China Says Payment Delays, Defaults May Worsen

BEIJING--Customers are taking longer to make payments and even defaulting on debt in a number of China's industries, particularly machinery, coal and steel, and there is a risk of this spreading to other sectors, the state-run Economic Information Daily reported Wednesday, citing results of a ministry inspection.

At a closed-door meeting held by the Ministry of Industry and Information Technology, five associations representing the steel, nonferrous metals, coal, electric power and machinery industries, reported their overall debt levels, and data showed that accounts receivable in the machinery and coal industries were high, the newspaper said.

The report said accounts receivable in the machinery industry in the first half of the year rose 17.3% on year to 2.49 trillion yuan ($392 billion). The report also said the net value of accounts receivable at 90 big and medium-sized coal companies surged 48.7% on year to CNY194.8 billion as of the end of July.

The situation in other industries is not serious yet, but if the sluggish market environment continues for some time while financing costs remain high, payment delays and defaults are likely to emerge, the report cited market participants as saying.

China’s Stocks Head for Fourth Monthly Loss as Earnings Falter
By Bloomberg News - 2012-08-30T08 :06 :22Z

China’s stocks fell, dragging the benchmark index down for a fourth straight month, after companies from China Cosco Holdings Co. (601919) to China Shipping Container Lines Co. reported first-half losses.

China Cosco, the world’s largest operator of dry-bulk ships, and China Shipping Container, the country’s second- largest carrier of sea-cargo boxes, dropped to their lowest levels since they listed in 2007. Steelmaker Beijing Shougang Co. sank 3.4 percent after forecasting a loss for the first nine months. Sinolink Securities Co. (600109) paced gains by brokerages after the Shanghai Securities News said regulators expanded margin financing today.

“There’s no sign of the economy or corporate earnings picking up,” said Dai Ming, a fund manager at Hengsheng Hongding Asset Management Co. in Shanghai, which manages $190 million. “Stock valuations are pretty low and that may attract bargain hunters betting on technical rebounds or government policy loosening.”

The Shanghai Composite Index (SHCOMP) slipped less than 0.1 percent to 2,052.59, its lowest close since February 2009, as almost three stocks dropped for each that rose. The gauge has dropped 2.4 percent this month. The CSI 300 Index (SHSZ300) declined 0.2 percent to 2,211.37 today, while the Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong sank 1.5 percent. The Bloomberg China-US 55 Index (CH55BN), the measure of the most-traded U.S.-listed Chinese companies, fell 0.7 percent in New York yesterday.

Signs that China’s economic slowdown is deepening have dragged the Shanghai Composite down 7.8 percent this quarter, the worst performer after Cyprus among 93 global stock benchmark index tracked by Bloomberg. The gauge is down 6.7 percent for the year and 2.4 percent in August.

Cosco Loss

China Cosco dropped 1.2 percent to 3.98 yuan. The company said its loss widened to 4.87 billion yuan ($767 million) in the first six months from 2.76 billion yuan a year earlier as a global capacity glut sapped shipping rates.

China Shipping Container slid 2.3 percent to 2.13 yuan after doubling its first-half loss from a year earlier to 1.28 billion yuan.

Beijing Shougang tumbled 3.4 percent to 2.85 yuan. The steelmaker said it expects a net loss of between 320 million yuan and 420 million yuan in the nine months to September.

Fifty-seven percent of companies in the Shanghai Composite missed analysts’ estimates for quarterly profit, while 41 percent beat projections, according to data on 221 earnings reports compiled by Bloomberg.

Margin Financing

Sinolink Securities jumped 10 percent to 11.87 yuan. Citic Securities Co. (600030), China’s biggest listed brokerage, advanced 1.7 percent to 10.34 yuan. Haitong Securities Co., the second largest, added 2.7 percent to 8.29 yuan.

China Securities Finance Co. allowed 11 brokerages to borrow money and lend to investors for margin financing today, the Shanghai Securities News reported. The move may bring about 10 billion yuan of new capital into the stock market today, the China Securities Journal reported separately.

CSR Corp. (601766), the nation’s biggest train maker, rose 1 percent to 4.06 yuan after its parent bought 471,000 shares in the company yesterday.

Publicly traded companies, especially those whose stock prices are below their book values, have an obligation to buy back their own shares, the China Securities Journal reported Aug. 2, citing an unidentified official at the China Securities Regulatory Commission.

Stock Holdings

Ping An Insurance (Group) Co. (601318), the nation’s second-biggest insurer, doesn’t plan to raise its holdings in equities because the economy has yet to bottom, the Shanghai Securities News reported today, cited Chief Investment Officer Timothy Chan.

China’s gross domestic product expanded 7.6 percent last quarter, the slowest pace in three years, as Europe’s debt crisis hurt exports and Premier Wen Jiabao’s campaign to cool consumer and property prices damped domestic demand. Bank of America Corp. estimates a further slowdown to 7.4 percent in the three months through September.

The People’s Bank of China cut interest rates in June and July for the first time since 2008 and has lowered banks’ reserve requirements three times starting in November.

Declines on the Shanghai gauge have dragged valuations to 9.3 times estimated earnings, compared with an average multiple of 17.1 for the past five years, according to data compiled by Bloomberg.

Relatively Disappointing

China’s stocks are cheap and may get cheaper depending on policy moves, Jonathan Lowe, managing director and senior portfolio manager of JPMorgan Asset Management Ltd. said in an interview yesterday. China is a liquidity- and policy-driven market and government policy actions have been relatively disappointing so far, he said.

New bank loans may increase from July in the next several months as the government boosts investment in infrastructure projects, according to a report from Industrial & Commercial Bank of China Ltd. published in the Shanghai Securities News today.

The National Bureau of Statistics and China Federation of Logistics and Purchasing are due to release a manufacturing index for this month on Sept. 1. The Purchasing Managers’ Index may fall to 50 from 50.1 in July, according to the median estimate of 24 economists by Bloomberg. Fifty marks the dividing line between expansion and contraction.

Further Downside Risk

Thirty-day volatility in the Shanghai Composite was at 12.2 today, compared with this year’s average of 17.2. About 6 billion shares changed hands in the gauge today, 23 percent lower than the daily average this year.

Chinese equities fell in New York, driving the benchmark index to the lowest level in three weeks. The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., slid 0.3 percent to $33.50 yesterday.

“There’s further downside risk for Chinese equities,” Michael Ding, lead portfolio manager of the China Regional Fund at U.S. Global Investors, which oversees about $2 billion, said in a phone interview from San Antonio.

