BUSINESS COUNCIL of MONGOLIA NewsWire

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Issue 125, July 2, 2010

NEWS HIGHLIGHTS:

Business:

Rio Tinto raises ownership in Ivanhoe Mines to 29.6%;

SouthGobi begins work on coal-handling facility;

Petro Matad spuds maiden well;

Polo sells its Mongolian unit to China-based Winsway;

Peabody Energy eyes Mongolia expansion;

Oyu Tolgoi construction workforce rises to 3,100;

Bucyrus comes to Ulaanbaatar;

Entree Gold completes acquisition of PacMag Metals.

Economy:

Limits to be placed on guarantee for bank deposits;

Maximum penalty for unfair trade raised to MNT10 million;

Honor for fertile mothers to cost MNT96 billion a year;

Move to pay allowance to 160,000 poor families;

Loans to SMEs frozen;

World Bank funds project to better manage social protection systems;

Dismal U.S., China data hit copper;

London Stock Exchange welcomes Mongolian companies;

Manufacturing growth slows in Asia;

The renminbi runaround;

Baltics show how fiscal medicine tastes,

European business wary of China regulation;

China’s factories spread the wealth;

China's push to develop its west hasn't closed income gap with east;

Uncertain fallout: nuclear power in Asia.

Politics: Prosecutor General calls for dismissal of Anti-Corruption Agency head;

Coalition Government is making Parliament irrelevant, says Speaker;

Talk of deal between parties to remove two Ministers;

DP group wants power plant agreement canceled;

Minister says organizers were “pathetically irresponsible” on July 1, 2008;

Parliament approves rail link with Russia;

Railway policy seen as favoring Russia over China;

President wants probe into judges’ qualifications;

Mongolia, Saudi Arabia to boost mining cooperation;

Civil movement leader joins political party;

MPs want stricter watch on foreign citizens. *Click on titles above to link to articles.

BCM MONTHLY MEETING RECAP

The monthly meeting on June 28, with Mr. Laurenz Melchers in the chair, was attended by 85 members. In the absence of Executive Director Jim Dwyer, Vice Director Ser-od Ichinkhorloo

welcomed the five new members since the last meeting. They are: Independent LLC, importer and distributor in Mongolia of frozen New Zealand fish products; Mongolian Mortgage Corporation (MIK), working to promote and develop primary and secondary mortgage markets; Valiant Art, seeking to ―bring new life to international art… with work from a little-known realm‖; Firebird Mongolia Fund, a closed-end, limited-life fund dedicated to local Mongolian equity securities; and HoldTop Investment LLC, the first U.S. Silicon Valley-based venture capital firm to expand to Mongolia. Their induction takes the membership strength to 150. The first of the evening‘s three presentations was by Mr. Dennis Price, COO-Mongolia, Mongolia Energy Corporation, on his company‘s Khushuut Coking Coal Project. Production will begin in August and will see a rapid rise before hitting a peak in 2013. The company has an agreement with Baosteel to supply coal to the Chinese company from 2010 to 2020. Trucks will take the coal to the Chinese border 340 km away, providing jobs to Mongolians. A power plant to be set up will supply electricity to areas outside the mine also. Mr. Randolph Koppa, Chairman of Mongolian Mortgage Corporation (MIK) and President of Trade & Development Bank, talked on how MIK was and would be promoting affordable home ownership for Mongolians through capital market development. The Central Bank and nine commercial banks hold shares in MIK, which promotes and develops primary and secondary mortgage markets and positions itself as an intermediary between the two. Its success in raising medium- to long-term funds on domestic and foreign capital markets through a series of capital market tools to create and ensure a smooth functioning of a long-term financing system to promote affordable home ownership and urban development for Mongolia‘s people will require right legislation, wise government policy, and free rivalry in the private sector. It has already given 16,807 loans worth altogether MNT233.7 billion. Mr. Ch.Ganbat, Advisor to the Minister of Road, Transportation, Construction and Urban Development, gave a detailed presentation on the proposed industrial and investment cluster in Sainshand, and on how it is expected to promote sustainable economic growth in Mongolia. The country‘s GDP is still ―miniscule‖ in terms of the market value of its mineral resources, and the complex will be a key factor in ―successfully developing our economic growth vision‖, raising the GDP to USD41 billion in 11 years, he said. The Boston Consulting Group, a leading global management consulting firm, was retained for the work and, Mr. Ganbat said, it has not recommended setting up a copper smelter, which the Mongolian Parliament insists upon. The whole implementation will be in five phases, beginning with floating of tenders by August 20. The Prime Minister himself chairs the steering committee for this seminally significant concept of development through clusters and concentrated infrastructure.

