For the new year, Beijing Review's former "State of the Market" has a new look. Our aim is to analyze a week's worth of China's most important market news and make it reader-friendly for the busy but inquisitive business reader. We hope you enjoy! The beginning of a new year is invariably accompanied by something good and something troublesome, especially in the country of yin and yang. Good news came toward the end of December 2006 for the mainland when Baosteel Group of China effectively called the shots in iron ore price negotiations with Brazil, setting a benchmark iron ore price increase of 9.5 percent. Sure, the price went up for China to import iron ore as usual, but by a much lower amount than in previous years-a victory for Chinese steel manufacturers. More good news for China in 2007: It's expected to outpace Germany to become the second largest trader by the end of the year, according to a World Trade Organization estimation. And even as foreign trade surges, so does enterprise within its borders. A total of $1.7 trillion in venture capital (VC) surged into China from January to November 2006, pushing the country to be the second largest destination of VC in Asia. So overall, China's economy is keeping consumers feeling warm and fuzzy, boosting the consumer price index and housing prices. And yet-and here comes the not-so-good-news-their money could be worth less soon, as Zhou Xiaochuan, the Chinese counterpart of Federal Reserve Chairman Ben Bernanke, has publicly expressed worries about inflation.

Chinese Steel Shows Its Strength

On December 21, Baosteel Group of China agreed with Brazilian mining giant Companhia Vale do Rio Doce (CVRD) on a 9.5 percent increase of the iron ore price, a deal that will certainly reverberate throughout the new year at other international iron ore price negotiation tables.

Currently, China is the largest iron ore importer of the world, while CVRD, together with London-based Rio Tinto PLC and Australian BHP Billiton Ltd., controls 70 percent of the seaborne iron ore market.

As a China steel manufacturing leader, Baosteel played the role of chief negotiator for the whole Chinese steel industry. A 9.5 percent price increase for iron ore shipped from Brazil to China beginning in May 2007 means iron-ore fines will be sold at about $44.47 per metric ton (the price of iron ore pellets is subject to changes). In the third quarter of 2006, CVRD sold iron ore for an average price of $40.61 per metric ton, excluding shipping costs.

In 2006, the iron ore price was raised by 19 percent, almost 10 percentage points higher, and in 2005, the three iron ore giants increased the price by a colossal 71.5 percent as China failed to prevent such a hike in price.

This was also the first time that the CVRD favored a Chinese company in settling the price, which consolidated China's involvement in the sector.

VC Keen on China

The Sixth China Venture Capital Forum revealed that by November 2006, over $13.4 billion in VC has flowed into China, making the country the second largest investment market in Asia just after Japan. That figure is an aggregate amount for all years.

Meanwhile, by November 2006, the total value of private equity hit a record high, surpassing $11.77 billion, and has been invested in 111 projects. According to Zero Zipo, a service provider on China's VC and private equity, by November 2006, VC from China and for the Chinese market reached $1.69 billion, up 57.5 percent compared with that of last year.

Some investors are still looking for new opportunities. Huang Jingsheng, Managing Director of Bain Capital, an investment firm, said that those wait-and-see venture capitalists are not in a hurry as there are many other options to choose from. Huang contended that they tend to switch attention to new emerging markets instead of sticking with their professional areas.

More and more VC organizations are beginning to invest in infant or growing enterprises that demonstrate foreseeable sound turnover. VC invested in those enterprises increased to $580 million in 2006 from $140 million in 2005.

As for Huang himself, when previously with Softbank Asia, he dealt with telecommunication and media investments. However, after working for Bain Capital, he switched attention to furniture material, hotels, retailing and financial industries.

Zero Zipo also reflected new VC trends. VC in the IT industry decreased to 62.1 percent of the total market investment in 2006. The modern services industry saw VC moving up to 9.6 percent, while investment in the biotech and pharmaceutical industry climbed to 7.1 percent in 2006 from 2.3 percent from that of 2005.