--Zhang Shidong. Editors: Richard Frost, Darren Boey

Exclusive: China considers downgrading domestic security tsar in next line-up

By Chris Buckley

BEIJING | Thu Aug 30, 2012 12:20am BST

(Reuters) - China's Communist Party is considering downgrading the role of domestic security chief as part of a move to a new and smaller top elite, reflecting fears that the position has become too powerful, sources said.

Reducing the party's Politburo Standing Committee, the inner council at the apex of power, from nine to seven members would come as part of a once-in-a-decade leadership change expected in the next few weeks or months.

China's domestic security chief, Zhou Yongkang, faces defeat if his successor does not follow his example, and that of recent predecessors, and win a place at the top table.

Before he was tainted in a succession of scandals that hurt the Communist Party this year, Zhou expanded his role into one of the most powerful, and controversial, fiefdoms in the one-party government.

He has been on the Politburo Standing Committee since 2007 while also heading the central Political and Legal Affairs Committee, a sprawling body that oversees law-and-order policy.

That double status allowed Zhou to dominate a domestic security budget of $110 billion a year. But the hulking, grim-faced 69-year-old is due to retire along with most members of the Standing Committee at the 18th Party Congress, which will meet before the end of the year.

Leaders appear likely to put a tighter leash on Zhou's successor as head of domestic security by keeping him or her off the down-sized Standing Committee. That successor would remain a member of the less powerful Politburo, which has 24 members -- returning to a pattern the party kept to for much of the 1980s.

The provisional agreement to shrink the Standing Committee and to effectively downgrade the status of Zhou's successor has been rumored for months and firmed up during secret discussions since July, said six sources with direct ties to senior leaders and retired party elders.

"As things now stand, the Political and Legal Affairs Committee secretary won't be in the Standing Committee. He'll have to answer to someone in the Standing Committee. Basically, he won't be his own judge anymore," said a retired party official who remains close to many sitting senior officials.

"I don't think all the people (in the Standing Committee) have been decided, but it seems clear it will be seven."

He and other sources spoke on condition of anonymity, fearing recriminations from discussing secretive party issues.

Zhou was implicated in rumors that he hesitated in moving against the politician Bo Xilai, who fell in a divisive scandal. Security forces also suffered a humiliating failure when they allowed blind rights advocate Chen Guangcheng to escape from 19 months of house arrest and flee to the U.S. embassy in Beijing.

Such fumbles gave President Hu Jintao and his virtually certain successor, Vice President Xi Jinping, a shared motive to put a growing array of police forces and domestic security services under firmer oversight, said Xie Yue, a professor of political science at Tongji University in Shanghai.

"It seems quite likely that Hu and Xi have mustered the will to demote the political standing of the Political and Legal Affairs Committee," he said.

"They're taking advantage of the opinion that the committee's reach has gone too far, and that it's created too many problems and scandals."

Since the 1990s, China's efforts to stifle crime, unrest and dissent have allowed the domestic security apparatus -- including police, armed militia and state security officers -- to accumulate power, and the domestic security budget now outstrips the military's in size.

"There's been a lot of criticism inside the party of the Political and Legal Affairs Committee," said a businesswoman with family ties to a senior politician, referring to Zhou's portfolio. "Zhou Yongkang remains in power, but his voice doesn't have the same impact."

The move to downgrade Zhou's successor would not dilute the party's overall determination to enforce domestic control, but could give other arms of state more room to counter the powers of China's policing apparatus, said Xie, the professor.

"This will reduce somewhat the importance of the Political Legal Affairs Committee inside the party's power array," Xie said in a telephone interview.

"The Political and Legal Affairs Committee secretary will no longer be directly involved in the Standing Committee's key decisions about his portfolio. Unlike Zhou Yongkang, he won't be at the table, directly involved in all those key decisions."

Two sources said the front-runner to replace Zhou as Central Political and Legal Affairs Committee secretary was Meng Jianzhu, now minister for public security.

FOCUS ON PROBLEMS

The push to slim down the Standing Committee at least partly reflects hopes that the next generation of leaders will be more nimble and cohesive in tackling problems, said several observers in Beijing.

"The Hu-Wen era pattern of dividing up powers and allotting responsibilities among all these different stallholders has ended up creating many problems," said Pu Zhiqiang, a Beijing lawyer who closely follows politics. "The next leadership wants to be able to act more swiftly."

Broad plans for the power succession and other proposals for the party congress were discussed at a secretive conclave in Beijing in late July, when two sources said Hu spoke to hundreds of senior officials for several hours.

Chinese state media issued a brief account of Hu's speech. But the two sources said the full version dwelled on the major economic and social challenges facing the government.

"He spoke about the many problems and potential crises. There was a sense of anxiety," said a retired official, who said he was given a broad summary of Hu's speech.

"He spoke about corruption, environmental pressures, economic problems - about all the problems facing the party," said another retired official.

"That sense of urgency is one reason to form a smaller Standing Committee," added the second retired official.

STILL SOME SURPRISES?

Overseas Chinese websites, which are beyond the reach of Beijing's censorship, have also carried reports that the Standing Committee will shrink to seven, and many of them have already offered lists of the likely candidates.

But bargaining over the leadership line-up is not over, and there was still room for surprises, with changes in one choice rippling through to other appointments, said several sources.

"Most people back going to seven (in the Standing Committee), but then it all depends on whether they can agree on who those seven are," said the second retired official.

"There's no final agreement yet."

That view was echoed by Joseph Fewsmith, an expert on Chinese politics, who noted that before the 16th Party Congress in 2002, signs that Hu Jintao would lead a seven-member Standing Committee faltered, and the committee took in nine members.

"My sense is that there is still some bargaining to go," said Fewsmith, a professor at Boston University.

"I'm surprised a date for the congress has not yet been set, but I'm assuming we have about six weeks to go. So we may still see some surprises."

ICBC Profit Growth Slows as China Banks’ Overdue Loans Rise
By Bloomberg News - 2012-08-31T08 :34 :53Z

Industrial & Commercial Bank of China Ltd. led the nation’s biggest lenders in posting slower profit growth as a sluggish economy curtailed demand for financial services and more borrowers defaulted on debt.

Net income at ICBC, the world’s largest lender by market value, climbed 11 percent in the second quarter to 61.8 billion yuan ($9.7 billion), according to first-half figures reported yesterday by the Beijing-based company. Combined earnings of China’s five biggest banks increased 13 percent to 203.6 billion yuan in the quarter, slowing from 33 percent a year earlier.

Overdue loans rose at the five banks as the economy decelerated for a sixth quarter, and China’s liberalization of interest rates threatens to squeeze margins in the second half. Still, Chinese banks’ bad-loan ratios are less than 1 percent and they remain among the world’s most profitable, with ICBC alone making more than JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. combined.