BUSINESS RIO TINTO RAISES OWNERSHIP IN IVANHOE MINES TO 29.6% Rio Tinto has increased its ownership in Ivanhoe Mines to approximately 29.6% after exercising its Series A warrants four months ahead of schedule, providing Ivanhoe Mines with USD393.1 million for development and construction of the Oyu Tolgoi complex. The warrants entitled Rio Tinto to acquire 46.03 million Ivanhoe Mines common shares at a price of USD8.54 per share. "Rio Tinto's early exercise of its warrants is an important step toward securing the financing and funding for Oyu Tolgoi as we move into the first summer of full-scale, site-wide work under the 2010 construction budget," Mr. Robert Friedland, Executive Chairman of Ivanhoe Mines, said. With the receipt of the USD393.1 million from Rio Tinto, Ivanhoe Mines' current consolidated cash position is approximately USD1.53 billion, of which USD774 million is solely available for use by Ivanhoe Mines, primarily for advancing the construction schedule at Oyu Tolgoi. Mr. John Macken, President and Chief Executive Officer of Ivanhoe, said that Rio Tinto's past and potential future investments in Ivanhoe now total approximately USD2.5 billion.

Source: Ivanhoe Mines SOUTHGOBI BEGINS WORK ON COAL-HANDLING FACILITY SouthGobi Resources Ltd. has begun construction of a coal-handling facility (CHF) at its Ovoot Tolgoi coal mine in southern Mongolia. The CHF will allow SouthGobi to add value to its coal by removing ash, or waste rock, and enable the blending of coal from different seams to create higher-value products. Mr. Alexander Molyneux, President and CEO of the company, said, "SouthGobi will be one of the first coal producers in Mongolia to conduct value-adding processing in country. Operation of the new facility will create approximately 25 new jobs." The new CHF, to cost approximately USD25 million, will include a 300-ton-capacity dump hopper,

which will receive run-of-mine coal from pits and feed a coal rotary breaker that will size coal to a maximum of 50 millimeters and reject oversize ash. A radial stacker will facilitate loading of the sized coal into customers' trucks for delivery across the Mongolia-China border. Key long-lead-time equipment has been ordered and SouthGobi has begun excavation and site preparation work. The facility is planned to be operational in early 2011. Source: SouthGobi Resources Ltd. PETRO MATAD SPUDS MAIDEN WELL Petro Matad Ltd. passed a key milestone last week when it spudded its long-awaited first well in Mongolia, after having been stopped on its tracks by unusually harsh winter weather conditions and then a regional shut down due to an outbreak of foot and mouth disease. The Davsan Tolgoi-1 wildcat in Block XX in the east of the country is being drilled vertically to a depth of 1,440 meters. It should take 30 days to complete and, as the first of three planned wells on the 14,250 sq km block, will be a key test of Petro Matad‘s strategy. It has taken Petro Matad four years, and no inconsiderable expense, to get to the point of drilling its first well and the London Stock Exchange AIM-listed company is obviously planning to make the most of every downhole data set. This is certainly going to be key test of Petro Matad‘s ambitions in Mongolia. Source: Petro Matad

POLO SELLS ITS MONGOLIAN UNIT TO CHINA-BASED WINSWAY AIM-listed miner Polo Resources has finalized the sale of its coal and uranium joint venture in Mongolia, just days after pulling out of a merger with Australian peer Caledon citing volatile market conditions. Polo has sold its stake in the venture to China-based miner Winsway for USD35 million, after buying in May 2009 for USD25.8 million. The firm will receive a one per cent royalty on coal sold from licenses currently held in the joint venture. Source: CITY A.M. PEABODY ENERGY EYES MONGOLIA EXPANSION Coal miner Peabody Energy, rebuffed in a recent acquisition bid in Australia, still wants to expand there to meet Asian demand and is also pursuing opportunities in Mongolia, Chief Executive Officer Gregory Boyce has said. Mr. Boyce said his company was looking at expanding into Mongolia, which is rich in untapped mineral and coal resources. Demand for coal rose 46 percent in the last decade -- faster than any other energy source, he noted. And he expects 90 percent of global coal demand growth to come from Asia. "China, Mongolia and India are our focus," Mr. Boyce said. Peabody now has a joint venture in Mongolia. In May the company and China's Winsway Coking Coal Holdings Ltd struck a deal to buy Polo Resources Ltd's stake in the joint venture. Mr. Boyce said Mongolia's proximity to China, with its huge demand for steel-making metallurgical, or coking, coal was the key to the investment. "Met (metallurgical) coal is at the surface, and mining risks are low," he said. "We see Mongolia as a place we want to be." Source: Reuters.com

