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February 13, 2007 5:22 pm

Pulp friction for APP in Yunnan

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China’s increasingly tight watch over the sale of state assets to foreigners has been extended to forests, with Beijing holding up the sale of a majority stake in a timber company to Asia Pulp & Paper, one of the world’s largest paper companies.

Environmentalists who have long been critical of APP’s China operations in provinces including Yunnan and Hainan applauded the State Forestry Administration’s decision last week to review the company’s purchase of a 58 per cent stake in state-owned Yunnan Yunjing Forestry and Pulp.

The decision, however, was not primarily based on environmental or national security concerns .

The SFA said it based its decision on worries about the price being offered, reportedly more than Rmb700m ($90m), for assets including 66,000 hectares of woodland in the province.

The valuation of state assets remains a highly sensitive issue in China, especially in the case of a sale to a foreign company.

An SFA spokesman said that Hainan Jinhai Pulp & Paper, a unit of APP, had not had a proper valuation done on the Yunnan assets as required by law during the acquisition of state-owned assets.

The sale price that the two companies had agreed on was too low, the spokesman said.

However, the APP purchase could still go through if the sale price is approved through proper channels.

APP said in a statement on its website that it will deal with the case “according to the final decision of the SFA.”

The purchase would have been a significant boost for APP, which now has logging concessions over about 287,000 hectares of forest. The company has a substantial business in China, with revenues of Rmb16.8bn in 2005, and has talked of listing its mainland unit on a domestic stock market.

In spite of relying on the alleged breaches of the rules governing the transfer of state assets, the SFA might have also felt pressure from activists who have been allowed unusually significant leeway in campaigning against APP’s China operations.

The SFA two years ago investigated charges by Greenpeace that APP had carried out illegal logging in Yunnan. State media subsequently quoted a senior agency official saying that the probe had found evidence of illegal logging.

China imposed limits on the logging of native timber in the late 1990s after devastating floods were blamed in part on extensive deforestation – something that the activists say they continue to monitor.

On top of concerns about flooding, growing environmental awareness at both the government level and increasingly among of the population at large has made extensions of logging concessions a sensitive issue.

China’s timber production has been sharply curtailed since the logging restrictions were introduced, with the shortfall made up by a huge surge in imports, mostly from the Russian far east in recent years, but also from south-east Asia and Papua New Guinea.

Furniture and other Chinese export industries that rely on steady supplies of wood have struggled to keep up with orders because of difficulties securing enough supplies.

APP, part of the Indonesian Sinar Mas group controlled by the Widjaja family, has been embroiled in controversy in recent years after it defaulted on $13.9bn of bonds held by scores of banks, trading companies and government agencies.

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