“Credit quality of Chinese banks has obviously deteriorated, which is a reflection of the significant decline in the economy,” said Lewis Wan, the Hong Kong-based chief investment officer at Pride Investment Group Ltd., which manages $300 million of assets. “The profit growth will certainly stall some more as lending margins shrink and fee income slows.”

Shares of the five biggest Chinese lenders have fallen by an average 7.4 percent in Hong Kong this year, according to data compiled by Bloomberg. ICBC and its local rivals trade at an average 5.3 times their forecast earnings for 2012, compared with 9.6 times for HSBC (HSBA) Holdings Plc, Europe’s most profitable bank, and 8 times for New York-based JPMorgan, the largest U.S. lender.

Economic Slowdown

China’s two interest-rate cuts this year, three reductions in banks’ reserve requirements since November and accelerated approvals for investment projects haven’t been enough to reverse a slowdown in output.

The economy grew 7.6 percent in the second quarter, the slowest pace since 2009. Barclays Plc, Deutsche Bank AG and Bank of America this month cut their forecasts for the nation’s third-quarter growth, while Morgan Stanley lowered its outlook for 2012 expansion to 8 percent from 8.5 percent.

Bank of Communications Co., China’s fifth-largest lender by assets, yesterday reported a 16 percent increase in second- quarter profit to 15.2 billion yuan. Agricultural Bank of China Ltd. (3988), ranked third, on Aug. 29 posted a 14 percent gain. Net income for China Construction Bank Corp. (939), the second largest, rose 20 percent while fourth-ranked Bank of China Ltd. last week said earnings growth slowed to 5.3 percent.

ICBC gained 0.2 percent to HK$4.20 at the close of trading in Hong Kong, while Bank of Communications added 1.6 percent to HK$5.07. The benchmark Hang Seng Index lost 0.4 percent.

‘Monopoly’ Profits

Premier Wen Jiabao said in April China needs to break the “monopoly” of several big lenders, which make easy profits because it’s hard to borrow money elsewhere. The five banks had 31 trillion yuan of loans outstanding as of June 30, controlling almost half of the nation’s total.

Soured loans at the nation’s 3,800 banks increased for a third straight quarter, the longest streak of deterioration in eight years, according to the China Banking Regulatory Commission. Most of the increase in bad loans came from the eastern Chinese province of Zhejiang, the Shanghai Securities News reported this month.

Overdue Loans

Overdue loans, an indication of future bad loan formation, at the five biggest banks totaled 416 billion yuan as of June 30, an increase of 27 percent from the end of last year, according to data compiled by Bloomberg. ICBC’s advances with payments pending for more than 90 days rose 7 percent to 62 billion yuan, while debt overdue for less than three months surged 60 percent to 80 billion yuan. At Construction Bank, the 90-day figure jumped 34 percent.

“Asset quality will continue to worsen, and the market has been expecting that,” said Ivan Li, head of research at Kim Eng Securities Hong Kong Ltd. “What is uncertain is the banks’ net interest margins” and how much they will shrink.

ICBC’s net interest margin, a measure of lending profitability, widened to 2.66 percent in the first half from 2.6 percent a year earlier. The measure shrank at Bank of China and Agricultural Bank in the second quarter from the previous three months.

Rate Deregulation

The central bank in June allowed lenders to widen the discount on borrowing costs to 20 percent and broadened it further to 30 percent last month as policy makers picked up the pace of interest rate deregulation.

The weighted average lending rate charged by banks had already fallen to 7.06 percent in June, down by 0.56 percentage point from March, according to the central bank. About 8 percent of loans were priced below the benchmark rate that month, the most in 11 months.

Bank of Communications faces “significant” pressure on its margins, Vice President Yu Yali said yesterday at a briefing. ICBC’s first-half loan margin doesn’t yet reflect the impact of the June rate cut, President Yang Kaisheng said.

China’s government is maintaining curbs on real estate and refrained from introducing a nationwide economic stimulus package similar to the one in 2008. Caterpillar Inc., the world’s largest maker of construction and mining machinery, shut its main excavator factory in China for much of July and had employees on shortened work weeks.

Record Profit

In the first six months, ICBC’s profit rose 12.5 percent to 123.2 billion yuan, according to yesterday’s statement, paving the way for it to post record profit for a seventh year since becoming publicly traded in 2006. The second-quarter figures were calculated based on the first-half numbers.

State-run Central Huijin Investment Ltd. bought more Shanghai-listed A shares of ICBC, Construction Bank, Bank of China and Agricultural Bank in the second quarter, Shanghai Securities News reported today, citing their interim reports.

China’s 3,800 lenders reported net income of $52.8 billion in the second quarter, 53 percent more the total earnings of 7,246 U.S. banks, data from the China Banking Regulatory Commission and the U.S. Federal Deposit Insurance Corp. show.

JPMorgan (JPM) last month reported a 9 percent decline in second- quarter net income to $4.96 billion after posting a $4.4 billion trading loss at its chief investment office.

HSBC, the largest European bank by market value, last month posted an 8.3 percent drop in earnings and made a $1.3 billion provision in the first half to compensate British clients wrongly sold payment-protection insurance and derivatives. The London-based lender also made a $700 million provision for U.S. fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system.

Special Report - China Inc's debacle in the Outback



By David Lague

HONG KONG | Thu Aug 30, 2012 10:15pm BST

(Reuters) - Larry Yung Chi-kin is a loyal scion of the Chinese Communist upper crust. His late father, Rong Yiren, was the legendary "Red Capitalist," one of the few industrialists to stay behind in the mainland after the revolution of 1949. Yung himself went on to found the conglomerate CITIC Pacific and become one of China's richest men.

So, when duty called, Larry Yung answered.

In 2006, foreign mining giants were jacking up prices of the iron ore needed by China's voracious steel industry. At the urging of Beijing, Yung and CITIC Pacific negotiated the rights to exploit a vast deposit of low-grade ore in the red-rock landscape of Australia's remote northwest Pilbara region.

The multibillion-dollar deal seemed to be a coup for China's resource-hungry economy. But Yung and Beijing are now paying a heavy price.

A few kilometres down a dirt track off the North West Coastal Highway, beside a towering pile of red tailings, the company has dug itself into what increasingly looks like a bottomless pit.

The original $2.47 billion (1.56 billion pounds) budget for the massive open-cut mine and processing complex has blown out to $8 billion and it is more than two years behind schedule. Senior company managers won't rule out a $10 billion price tag for one of China's flagship offshore resource investments. "It has the potential to be a company killer, that's for sure," says Clinton Dines, a former president of mining giant BHP Billiton in China.