OYU TOLGOI CONSTRUCTION WORKFORCE RISES TO 3,100 Mr. John Macken, President and Chief Executive Officer of Ivanhoe Mines, has said that with the ramp-up to full construction now well under way, the Oyu Tolgoi workforce has been increased to its current total of 3,100 men and women. Production of copper and gold from Oyu Tolgoi is expected by 2013. The 2010 Oyu Tolgoi Integrated Development Plan (IDP-10) estimated that the initial capital cost required to achieve production from the open-pit mine on the Southern Oyu deposits is USD4.6 billion. This amount includes USD1.1 billion to be spent advancing underground development at the Hugo North Deposit in preparation for the start of block-cave mining following the start of production from the open pit. Options to finance the remainder of the estimated capital costs include, but are not limited to, additional potential debt, equity offerings, a credit facility, the sale of subsidiaries, equity investments, project financing and/or various corporate transactions. Last month, Ivanhoe signed a joint mandate letter with the European Bank for Reconstruction and Development (EBRD) and the World Bank Group's International Finance Corporation (IFC) for evaluation of a major financing package for the construction Oyu Tolgoi. The company has also received expressions of interest from export credit agencies to provide up to USD500 million in direct project debt financing.

Source: Ivanhoe Mines

BUCYRUS COMES TO ULAANBAATAR Bucyrus, which designs and manufactures high productivity mining equipment, will open its own office and sales center in Ulaanbaatar, as soon as the registration process is concluded. Bucyrus has terminated the existing dealership contract with Wagner Asia and will henceforth deal directly with its existing and potential customers in Mongolia. Dr. D.Purevsuren has been named Country Manager, Mongolia. More information can be had from Mr. Tsogt Tumurkhuyag, Stakeholder, Bucyrus Mongolia by calling 976 8811 0067/ 976 9911 0736, or by Emailing tsogt.ub@gmail.com. Source: Bucyrus Europe

ENTRÉE GOLD COMPLETES ACQUISITION OF PACMAG METALS Entrée Gold Inc. has completed its acquisition of all issued shares and options of PacMag Metals Limited, after all regulatory and administrative matters were addressed and the transaction closed as of June 30. "I wish to welcome the shareholders of PacMag to Entree and hope they continue to be part of Entrée's growth story. Growth will be fueled by the advancement of its world-class deposits in Mongolia, assisted by the company's partners Rio Tinto and Ivanhoe Mines. Entree will also strive to add value to its other holdings worldwide," said Mr. Greg Crowe, President and CEO of Entrée Gold. Entrée Gold is a Canadian mineral exploration company focused on the worldwide exploration and development of copper and gold prospects. Its flagship property is in Mongolia, where it holds two mining licenses (Shivee Tolgoi and Javhlant) and one exploration license (Togoot). Rio Tinto and Ivanhoe Mines are major shareholders of Entrée, holding approximately 13% and 12% of issued and outstanding shares, respectively. Source: Entrée Gold Inc.

ECONOMY LIMITS TO BE PLACED ON GUARANTEE FOR BANK DEPOSITS The Government has prepared some amendments to the law presently guaranteeing the security of bank deposits. This follows reports that some banks have been abusing the provisions of the guarantee to secure deposits on inflated promises, and also to relax their internal risk control mechanism. All this could end up disturbing stability in the banking system. The amount of money in bank deposits covered by the government guarantee is estimated to be MNT 3.1 trillion, while the state budget for 2010 is for MNT 2.4 trillion. The government now proposes to limit both the types and amount of deposits covered by the guarantee. Accounts that receive interest at a rate above the Central Bank policy loan rate, 11% at present, are likely to be taken out of the guarantee. In addition, it wants all banks to put 1 percent of the guaranteed funds in a special Government fund, which can be used at an emergency. In view of the urgency of the matter, the amendments are expected to be disposed of by Parliament before it takes a break on July 5.

