microelectronics and Photoelectron device
3. Communication Equipment and Products
4. Broadcast and Television Technology and Products
5. Production equipment and test instrument for specialized techniques

Software and Outsourcing

1. System Software
2. Support Software
3. Application Software
4. Outsourcing

Aeronautics and Astronautics

1. Aircraft and Support Products
2. Ground Service Equipment
3. Commercial Carrier Rocket
4. Commercial spacecraft and ground facilities

Advanced Manufacture

1. Automated Machinery and Equipment
2. Key Basic Parts of Electromechanics
3. Instrumentation and System
4. Modern Transportation

Biomedicine and Medical Equipment

1. Biomedicine
2. Chemical medicine
3. Food Biotechnology and Products
4. New-type medical equipment

New Material

1. Metal Material
2. Inorganic Nonmetal material
3. Organic Macromolecule Material and Products
4. Composite Materials

New Energy and Efficient Energy Saving

1. New Type Energy and Equipment
2. Energy-saving Product

Environmental Protection

1. Atmospheric Pollution Prevention and Control Equipment
2. Water Pollution Prevention and Control Equipment
3. Solid Waste Disposal Equipment
4. Environment Monitoring Instrument

Geospace and Ocean

1. Reconnoitering and developing apparatus for energy sources and the mineral sources
2. Equipments for engineering meteraging and globe physical observation
3. Foundation Stability Exploration and Checkout for Large-scale project
4. Ocean Inspection Technology

Modern Agriculture

1. New breeds of choiced animals and plants
2. Fine breed's embryo biologic engineering products of the livestock
3. Biologic pesticide and biologic prevention products
4. New diagnostic reagent and biologic vaccine
5. New fertilizer
6. New high-efficiency feedstuff and additive
7. Agricultural engineering apparatus
8. Apparatus for the storage of agricultural products and byproducts,and the processing of the new tech-products

Outside of these high technology industries, the catalogue also lists numerous other industries that are encouraged by the Chinese government

China recently appointed its current head of foreign exchange agency as the head of a special monetary policy office to promote internationalization of China’s currency. Lately, China has been advocating the broader role of the RMB in global financial transactions. China has signed currency swap agreements with several key trading partners, including Brazil and Argentina. It has also indicated an interest to conduct business with Russia using the RMB.

On July 6, China’s central bank released a rule permitting companies in select cities to settle cross-border trades using the RMB. China’s central bank claimed that the move would likely reduce companies’ exposure to foreign exchange risks, increase liquidity in foreign trade and cut transaction costs.

These actions signifies an effort by China to reduce reliance on the USD for international trade. At the end of June, Chinese foreign exchange reserves topped $2.13 trillion, $801.5 billion of which are U.S. Treasury Bills. China is the United States' largest creditor. However, due to the economic downturn and the declining value of the USD, China is looking to diversify some of its holdings.

Sinopec, China’s largest oil refiner, is in talks to acquire Geneva-based oil and gas producer Addax Petroleum for approximately USD $8 billion. Addax is mainly based in West Africa and the Middle East. It produced 134,730 barrels of oil a day in the 1^st quarter. Meanwhile CNOOC, China’s 3^rd largest oil company, is planning a USD $4 billion deal for the assets of US-based Kosmos Energy LLC.

China Minmetals Non-ferrous Metals Company’s proposed acquisition of Australian miner OZ Minerals has received OZ’s shareholders’ approval. The acquisition price is USD $1.386 billion. OZ is the world’s second largest producer of zinc. It also produces copper, gold, lead and silver.

China is taking full advantage of this depressed economy to acquire as much assets as it can to bolster its holdings in various resouces around the world. This can be seen on these large scale acquisitions or on a smaller scale by individuals purchasing investment property here in the US.