It is a dramatic reversal for Yung, 70, who emerged from obscurity after the Cultural Revolution to become first tycoon among China's "princelings," the children and grandchildren of the party elite.

BUNGLED HEDGING

To compound its pain, CITIC Pacific in 2008 bungled an attempt to hedge against the overruns - exposing the company to a further $2 billion in losses. Yung and his long-time deputy, Henry Fan Hung-ling, were forced to resign that year when Hong Kong police and regulators launched investigations into the hedging transactions.

According to people familiar with the investigations, police and regulators in Hong Kong have concluded their probes into suspected fraud, theft and disclosure failings. They have handed their findings to prosecutors in the semi-autonomous city, who are weighing whether to lay charges against some of China's highest-profile business figures in the politically charged matter.

Yung's office did not return calls requesting comment. A spokeswoman for Hong Kong's Department of Justice did not respond to questions about the investigations. Officials in Beijing have been publicly silent about the probes.

But senior Chinese leaders have privately said they are worried the mine could turn into an embarrassing failure, according to Australian government officials and foreign mining executives. Soaring costs and missed deadlines in the Pilbara mine have delivered a major setback to China's global drive to secure reliable supplies of key raw materials.

CITIC Pacific's Australian subsidiary, Sino Iron, is scrambling to begin operations at the mine and release a flow of revenue that is projected to last for 25 years. Shipments were supposed to begin this year, reaching a pace of 27.6 million tonnes a year.

CITIC Pacific chairman Chang Zhenming said at the company's August 16 results briefing in Hong Kong it now expects trial production to begin only in November, the latest in a series of missed deadlines.

"Before the end of the year we should have production ready for export," said Chang, a veteran of China's state-owned finance sector who was drafted in to replace Yung.

OUTBOUND TROUBLES

The saga speaks to the broader problems that China's state-owned giants are having as they venture into the wider world. Resource projects account for most of the $380 billion of total Chinese outbound investment as of the end of 2011, according to China's Ministry of Commerce. Losses on these investments have reached almost $27 billion, official media reports say.

Most of it has been blamed on failures to undertake proper research before deals are signed. "In many of these cases, my view is that due diligence was either poor, non-existent or there was an element of hubris involved," says Mike Komesaroff, managing director of Queensland-based Urandaline Investments, a consultancy specialising in China's minerals and metals industries.

CITIC Pacific declined requests for interviews with senior managers about the Pilbara mine or answer questions about its feasibility study and background research on the project.

The market outlook isn't good. Iron-ore prices are expected to continue sliding as China's economy shows signs of slowing. Australia's Bureau of Resources and Energy Economics forecasts ore will average about $136 a tonne this year, a drop of about 11 per cent from 2011. Some analysts expect steeper declines, with China on track to record its first annual drop in steel output in more than three decades.

It's a major shift. Years of seemingly insatiable Chinese demand delivered a bonanza for Australia's BHP Billiton, the Anglo-Australian Rio Tinto and Vale of Brazil, which together account for almost 70 per cent of world sea-borne iron-ore trade.

Ore, which had traded for less than $13 a tonne in 2000, peaked at almost $200 a tonne last year. In one savage hike in early 2005, the three miners increased prices by 71.5 per cent.

"That really got their attention," says Shanghai-based Dines, who came under fire from steelmakers when he represented BHP in China and now runs hedge fund Caledonia Asia. "From that moment, China really started worrying about securing reliable supplies of raw materials, particularly iron ore, and the cost of those materials."

That's when Larry Yung headed into the Outback.

FLOUR AND TEXTILES EMPIRE

It was the biggest risk he had ever undertaken, and he was doing it without the support of his legendary father. Just five months before CITIC Pacific in March 2006 signed agreements to mine the Pilbara deposit, Rong Yiren died in Beijing, aged 89.

Rong had become a household name in China after 1949, when he remained in Shanghai and cooperated with Communist efforts to build a socialist economy. As the head of the family's flour-milling and textile empire, Rong was then estimated to be one of the 10 richest men in China, according to reports at the time. His only son, Larry Yung (Rong Zhijian in Mandarin) lived his early years at the family mansion on leafy Kanping Road in what had once been the French Concession.

Even under the Communists, Yung was extravagant. He drove a red open-topped sports car around the city and invited friends and classmates to dine at expensive restaurants, China's official media reported.

That all changed with the Cultural Revolution, when Red Guards ransacked the clan's homes, smashing and stealing valuable art and antiques. Rong was spared the brutality meted out to others with similar backgrounds. But he ended up working as a janitor, according to reports later published in the official media. Yung was forced to spend six years labouring in Sichuan Province after graduating from Tianjin University with a degree in electrical engineering.

With the end of the upheaval and Deng Xiaoping's rise to power in the late 1970s, Rong was rehabilitated. Deng tasked him with a key role in guiding China's opening to the global economy.

He set up state-owned China International Trust and Investment Corporation, now known as CITIC Group, as a vehicle to coordinate the massive foreign investment needed to jump start a shattered economy. His rehabilitation was complete when, in 1993, he was appointed to the largely ceremonial but prestigious position of Vice President.

RED CHIP PIONEER

As his father returned to influence, Yung moved to Hong Kong in 1978 and started an electronics engineering company with two cousins. He joined CITIC in 1986 before leading the takeover of an existing listed company and renaming it CITIC Pacific. The deal created one of the first "red chips," mainland-controlled companies with shares traded in Hong Kong.

CITIC Pacific gobbled up investments in aviation, property, telecoms, tunnels, bridges, power plants and mainland steel mills. The establishment Swire Group, a pillar of colonial Hong Kong, welcomed him onto the board of its airline subsidiary, Cathay Pacific, when CITIC Pacific became a major shareholder.

As the deals rolled in, the Yung family's links to the CITIC empire deepened. Two of his children, son Carl Yung Ming-jie and daughter Frances Yung Ming-fong, joined the company in senior positions.

The company's stock peaked at almost HK$50 in October 2007, valuing his 19 per cent stake at HK$20.9 billion ($2.7 billion) (The stock now trades at about HK$11.)

That year, Yung took home almost HK$67 million in pay, including a HK$48 million bonus, according to company filings.

CHINA'S RICHEST TYCOON

The silver-haired Yung fit seamlessly into the close-knit ranks of Hong Kong's super rich. He bought Birch Grove in Sussex, the former home of late British Prime Minister Harold Macmillan, for a reported 5.5 million pounds in 1989 and spent heavily adding a golf course. The house has since been sold.