Source: Montsame, Ardiin Erkh, Udriin Soniin

MAXIMUM PENALTY FOR UNFAIR TRADE RAISED TO MNT10 MILLION Parliament recently approved several amendments to the Competition Law which has been in force for 17 years. Mr. D.Mandakh, Head of the Department for Fair Competition and Consumer Rights, has said the new regulations ensuring fair competition will apply to all the nearly 40,000 registered business entities in the country, of which 160 are considered to be monopolies. The amendments are aimed at restricting these from deriving unfair trade advantages by exploiting their monopoly status, especially in matters of pricing. At present, the maximum fine for violation of the law was MNT250,000, an amount which has proved to be no deterrent. This has now been raised to MNT10 million.

Source: Udriin Soniin

HONOR FOR FERTILE MOTHERS TO COST MNT96 BILLION A YEAR MNT96 billion will be needed every year to implement the decision, supported by 93 percent of MPs, to give awards and monetary encouragement to mothers of many children. Those who bore six or more children will receive a Grade One Star and MNT1 million each, while those with four or five children will win a Grade Two Star and MNT500,000. The last census in 2000 showed that 53,903 of the 541,149 families in Mongolia in 2000 had more than four children. Source: English.News.mn

MOVE TO PAY ALLOWANCE TO 160,000 POOR FAMILIES A Ministry for Social Welfare and Labor has revealed that the draft amendments to the social welfare law that the Government has submitted to Parliament contain a provision to pay a monthly cash hand-out to every poor family. A survey conducted by the National Statistics Office shows that 73 percent of poor families have at least one member with a job. Thus it is not unemployment as such but rather failure to earn enough that keeps families poor. Poor families also have many children with not enough earners to support them. The draft recommends giving MNT7,000 to each adult and MNT10,000 to every child in designated families. On an average a family will get MNT40,000. Families will qualify to be registered as poor on the basis of average income. The ministry estimates MNT60-80 billion will be needed per year to give the allowance to 160,000 households. This is expected to reduce the poverty rate by between 3.7-8.2 percent. MNT160 billion was earlier spent from the state budget to pay child money and young family money. Source: Ardiin Erkh

LOANS TO SMEs FROZEN MNT 30 billion in soft loans should have been made available to small and medium enterprises by June 30, but only 70% of the amounts have been given, and the process has been frozen in Arkhangai, Khuvsgul, Selenge, Bayan-Ulgii and Khovd provinces. Mr. Ts.Nyam-Osor, a senior official in the concerned department, has claimed that this happened because the State Bank suddenly announced its inability to provide the pre-arranged MNT 3.5 billion to the five provinces. He felt that the State Bank was going through some teething problems and indicated that a new bank would soon be selected to carry on with the work. Source: Udriin Soniin

WORLD BANK FUNDS PROJECT TO BETTER MANAGE SOCIAL PROTECTION SYSTEMS The World Bank approved on Monday a USD12 million credit for the Mongolia Multi-sector Technical Assistance (MSTA) project, which aims, among other things, to help Mongolia improve and manage social protection systems for the poor, and to support the government‘s efforts to build its capacity for policy making and regulation in the fiscal, social and financial sectors. The global financial crisis ―highlighted the need for policy reforms – especially in terms of policies to protect the country‘s poorest people from the boom and bust cycles typical of economies that depend on mineral exports,‖ said Mr. Arshad Sayed, World Bank Country Manager for Mongolia ―The challenge now is to turn the crisis into opportunity. The MSTA project aims to build the capacity needed to achieve this.‖ Policy reforms include adopting an appropriate fiscal framework, improving the budget process and the planning and management of public investments, and implementing a targeted poverty benefit. Other key reforms are to prepare the banking sector for the upturn in economic activity, investment and capital inflows in the years ahead. ―The MSTA will assist Mongolia to successfully manage the upcoming mining boom and any bust that may follow,‖ said Mr. Rogier van den Brink, World Bank Lead Economist and the Task Team Leader for the project. The money will come from the World Bank‘s arm for the world‘s poorest countries – the International Development Association. The project, targeting the country‘s key budget management and social protection ministries, will run from July, 2010 to December, 2014.

