June 2006 China News

BEIJING (Reuters) - China raised interest rates for the first time in 18 months to slow a boom in credit and investment that risks destabilizing the world's fastest-growing major economy.

In a move which took global markets by surprise, the central bank raised its benchmark one-year lending rate to 5.85 percent from 5.58 percent but kept its deposit rate unchanged at 2.25 percent.

Most economists had expected the central bank, which announced the move on its Web site, to require banks to lock up more cash in reserve as the first step towards curbing credit growth.

"This is very unexpected. The market was anticipating a hike in reserve deposit ratios," said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.

But he added: "It's a positive step in so far as it should help take some of the steam out of investment demand. It also signals a proactive central bank."

The case for tighter policy was sealed after first-quarter figures showed annual gross domestic product growth accelerated to 10.2 percent from 9.9 percent in the fourth quarter of 2005.

Annual fixed-asset investment growth picked up to 27.7 percent from 25.7 percent in all of 2005, while banks extended 1.26 trillion yuan in new loans in the first quarter -- more than half the central bank's target for the whole year.

Still, Tim Condon with ING Financial Markets in Singapore said he was surprised at the central bank's choice of tightening tool because the last increase in lending rates, in October 2004, had scant impact in cooling the economy.

"So I am kind of skeptical this one will either, but it does show the authorities' determination to rein in some of that liquidity," Condon said.

Like others, Condon expects the authorities to weigh in with other steps before long.

"The government and central bank are determined to tighten and if they don't see the target being met, there could be more measures coming," said Jun Ma, a Deutsche Bank economist in Hong Kong.

Zhu Jianfang, chief economist at China Securities in Beijing, added: "I'm quite sure that there must be more measures to be rolled out in coming weeks to drain extra cash from the banking system because, with the lending rate increasing while the deposit rate remain unchanged, the wider gap will encourage banks to lend more."

Investment is booming because China is awash with cheap money from its record trade surplus, which tripled last year to $102 billion; from foreign direct investment exceeding $1 billion a week; and from speculative inflows betting on a stronger yuan.

The Group of Seven industrial nations urged China last weekend to redress this imbalance by letting the yuan rise faster. So far the central bank has let it edge up just 1.2 percent since revaluing it by 2.1 percent last July and unshackling it from a decade-old dollar peg.

But Beijing has conspicuously held the yuan down this week, despite the G7 statement, and Wang Chuanglian, an economist with Great Wall Fund Management in Shenzhen, said it was no accident that the central bank had not raised deposit rates, which could have attracted more unwanted capital inflows.

"The central bank is reluctant to raise deposit rates because of its concerns over the yuan," he said.

Yet many economists believe a stronger yuan will have to be part of the solution to restoring balance to the economy.

Partly because Beijing has been reluctant to let the currency rise, fearing job losses in export industries, it has had to keep the cost of money far too low for such a fast-growing economy.

"The yuan's exchange rate imposes interest rates which are too low, considering the strength of Chinese economy," Lorenzo Bini Smaghi, a member of the European Central Bank's executive board, said in Florence before the rate rise.

BEIJING, China (Reuters) -- China's remote far western region of Xinjiang, where part of Oscar-winning "Crouching Tiger, Hidden Dragon" was filmed, is to ban movie shoots at scenic spots for fear of damage to the environment.

That movie, along with "Hero" by Chinese director Zhang Yimou, was filmed without permission in Xinjiang, the Beijing News said, citing a report in the Urumqi Evening News, though it did not say if the film crews had harmed the environment.

"If the environment is seriously damaged and not returned to its natural state in time, legal and economic measures will be taken against those responsible," the newspaper said, citing regulations from the local government.

Xinjiang is a vast, mostly Muslim region about the size of Mongolia that contains deserts, forests, mountains and lakes that have made it a favorite destination of directors looking to add sparkle to their films.

Chinese environmental authorities said they would fine the crew of the country's most expensive movie, "The Promise" by Oscar-nominated director Chen Kaige, for damaging the environment in an area of outstanding natural beauty.

The producers neglected to carry out an environmental impact report and did not apply for permission to build roads and buildings around Bigu Lake in the southwestern province of Yunnan, state newspapers said.

China is trying to balance economic needs with environmental protection after years of breakneck growth that has led to poisoned air and water for many cities, denuded hillsides and litter strewn tourist sites.

Beijing battles smog ahead of Olympics

BEIJING, China (Reuters) -- A glance from the window of any of Beijing's towering skyscrapers is enough to ascertain the biggest problem facing the city in the run-up to the 2008 Olympics -- smog.

The biggest event on the global sporting calendar will be hosted in one of the world's most polluted cities unless there are dramatic improvements in air quality over the next 809 days.

The helter-skelter pace of economic growth in China has come at a cost, and in the capital that price is the dirty, yellow-brown haze that restricts visibility and clogs the lungs.

The International Olympic Committee's (IOC) Hein Verbruggen said last week that, while it was definitely a challenge, he was certain the air would be cleaner by the time the Games start.

"They have an interest, they have a genuine straightforward vested interest in presenting this city in the best possible way during the Olympics and that is, for me, more than enough guarantee," he told Reuters at the end of the IOC inspection.

"They voted a budget of $12.3 billion before they won the right to host the Olympics to clean up the air and I'm absolutely sure they're spending it," he said.

"It's an uphill battle but they will deliver. I'm absolutely sure."

Measures such as the relocation of industry out of the city, a switch to the use of gas from coal in homes and the phasing out of old public transport vehicles have made inroads into the problem.

But the economic boom has brought with it an explosion in car ownership and the 400,000 or so new vehicles that hit the road in Beijing last year have caused more than congestion.