Like other tycoons in gambling-mad Hong Kong, Yung invested in champion thoroughbreds and was elected a steward of the prestigious Hong Kong Jockey Club. Club records show 13 Hong Kong horses listed under his ownership won combined prize money of almost HK$100 million. By the time he began scouting for iron ore, China's official media was describing him as the country's richest tycoon.

His connections did him little good in the arid outback. Established players had already scooped up most of the best deposits of hematite, a rich form of iron ore, local miners say.

CITIC had little choice but to invest in plentiful deposits of lower-grade magnetite ore, which then accounted for less than 1 per cent of Australia's iron ore output.

In 2006, after Yung had visited Australia to explore potential investments, CITIC Pacific signed a deal for the right to mine up to 6 billion tonnes from the Pilbara deposit owned by Australian mining entrepreneur Clive Palmer.

Australian officials involved in the discussions say Yung was a confident and polished host. At a meeting in Hong Kong after the signing, Yung told his Australian guests he was flying to South America the following day on his private jet to hunt wild boar.

The Australian government approved the deal in June 2006. Within months, it became clear CITIC Pacific had underestimated the costs of establishing Australia's biggest magnetite mine. There were also unexpected management challenges.

COSTLY, UNRULY AND SCARCE

By Chinese standards, Australian labour is expensive, unruly and in short supply. Government and unions quickly dashed expectations an army of low paid Chinese workers could be imported to build the facility.

That irritated CITIC Pacific managers, who went public with critical views on local working conditions and habits. Then, in the midst of an Australia-wide mining boom, the price of energy, materials and engineering services soared. Complex projects in China had been completed much faster and at lower cost than similar projects in Australia.

"For a Chinese company coming to operate in Australia, this is a big issue," says metallurgical engineer Darryl Harris, a director of Perth-based Indo Mines who has also worked extensively in China. "The trouble is they can't transfer that know-how here."

With costs ballooning at Sino Iron, the Australian dollar began to rise on the back of soaring commodity exports. By July 2008, it had risen 25 percent since work started at the mine, effectively boosting labour and other costs by one-fourth for the company, which had borrowed from Chinese banks.

Facing the prospect of further currency losses, CITIC Pacific entered into a series of leveraged derivative contracts in June and July 2008 to hedge against the rising currency.

They struck deals with a range of banks, including Citibank, Rabobank, Standard Chartered, Natixis, Credit Suisse, Bank of America, Barclays Capital, BNP Paribas, Morgan Stanley, HSBC, China Development Bank, Calyon and Deutsche Bank, according to copies of contracts the company later disclosed.

Just as the contracts were signed, the global financial crisis hammered the Australian dollar in August of 2008, leaving the company holding wrong-way bets.

It wasn't until Sunday, September 7, 2008, five days before Lehman Brothers filed for bankruptcy, that Yung and his senior managers learned about the exposure, according to disclosures made later to the Hong Kong Stock Exchange. At the time, the Australian dollar was trading at about 81 cents to the U.S. dollar.

CITIC Pacific finally announced six weeks later, on October 20, that it faced losses of up to $2 billion on its hedging. By then, the Australian currency had sunk to 69 cents.

"Needless to say, this is a very unhappy event," Yung told a news conference that day.

POLICE, WATCHDOG INVESTIGATE

Yung blamed finance director Leslie Chang and financial controller Chi Yin-chau for failing to seek his approval for the trades and informing him of the potential risk. Both men had resigned, he added. Hong Kong newspapers later reported Yung's daughter, Frances, was demoted with a pay cut from her position in the finance department.

CITIC Pacific also announced its major shareholder, Beijing-based CITIC Group, had bailed it out with a $1.5 billion loan and would double its stake to 58 per cent in return for absorbing most of its liabilities.

Two days after the company came clean, the Securities and Futures Commission announced it had launched a probe into the delay in informing the market.

After examining documents handed to the market regulator, Hong Kong police mounted a separate probe. On April 3, 2009, detectives raided the CITIC Pacific office. Five days later, Yung and Fan resigned.

In the years since, CITIC Pacific has sparred with investigators. After first saying it would cooperate with the probe, the company began a legal effort to reclaim material handed to the SFC and seized in the police raid.

In two rulings last year, Hong Kong's High Court rejected the company's bid to claim legal privilege over the documents. The court found a prima facie case of conspiracy to defraud and of theft, and ruled the documents, including legal advice, had been produced to facilitate those alleged offences.

From stock exchange filings and court evidence, it is clear that between learning of the scale of its hedging losses on September 7 and informing the market in late October, managers made determined efforts behind the scenes to shore up company finances. Shareholders, however, were not warned

"CONSPIRACY TO DEFRAUD"

On September 16, 2008, CITIC Pacific informed the exchange about two unrelated mainland investments, but did not disclose the hedging losses senior management had learned about more than a week earlier. The board met on September 23 to discuss the crisis and directed its audit committee to begin investigating the hedging contracts, according to the two rulings.

In the following three weeks, the company borrowed HK$250 million from the bank of Tokyo-Mitsubishi, HK$1 billion from the Bank of China and HK$500 million from the Industrial and Commercial Bank of China.

Resolutions authorizing the borrowing were signed by the board's finance committee, including Larry Yung, Henry Fan, Peter Lee and Leslie Chang, according to evidence police gave the court.

Prosecutors said while securing the loans, CITIC Pacific's board sought legal advice on how long it could delay announcing the losses.

"They wanted to raise money without telling what their true financial position was," prosecutor Charlotte Draycott told the court. "This is a conspiracy to defraud."

In March, CITIC Pacific won a more favourable assessment from the Court of Appeal. It upheld the company's claim that some of the documents were privileged and thus unavailable to the prosecution. The court also disagreed with earlier findings of suspected criminal conduct.

Although police would have preferred to use the documents, the ruling does not undermine the case, people familiar with the investigation told Reuters.

PIPELINE OR PIPEDREAM?

As prosecutors ponder the evidence in Hong Kong, CITIC Pacific is intensifying efforts to end its suffering in the Pilbara.

On a recent day, the 4,000-strong work force raced to bring the mine into production. Plumes of dust whipped away in a hot dry wind as giant bulldozers sent slate-grey ore cascading down a stockpile behind a new power station and processing plant.

A 30-kilometer pipeline that will carry the ore snakes away from the processing complex through low scrub towards the coast at Cape Preston, where the company has built a port.

But even once shipments begin, it may take years for CITIC Pacific to dig itself out of trouble.

Weakness In Chinese Employment And Domestic Demand Suggests Policy Easing Might Be Back On The Table

China's official manufacturing PMI contracted to 49.2 in August, below economist's expectations of a decline to 50. This puts China's manufacturing at a nine-month low.