Source: The World Bank

DISMAL U.S., CHINA DATA HIT COPPER Copper futures slumped this week as disappointing economic data from Asia and the U.S. painted a bleak picture of demand for the industrial metal. Most-active copper for September delivery was down 4.7%, at USD2.9445 per pound on the Comex division of the New York Mercantile Exchange. The nearby July contract slid 4.8%, to USD2.9250. It has skidded 12% so far this year, although it remains up 30% over 52 weeks. Concerns about China, the world's largest consumer of copper, were fanned after the Conference Board revised its leading economic indicator for China to a gain of 0.3% for April, compared to the previously reported 1.7% rise. Adding to worries about the health of the global economy, Japan reported that industrial production slipped 0.1% in May, while household spending fell 0.7%. Copper's weakness then accelerated after an "absolutely horrible" report on U.S. consumer confidence, said an analyst. Copper for three-month delivery on the London Metal Exchange was trading at USD6,425/t on Tuesday. Earlier it had fallen to USD6,340 /t, its lowest since June 18. The metal used as a gauge of

economic activity is on course for its first quarterly loss since the last three months of 2008 when it fell below USD3, 000/t. The metal has lost nearly 20% since early April. Still, there are some supportive factors that are keeping copper from declining further. Inventories stored in London Metal Exchange warehouses keep declining, while canceled warrants, which are earmarked for delivery, continue to rise. Source: The Wall Street Journal Asia, Reuters.com

LONDON STOCK EXCHANGE WELCOMES MONGOLIAN COMPANIES A Mongolia Day was observed at the London Stock Exchange on June 28 to begin the process of Mongolian mineral resources companies being listed there. Mr. O.Chuluunbat, MP, Mr. R.Sodkhuu, director of the Mongolian Stock Exchange, Mr. D.Sugar, head of the State Property Committee, Mr. D.Enkhjargal, the Central Bank representative in London, Mr. B.Ulziibayar, director of Norton Sec, and a media team from Ulaanbaatar were among those present. Senior LSE officials welcomed the Mongolian team and expressed their readiness to help Mongolian companies. Presentations containing suggestions on trading in international markets were given by Credit Suisse and Rio Tinto. Both referred to Mongolia‘s huge potential and stressed that investors would be closely watching the policy of the Mongolian Government. In their turn, Mr. Chuluunbat, Mr. D.Erdenebileg, deputy director of Oil Department, and Mr. B.Ganzorig, director of Foreign Investment Department, gave detailed information on the mining sector, the legal environment and government policies. Mr. Sugar talked about the 15 strategic deposits, and was very attentively heard. Source: Ardiin Erkh

MANUFACTURING GROWTH SLOWS IN ASIA Chinese factories slowed production in June for the first time in fifteen months, while manufacturers in other major Asian countries eased the pace of growth in output, according to new data released on July 1. The combination of lower output in China and slower expansion in Japan, South Korea, India and Taiwan confirms that the region is seeing an easing from the growth surge that followed the global financial crisis. However, factory activity – which includes measures such as new hires in addition to output – continued to expand in the four countries, suggesting that manufacturers may be experiencing a return to more normal rates of growth rather than heading for contraction. The most striking change of pace came in China, where both the official and unofficial purchasing managers‘ indices (PMI) showed that the pace of expansion in manufacturing had slowed markedly. The official Chinese PMI fell to 52.1 in June from 53.9 in May, while the unofficial but closely watched HSBC index fell to 50.4 from 52.7. An index figure above 50 indicates an expansion of manufacturing activity while a figure below 50 indicates a contraction. The official Chinese reading was the lowest since February, but economists generally played down the deceleration reading. However, China‘s National Bureau of Statistics described the official numbers as ―grim‖, saying they reflected the impact of tighter government economic policies and a weakening of the global recovery. Read more… The HSBC South Korea PMI fell to 53.3 for June from 54.6 in May, indicating the weakest pace of expansion since December 2009, but extending a series of positive monthly reports to 16 successive months. After surging over the first five months of the year, the growth of Taiwan‘s economy is starting to cool. In Japan, the Nomura/Japan Materials Management Association PMI fell to 53.9 from a four-year peak of 54.7 in June. The numbers suggested that firm growth was continuing, and marked the twelfth successive month of expansion. Source: The Financial Times