Athens, Beijing's predecessor as host of the Summer Games, had similar pollution problems in the years before their Olympic year of 2004, as Verbruggen recalled.

"This was also a big discussion point about Athens," he added. "It was not easy, but they delivered."

'Green Olympics'

Jiang Xiaoyu, vice president of the Beijing Organizing Committee for the Olympic Games (BOCOG), said last week the 'Green Olympics, High-Tech Olympics and People's Olympics' slogan reflected how much stock BOCOG placed on the environment.

"Since 1998, Beijing has done a lot to improve the air quality in Beijing," he said, pointing out that official statistics showed there were 234 "clean air" days last year to just 100 back in 1998.

This year started badly, however, with 13 days of the worst measure of pollution by mid-April and frequent sand storms further depleting the air quality.

Failing a permanent solution to the problem, Beijing authorities may at least ensure the air is clean for the 16 days of the Games.

Jiang confirmed limiting car usage -- a measure adopted by Athens in the early 1980s -- was being discussed, while there has also been talk of seeding clouds to cause rain, factory closures and extended holidays for public employees in August 2008.

Ultimately though, as Verbruggen pointed out, should Beijing fail to meet the commitments they have made to the IOC on air pollution, there are unlikely to be any serious repercussions.

"Even if they did not attain their targets, what can you do?" he asked. "Let's be open about this, we can't say tomorrow, we go somewhere else."

China: Your company name may not be yours

Even if you're not yet doing business there, experts advise U.S. brands to quickly register trademarks or risk losing them to local 'pirates.'

It doesn't matter if you're already in China, about to take your business there, or have no interest in going East just yet -- experts strongly suggest that companies quickly register all their brands in China anyway or else risk becoming the victim of local "trademark squatters."

Stephen Baker, trademark attorney with law firm Baker & Rannells, said international trademark squatting is similar to "cyber squatting," or the domain-name grab that occurred when people first started to recognize the power and popularity of the World Wide Web .

Companies that didn't rush to register their brand names as their Internet address often found that someone else had already anticipated the move and registered the same address ahead of them. In some cases, these "cybersquatters" were able to exhort large sums of money from corporations and individuals who wanted to get back their domain name.

"Trademark piracy is the same thing. Opportunists in China and elsewhere think they can make a lot of money by registering well-known U.S. and international brands in their country," said Baker, adding that his firm is currently involved in multiple trademark piracy cases in China.

He gave an example: "We currently have a cancellation proceeding underway in China where a Chinese national filed to register a trademark that belonged to an alcohol beverage company with presence in the U.S. (and) a division in Europe," he said.

According to Baker, the company's U.K. unit went to register its trademark in China only to find that it had already been registered, which in itself isn't illegal in China.

"We're going after the registrant on the grounds that they had the trademark but never used it during the ownership period. So we want it cancelled on grounds of abandonment," said Baker.

News flash: There's no such thing as an international trademark

While trademark squatting isn't specific to China -- Baker listed ongoing cases in Jordan, Nigeria, Korea and Australia, as well as the United States -- observers admit that the issue does take on an added dimension of complexity in China.

One reason is China's status as a manufacturing hub for a large number of international brands. Secondly, China's fast-growing economy has given risen to a sizeable population of middle-class consumers with a thirst for branded goods.

Pamela Church, an intellectual property lawyer and partner with law firm Baker & McKenzie, said it's critical for U.S. brands who already source from China to register their trademarks there simultaneously.

This is crucial, she said, because U.S. companies may not be aware that there's no such thing as an international patent or trademark. This leaves "unprotected" trademarks vulnerable to legions of trademark pirates in China who are hunting the globe in search of buzzworthy brands that they anticipate will look to enter lucrative international markets.

According to Church, China has a "first to file system" regarding trademarks. In other words, if a local Chinese registrant files for a U.S. trademark that's not already registered, he or she then legally owns the brand, and has the right to manufacture and sell the branded product in China.

"So many branded products are manufactured in China and suppliers already have product knowledge and know how to use the brand," said Church. "If your trademark isn't protected, the manufacturer can acquire the trademark and start selling it in the local market and other markets without the brandholder's consent."

Maybe this isn't a big problem if you're a small company without any immediate plans to expand internationally, said Robert Eisen, partner with Baker & McKenzie.

But, if this same company at a later stage does decide to go to China and launch a brand that is already registered by a "pirate," then the company becomes the "infringer" and could find itself being sued by the local registrant or having to negotiate to buy its trademark back.

"And if you're already a successful international brand and you lose your trademark protection in China, your brand can also take a hit from cheap counterfeits leaking from China into other markets," Eisen said.

What should U.S. companies do?

Owen Smigelski, an intellectual property attorney with San Diego-based Achtel Law firm, recommends U.S. brandholders immediately file their trademark particularly in those countries where trademark squatting is springing up more frequently.

"Over the past couple of years we've certainly have had more clients pursuing trademark issues in southeast Asia versus earlier," Smigelski said. "I think with the Olympics coming up, China is also looking very attractive for lots of international brands and they should be aware of trademark issues."

It's relatively inexpensive to register the trademark, typically under $1,000, he said, while trademark litigation can run into thousands of dollars.

Baker & McKenzie's Church also advised that companies register all the trademarks in their portfolio as well as their Chinese translation and transliteration for all-round protection against trademark pirates.

Additionally, people familiar with the Commerce Department's thinking on the issue suggest U.S. companies carefully vet their partners in China and enter into a registered contract with local businesses.

China's central bank ups one-year lending rate for first time in 18 months to ease credit boom.

'Green Olympics'