But a look at the sub-indices shows some truly worrisome signs for China. New orders fell to 48.7 in August, from 49.0 in July, while new export orders held steady at 46.6. This shows that there has been a decline in domestic demand.

Moreover the employment sub-index fell to 49.1 in August, from 49.5 the previous month.

We have previously argued that China won't unleash a massive stimulus, because as part of China's rebalancing, policymakers are comfortable with a slower pace of growth. Although premiere Wen Jiabao and president Hu Jintao have recently emphasized growth, they haven't unleashed anything close to the 4 trillion yuan stimulus of 2008.

Instead policymakers are more concerned with employment growth. In recent weeks Chinese stocks were hit by reports that Beijing wouldn't easy policy much further, but the weakness in employment shown in this manufacturing report suggests some action from policymakers might be in the pipeline, though another massive stimulus is still unlikely. Bank of America's Ting Lu writes:

“Employment” dropped further to 49.1 in Aug from 49.7 in June. The further deterioration of labor market condition could push Beijing to step up policy easing/stimulus in supporting growth. In this year of leadership transition, employment and social stability should be of top concern to politicians. Note that “Employment” started dropping to below 50.0 in October 2011, which might help trigger a change in policy stance at that time."

Lu expects a second round of policy easing including reserve requirement ratio cuts in September and October. But he warns that "the scale of easing/stimulus won’t be very big, and we should avoid taking local goverments' long-term planning as short-term stimulus".

Iniciado por MateAmargo

El PMI chino muestra contracción por primera vez en nueve meses.


Weakness In Chinese Employment And Domestic Demand Suggests Policy Easing Might Be Back On The Table - Business Insider

Chinese PMI August Official - Business Insider

Insight: China's steel traders expose banks' bad debts

By Ruby Lian and Kelvin Soh

SHANGHAI/HONG KONG | Sun Sep 2, 2012 6:00pm EDT

(Reuters) - China's banks are coming after the country's steel traders, hauling executives into court to chase down loans that some traders said they didn't initially need and can't now repay.

The heavy push to recover the loans is another sign of strain on China's financial system at a time when the country's leaders are contemplating another round of stimulus to boost the economy, and when banks are worried about bad debts piling up.

The battle between the banks and steel traders also exposes flaws in the 4 trillion ($629 billion) stimulus round in 2008, and offers a warning to those calling for pumping more money into the system. At that time, Chinese banks threw money at the steel trade - a crucial cog in supplying the country's massive construction and infrastructure growth.

But those steel loans, after offering a quick fix, became excessive, poorly managed, or a combination of the two. Government officials insisted more money was needed to prop up the industry. Steel executives said the money flow was too heavy, and they had to put the money to work in real estate and the stock market.

"After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn't need," Li Huanhan, the owner of Shanghai Shunze Steel Trading, told a judge at a recent hearing. "We had nothing to do with the money, so we turned to other investments, like real estate."

PLUSH APARTMENTS

While some loans did go towards equipment and expansion, executives admit money was also used for pet property projects, plush apartments and stock market bets.

By the end of last year, China's steel industry had a total debt burden of $400 billion - around the size of South Africa's economy. Some of China's leading mills alone owe 200-300 billion yuan ($32-$47 billion), according to the China Iron and Steel Association.

The aggressive tack by China's lenders, many of which are state-controlled, comes as pressure builds inside a stretched financial system. Results at China's big banks show profit growth is at its weakest since the global financial crisis, while bad loans rose for a third straight quarter to 456.5 billion yuan ($71.8 billion) by June, the China Banking Regulatory Commission said this month.

Steel traders are unlikely to be helping the bad loan issue, with Shanghai steel futures having almost halved from their 2009 highs to below 3,400 yuan ($540) a metric ton (1.1023 ton).

As the steel market turned - a victim of crippling over-capacity, heavy debt and sliding prices - alarm bells sounded among banks and regulators about the risk of lending to the industry. In June, after months of cajoling, banks were ordered to clamp down on new lending to steel traders.

Steel industry executives complain the banks went overboard.

"Banks should consider the greater good and not just focus on protecting their own interests," said Xiao Zhicheng, head of the Zhouning Chamber of Commerce that overlooks Shanghai's steel trading industry's interests. "Instead of pumping in more blood to save the patient, it's choosing to draw more blood."

TAKEN TO COURT

In one Shanghai courtroom, steel trading firm boss Li tries to fend off a fed-up lender. China Minsheng Bank, the country's eighth-biggest lender, is trying to recover 3 million yuan ($472,100) of loans it made to the trading firm.

When the bank recalled the loan in June, Li tried to sell two Shanghai apartments she had used as collateral. In a flat property market, she came up empty-handed.

Her plea for more time to repay is one of more than 20 court cases Chinese banks have taken against steel traders. The targets tend to be mainly smaller trading firms with fewer than 50 employees, as the larger state-backed steel firms have more cash reserves.

These traders are mainly based in and around Shanghai, a tight-knit community drawn from Zhouning in the southern province of Fujian. At its peak in 2009, some 12,000 steel trading companies were scattered across the city, accounting for close to 3 percent of Shanghai's GDP, according to the local business chamber.

By some estimates, the number of steel traders has fallen by half, as steel prices crumpled in the third quarter of 2011.

"The court cases you see are usually when things get desperate," said a loans official at a Shanghai branch of Bank of Communications, who asked not to be named because of the sensitivity of the subject. "We've had people go missing. Some have fled overseas, while others just take on a new identity and move somewhere else."

The owner of one of China's biggest steel trading firms, Yizhou Group, skipped the country with his wife and children after piling up about 1 billion yuan ($157 million) in loans to banks including Bank of Communications, the official said.

Calls to Yizhou were not answered.

In the Shanghai courtroom, lawyers for Minsheng Bank told Li after the hearing that banks were desperate to recall loans as they had heard of some borrowers going missing with tens of millions of yuan still owed.

"One trader fled to Australia after borrowing 23 million yuan, while others used their property as collateral to several banks at the same time " Li said, recounting what she'd heard from a lawyer. "So banks are very cautious and taking immediate action against borrowers if they don't repay."

Another steel trader said banks promised fresh loans once existing loans had been repaid, but then withdrew credit lines.

"Some banks lied to us that they will give out new loans immediately after we repay the old ones, but they never really did. They just shut down the credit lines after they got the money back," said a Fujian trader surnamed Xiao from a small Shanghai trading firm with just eight employees.

Some traders resorted to finding private lending at a much higher cost so they could pay back bank loans, in the hope of getting new loans from the banks - leaving them mired in expensive debt when the banks pulled the plug.

"The banks have taken a tougher stance this year and not only required company assets to be used as collateral but also required the borrowers to use their own property as collateral," said Xiao.