THE RENMINBI RUNAROUND China‘s new currency policy doesn‘t address the real issue, which is that China has been promoting its exports at the rest of the world‘s expense. In fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith — an attempt to exploit U.S. restraint. To keep the rhetorical temperature down, the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior. Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints. In short, they‘re playing games. To understand what‘s going on, we need to get back to the basics of the situation. China‘s

exchange-rate policy is neither complicated nor unprecedented, except for its sheer scale. It‘s a classic example of a government keeping the foreign-currency value of its money artificially low by selling its own currency and buying foreign currency. This policy is especially effective in China‘s case because there are legal restrictions on the movement of funds both into and out of the country, allowing government intervention to dominate the currency market. And the proof that China is, in fact, keeping the value of its currency, the renminbi, artificially low is precisely the fact that the central bank is accumulating so many dollars, euros and other foreign assets — more than USD2 trillion worth so far. There have been all sorts of calculations purporting to show that the renminbi isn‘t really undervalued, or at least not by much. But if the renminbi isn‘t deeply undervalued, why has China had to buy around USD1 billion a day of foreign currency to keep it from rising? The effect of this currency undervaluation is twofold: it makes Chinese goods artificially cheap to foreigners, while making foreign goods artificially expensive to the Chinese. That is, it‘s as if China were simultaneously subsidizing its exports and placing a protective tariff on its imports. So where does the recent policy announcement fit into all this? Well, China has allowed the renminbi to rise — but barely. And all indications are that watching the future movement of the renminbi will be like watching paint dry: Chinese officials are still making statements denying that a rise in their currency will do anything to reduce trade imbalances, and prices in the forward market, in which traders agree to exchange currencies at various points in the future, suggest a rise of only about 2 percent in the renminbi by the end of this year. This is basically a joke. So what comes next? China‘s government is clearly trying to string the rest of us along, putting off action until something — it‘s hard to say what — comes up. That‘s not acceptable. China needs to stop giving us the runaround and deliver real change. And if it refuses, it‘s time to talk about trade sanctions. Read more… This policy is very damaging at a time when much of the world economy remains deeply depressed. In normal times, you could argue that Chinese purchases of U.S. bonds, while distorting trade, were at least supplying us with cheap credit — and you could argue that it wasn‘t China‘s fault that we used that credit to inflate a vast, destructive housing bubble. But right now we‘re awash in cheap credit; what‘s lacking is sufficient demand for goods and services to generate the jobs we need. And China, by running an artificial trade surplus, is aggravating that problem. This does not, by the way, mean that China gains from its currency policy. The undervalued renminbi is good for politically influential export companies. But these companies hoard cash rather than passing on the benefits to their workers, hence the recent wave of strikes. Meanwhile, the weak renminbi creates inflationary pressures and diverts a huge fraction of China‘s national income into the purchase of foreign assets with a very low rate of return. What the Chinese have done, they claim, to increase the ―flexibility‖ of their exchange rate: it‘s moving around more from day to day than it did in the past, sometimes up, sometimes down. Of course, Chinese policy makers know perfectly well that although U.S. officials have indeed called for more currency flexibility, that was just a diplomatic euphemism for what America, and the world, want (and have the right to demand): a much stronger renminbi. Having the currency bob up or down slightly makes no difference to the fundamentals. Source: The New York Times

BALTICS SHOW HOW FISCAL MEDICINE TASTES As debate rages within the Group of 20 nations over how quickly countries should consolidate their bloated budgets, and as Mongolia fails to heed repeated IMF warnings that standby agreement would be discontinued if it jettisons the austerity measures imposed at IMF behest, the Baltic region has emerged as a laboratory for the harsh fiscal medicine being prescribed by deficit-laden governments across the world. Estonia, Latvia and Lithuania are already deep into the age of austerity. Estonia led the way with cuts equivalent to 9.3 percent of gross domestic product in 2010, followed by Lithuania with 7.3 percent and Latvia 6 percent. By comparison, the UK is planning to take five years to make savings worth 8 percent of GDP. To fiscal hawks, the Baltic trio is a model – a role the region‘s policymakers are happy to embrace. ―My advice would be very simple: start fiscal consolidation as soon as possible,‖ Mr. Andrius Kubilius, Prime Minister of Lithuania, has said. ―Don‘t wait until the situation becomes more difficult.‖ Yet, for those who worry that excessive austerity risks undermining recovery, the Baltic experience is a cautionary tale. Much like most other countries, the Baltic states were badly hit by the bursting of a credit bubble in 2008 that sent their economies into freefall and their budget deficits soaring.

While others cushioned the impact with stimulus spending, the Baltic trio plunged straight into austerity. As a result, they suffered the deepest recessions in the European Union last year, with Latvia‘s economy shrinking by 18 percent. While Estonia appears to have won its budget battle – its deficit is projected to be among the lowest in the EU this year at 2.4 percent of GDP – Latvia and Lithuania face more pain ahead. Both are forecast to have budget gaps of 8 percent or more this year. Mr. Kubilius insists the Baltic region will eventually benefit from its early action. ―Others are just starting out with these austerity packages. For us, it is already normal business. We have regained competitiveness and we are looking forward.‖ Read more… The region has since stabilized but, for many ordinary people it still feels like a depression. Wages have plummeted while unemployment has rocketed, with more than a fifth of the Latvian labor force out of work. The Baltic governments have a strong motivation for making cuts. All three are preparing to enter the Eurozone, whose rules require new members to have deficits no greater than 3 percent of GDP. Estonia has achieved the goal and is set to join next January. Latvia and Lithuania plan to enter in 2014.

Source: The Financial Times

EUROPEAN BUSINESS WARY OF CHINA REGULATION Many European companies expect the regulatory environment in China to get worse over the next two years even though they are optimistic about growth prospects, according to a new survey. The European Chamber of Commerce has said that businesses from Europe are looking to increase investments in China, but could yet decide to scale back their presence significantly if the operating environment became more difficult. ―The Chinese authorities should not take the presence and commitment of European companies for granted,‖ said Mr. Jacques de Boisseson, president of the European Chamber in China. ―This massive commitment to the Chinese market is not unconditional. If perceived risks materialize to a great extent, the presence and commitment of our members may disappear.‖ Mr. de Boisseson was speaking at the launch of the chamber‘s annual survey of European businesses in China, which mixes buoyant views about the prospects for the market with growing pessimism about the political climate facing foreign companies. The survey is the latest warning from the foreign business community in China that the operating conditions and political limits they face have become more difficult since the global crisis. Such fears have been echoed in recent statements by the American Chamber of Commerce in Beijing. The Chinese government has taken some steps to address these concerns, including changes in public procurement rules. Indeed, Premier Wen Jiabao met a delegation of European companies in April and said they would not be discriminated against. ―We do not want to have to vote with our feet to be heard by the Chinese government,‖ said Mr. de Boisseson. ―But the perception today is one of concern, and we look forward to the premier‘s words being translated into deeds.‖ According to the survey, 64 per cent of companies said China was one of their top three destinations for investment. Yet 39 per cent of European companies said they thought the regulatory environment would worsen over the next two years, with only 10 per cent expecting it to improve. While 78 per cent of companies said they were optimistic about growth, only 34 per cent said the same about the prospects for profitability this year.

Source: The Financial Times

CHINA‟S FACTORIES SPREAD THE WEALTH Karl Marx would not have been surprised by China‘s astonishing two decades of growth. His analysis of capitalism, describing how an ―industrial reserve army‖ holds down wages and boosts profits and capital accumulation, would have noted that nowhere is the pool of unemployed but employable workers greater than in this nominally communist yet voraciously capitalist state. The protests and wage demands at Foxconn‘s and Honda‘s China plants, however, show how rapidly this analysis is becoming outdated. For a while, China‘s reserves of cheap workers from the rural hinterlands seemed inexhaustible. But sooner than most expected, two limits have come into view. One from workers‘ heightened expectations in the manufacturing cities of China‘s coastal provinces. The other from the mounting stress rural-to-urban migration puts on China‘s physical and social environment – and on migrants themselves, who enjoy little protection under their country‘s anachronistically place-bound legal system. So the flow of migrants from inland China can no longer be counted on infinitely to expand