HIGH RISK, HIGH RATES

For the banks, lending to steel traders was highly profitable while it lasted.

China Minsheng charged interest rates of up to 24 percent a year to small- and medium-sized trading firms, according to some in the industry - four times the government-set lending rate.

Bankers say the higher rates they charge are a direct response to the higher risk profile the steel traders carry, and not a single Minsheng loan to steel traders can be called a non-performing loan under China's four-tier classification system, said Shi Jie, assistant to Minsheng Bank's president.

"The steel trading sector is a particularly high-risk sector," Shi said. "We've been very carefully controlling our risks there, and working with borrowers to come to a reasonable agreement if there are problems."

In China, a loan is only classified as non-performing if it is overdue for more than 90 days and the borrower has missed interest payments. Otherwise, troubled loans can be classified under a different category known as "special mention" loans, or they can be called "overdue".

Domestic steel prices rose by 25 percent in April-September 2009 before prices slumped. While the industry rode the price spike, bank loans offered a route to investing outside the industry.

The most common loan method was through a letter of credit, where banks paid for a trader's purchase and then gave the trader 3-12 months to repay. That allowed traders a window where they could sell the goods and use the proceeds to invest.

Executives say they couldn't refuse the money coming in, and the cash did sometimes go into real estate or even 'shadow banking', where they would take the loan and lend it to another party at a higher rate.

FLIGHT, SUICIDES

Bank of China said loans to industries at risk of overcapcity, such as steel and shipbuilding, made up less than 4 percent of its total loans and had a bad debt ratio lower than its overall loan book.

"We're looking to cut our exposure to industries at risk of overcapacity," the bank's president Li Lihui said. "Internally, we are raising our own risk control measures and working with clients to cut our risk exposure."

Shanghai Gangmin Metals, which borrowed from banks including China Construction Bank, said most of the money was used to pay for steel supplies, though it did have other investments.

"Money obviously needs to be put to work ... you can't let it sit in a bank account," said the company's general manager Su Cheng. "Ultimately, we think we'll be able to reach a reasonable agreement with the banks. We just need more time."

Many of Su's peers aren't so confident.

Reports of steel traders fleeing China are becoming more widespread, as are local media articles of indebted executives committing suicide.

Ratings agency Fitch said last week that China's steel sector continued to suffer from oversupply and weak prices could persist through the first quarter of 2013. China's biggest steelmaker Baoshan Iron and Steel has predicted a "most difficult" third-quarter.

"There's good reason for the banks' lack of confidence in steel traders," said Arthur Kwong, head of Asia Pacific Equities at BNP Paribas Investment Partners in Hong Kong, which has total assets under management of $640 billion globally. "When you have an industry where people run away after falling behind on their loans, that doesn't inspire a lot of people."

(Reporting by Ruby Lian in SHANGHAI and Kelvin Soh in HONG KONG; Editing by Michael Flaherty and Ian Geoghegan)

Iniciado por Serpiente_Plyskeen

Caragill Inc ve expansión en la demanda de carne y productos lácteos en China a pesar de la crisis:
Cargill Sees China ‘Mega-Trend’ of Rising Meat, Milk Demand

Mientras parece que Wen Jiabao se va a largar fallando los objectivos de crecimiento desde su toma de posesión en 2003:
China Deterioration Raises Risk of Wen Missing Target: Economy - Bloomberg
Mucha gente ve cada vez más cerca un plan de estímulo chino, esta vez el sector minero británico:
Miners lift FTSE on China stimulus speculation | Reuters

Mientras comienza la danza de las sillas para el nuevo politburo:
Hu Ally Sidelined as China’s Leaders Jockey Before Handover

Global crisis moves East as China suffers rapid downturn

By Ambrose Evans-Pritchard

9:09PM BST 03 Sep 2012

Hong Kong and Singapore both contracted in the second quarter and are probably in technical recession.

China’s industrial output is contracting at the fastest pace since the depths of the global financial crisis, with knock-on effects spreading across the Far East.

“It just keeps getting worse,” said Alistair Thornton and Xianfang Ren from IHS Global Insight. “The government has underestimated the pace of the slowdown and is behind the curve.”

The HSBC/Markit manufacturing index for China fell to 47.6 in August, the lowest since the onset of Great Recession in late 2008. Inventories are rising. The index for new export orders fell to the lowest since March 2009. “Beijing must step up policy easing to stabilise growth,” said Hongbin Qu from HSBC.

China’s official PMI manufacturing index – weighted to big companies – also fell through the contraction line of 50, though services are holding up better.

Evidence of a hard landing over the summer is becoming clearer. Rail volumes fell 8.2pc in July from a year before. The Japanese group Komatsu said its exports of hydraulic excavators to China – a proxy gauge for Chinese construction – fell 48pc in August from a year before.

The twin effect of China’s downturn and Europe’s double-dip recession has turned into a full-blown shock for much of Asia. Hong Kong and Singapore both contracted in the second quarter and are probably in technical recession.



South Korea’s exports fell 6.2pc in August, with car sales down 18.2pc. India’s exports fell 14.8pc in July, an extra blow as it grapples with its own post-boom hangover. “The coming days ahead are tough,” said Indian commerce secretary S R Rao.

Stephen Jen from SLJ Macro Patrners said we are starting to see Phase III of the global crisis as “the eye of the storm moves East”, with China and emerging markets succumbing at last to the effects of debt leverage.

Mr Jen said markets have already discounted any likely trouble in Europe and America, but have yet to “price” the mounting risks in Asia correctly. “There seems to be a big gap between the prevalent view on China, and what is likely to happen: the sanguine consensus view that China can do no wrong will likely be proven to be incorrect,” he said.

Jim O’Neill from Goldman Sachs said the Chinese government will “surely step in” if the calibrated soft landing slips control. The central bank has kept monetary policy tight to keep a lid on property prices and rein in rampant loan growth, up by almost 100pc of GDP in five years.

The authorities cut the required reserve ratio for banks in May to 20pc – still very high by global standards – but have refused to ease further despite ever louder pleas for action from the markets. Governor Xiaochuan Zhou opened the door to monetary loosening last week, saying a change in the reserve ratio was “still possible”.

China’s regions have unveiled vast infrastructure and stimulus projects over recent weeks with the blessing of the Politburo, but it is unclear how these can be financed. Beijing-based media group Caixin reports that Beijing, Shanghai and other cities already face a “budget crunch” as land-sale receipts fall sharply.

Local governments have $1.7 trillion (£1.07 trillion) in debts through 6,000 arms-length vehicles, described by Cheng Siwei from Beijing’s International Finance Forum as China’s “sub-prime” crisis.

The state-run banks can clearly crank up lending if told to do so, but Fitch Ratings says the law of diminishing returns has already set in, with each extra yuan of debt generating less than half a yuan in extra growth.

Overdue loans at major banks jumped 27pc in the first half of the year. The steel industry alone has $400bn of debts.

China will have to steer a delicate course, offering just enough stimulus to keep the show on the road without reverting to the dangerous excesses of the last five years.

China Said to Plan Boosting Exporter Tax Rebates as Growth Slows
By Bloomberg News - 2012-09-04T06 :43 :31Z

China may expand exporters’ tax rebates to help them cope with a slump in trade growth, according to three people with direct knowledge of the plan, deploying a stimulus tool used during the global credit crunch.

The government may give exporters a full rebate of the 17 percent value-added tax on products including furniture, shoes and toys, up from the current range of 13 percent to 15 percent, said the people, who asked not to be identified because the discussions are private. The policy may be rolled out as soon as this month, depending on whether trade remains weak, they said.

Premier Wen Jiabao has pledged policy “fine tuning” to cope with a deepening slowdown in the world’s second-largest economy that saw export gains slump to an annual 1 percent pace in July from 11 percent in June. The deterioration in trade escalated the risk that Wen will miss his full-year economic expansion target for the first time since he took office in 2003.

“Further policy loosening is needed to prevent a further slowdown in production growth,” Sun Mingchun and Sun Chi, Hong Kong-based economists at Daiwa Securities Group Inc., wrote in a note today. “Export growth should remain weak.”

Dai Bohua, a spokesman for the Ministry of Finance, which oversees tax policy, didn’t answer the phone when contacted three times by Bloomberg News today. The ministry didn’t immediately respond to faxed questions from Bloomberg News.

China used the tool in 2009 to help the economy when exports plunged during the global financial crisis, at one point raising tax rebates on 553 products including motorcycles and sewing machines.

Shipments abroad of products covered by the tax change totaled at least $130 billion in 2011, or about 6.8 percent of China’s overseas sales. China’s customs administration is scheduled to publish August trade data on Sept. 10, and the September figures on Oct. 13.

The nation’s gross domestic product expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years. Wen set a 2012 goal of 7.5 percent in March.

--Steven Yang. With assistance from Xin Zhou in Beijing. Editors: Scott Lanman, John Liu

China's leadership faces fresh scandal over fatal Ferrari crash

Reports claim close ally of China's president has been demoted following his son's alleged involvement in car crash

Tania Branigan in Beijing
guardian.co.uk, Monday 3 September 2012 17.12 BST

A fresh scandal has hit China's leadership ahead of this autumn's once-a-decade transition of power, with reports that a close ally of president Hu Jintao has been blocked for promotion or even demoted following his son's involvement in a fatal Ferrari crash.

Photos of the horrific smash in Beijing were deleted within hours of appearing on microblogs and websites in March. Even searches for the word "Ferrari" were blocked on the popular Sina Weibo microblog – prompting widespread speculation that a senior leader's child was involved.

Now unnamed sources have identified the driver of the black sports car as the son of Ling Jihua, who was removed as head of the party's general office of the central committee this weekend, the South China Morning Post and Reuters reported.

State media announced Ling had been made head of the united front work department – an important role, but a sign that he is unlikely to win promotion to the Politburo as hoped, analysts said.

The high-speed crash has shed further light on the lifestyles of those around the Communist leadership. The party has already weathered the ousting of the ambitious politician Bo Xilai, and the conviction of his wife, Gu Kailai, for murdering British businessman Neil Heywood.

The exposure of the multimillion pound fortunes of Gu and Bo's family members, and subsequently of relatives of Hu's heir apparent, Xi Jinping, have added to embarrassment for the party.

The Post said that Ling's son, named Ling Gu and aged in his 20s, was killed in the crash and two young women seriously injured.

Sources quoted by Reuters said at least one of the trio died but that the victims' identities were unclear; one said the young man had survived.

Both quoted sources claiming the son's death certificate was altered to disguise his identity.

The Post alleged his surname was changed to "Jia": a homophone for "fake" in Chinese, but also the surname of another senior leader, Jia Qinglin, who was reportedly furious at rumours that his family might be involved and ordered an investigation.

Calls to Ling's new and former departments rang unanswered and the Beijing city government and police have declined to comment on the collision.

"The central leadership decided that the scandal over the incident was too serious to allow Ling Jihua to be promoted, and Hu Jintao really couldn't resist," a retired party official told Reuters.

A businesswoman with family ties to a senior leader told the agency that Ling, 55, had been criticised by leaders – including former president Jiang Zemin, who had opposed his promotion – for attempting to cover up the crash.

Analysts disagree over whether the move is a serious setback to Hu's efforts to retain influence in the next administration by promoting allies before he steps down. Ling's replacement Li Zhanshu, 61, came up through the Communist youth league – Hu's power base – but is seen as less close to the president and unlikely to be promoted.

"The united front department is not meaningless, but the General Office is a key position … Ling has not been sidelined, but he has not been promoted," said Jean-Pierre Cabestan of Hong Kong Baptist University, saying it would be important to see whether he could keep his place in the central secretariat.

Russell Leigh Moses, a Beijing-based political analyst, said: "My sense is that the shaking up of party ranks began some time ago and now we are seeing it become more high profile … I'm not a fan of the view that this [transition] is all institutionalised and there are no worries – I think we have seen over the last year that it is anything but institutionalised."

Following March's crash a state-run English language paper, Global Times, startled readers by accusing authorities of a cover up and hinting that the child of a high-ranking official was involved.

Some analysts suspect political players have deliberately leaked information amid the jockeying for position; and that details – such as a claim that the two young women were wholly or semi-naked – may have been embellished for maximum damage.

Steve Tsang, an expert on elite politics at the University of Nottingham, said it was not clear whether Ling himself had ordered the cover-up and that the reaction would probably have been similar if another senior official had been involved.

"It reflects so badly on the whole leadership and their privileges … It's not been a good year for the party in terms of reputation," he said.

But he added that most people in China would not learn about it and that if they did it would be "more a confirmation of their cynicism than a revelation of something odious".

Searches for the word Ferrari were possible again on Monday, but brought only innocuous results from sports car lovers.

Bo Xilai's son Bo Guagua has also been reported to have driven a red Ferrari, although he has denied ever doing so.

Such lavish lifestyles embarrass the party whoever is involved, added Cabestan.

"The Ferrari can be black or red; it doesn't matter," he said, echoing the famous Chinese maxim on reform that it does not matter whether the cat is black or white, as long as it catches mice.