manufacturing capacity on the coast. Business has taken the consequences. Foxconn is preparing to move production of some Apple gadgets (it makes iPods, iPads and iPhones) to a future factory in inland Henan, China‘s most populous province. The industrialization of China‘s coast was history‘s single greatest poverty-reducing phenomenon. We may be set for a second act. Read more… The company may have little choice. The wage doubling it has conceded to some of its workers will have little impact on its sale prices – labor accounts for only 3 per cent of total costs – but can do a lot of harm to the profit margin. With wages more than a third lower in some provinces compared with Shenzhen, it is not surprising that more manufacturers seek to build factories off the beaten track. The more of them that do so, the easier it will be to meet customers‘ need to ramp up production in the face of increased demand. That need made some of the companies that put their logo on the products resist relocations in the past. As this changes, a new chapter is being written in the awe-inspiring story of economic development in Asia. Starting with Japan, country after country grew rich by following the same playbook: step on to the lowest, dreariest and most labor-intensive rung of industrialization and gradually move up the value chain as you build up skills and capital, letting poorer countries take on the tasks you shed. This is how the ―Asian tigers‖ copied Japan, and how successive generations – including China itself – followed. The current relocations are no less momentous for happening within a single country.

Source: The Financial Times

CHINA‟S PUSH TO DEVELOP ITS WEST HASN‟T CLOSED INCOME GAP WITH EAST Ten years ago, China's leadership launched its "Go West" campaign, an ambitious plan to develop and modernize the country's poor western hinterlands. The aim was simple: to close the region's yawning income gap with the more prosperous east and assuage restive minority populations, particularly in Xinjiang and Tibet. China's economic boom had largely left the west behind. Spreading the wealth was as important politically as economically -- it was a way of increasing domestic stability and cementing the government's control. Chinese officials rattle off all the statistical measures of the program's success: Highways were constructed. Houses were built. Nomads were resettled in "model" villages. Millions of people have electricity and clean drinking water. A rail line links Beijing in the east to Lhasa on the Tibetan plateau. And annual economic growth in the west is about 12 percent, higher than the national average. But beneath the barrage of official statistics lies another reality. China's west -- defined as the dozen provinces and "autonomous regions" stretching from Inner Mongolia to Xinjiang and Tibet -- remains the poorest, least-developed and least-educated part of the country. The massive investment, critics say, has mainly benefited state-owned companies that build the roads and railways and mine the minerals. There is little indigenous industry and scant foreign investment. Hundreds of thousands of people have been displaced from their homes, and nomads have been resettled into villages where they have no livelihood. Locals complain that China is primarily interested in extracting minerals to keep the factories back east running. Most agree that China's decade-long building spree has led to tangible improvements. "The economic development of the western region has made huge strides," Premier Wen Jiabao said late last year, announcing China's plans to continue the Go West campaign "unswervingly" for another decade. But the question is: At what cost to indigenous populations and the environment? " Read more… Mr. Nicholas Bequelin, a China expert with the Asian division of Human Rights Watch, said: "It's not a people-centered modernization program. It's a top-down program that has mostly benefited state enterprises and the party-controlled institutions." The west, as China defines it, includes coal mining areas such as Shanxi; tiny, dirt-poor Ningxia; and relatively better-off provinces such as Sichuan. The west borders 14 countries, makes up 70 percent of China's landmass and is home to 27 percent of the population. In China's export-driven economy, factories need to be close to the ports, and that means on the east coast or in the southeast. Inland areas are bound to fall behind. The bulk of the economic activity in the western provinces is in mining. But local areas get little economic benefit. The biggest impacts, many critics say, are that people are relocated and that fragile ecosystems are threatened.

Source: The Washington Post

UNCERTAIN FALLOUT: NUCLEAR POWER IN ASIA That nuclear power is safe falls high on the list of arguments put forth by its proponents. But will it prove safe for stock investors? A certain logic has gripped governments across Asia: nuclear power balances the need to meet rising energy demand with carbon-emissions targets. Nearly two-thirds of the 55 nuclear power plants being built globally at the end of 2009 could be found in Asia, according to the International Energy Agency. China alone accounts for 20 of these, and India a further five. The list keeps growing. Last week, Vietnam unveiled plans to build 13 nuclear reactors by 2030. A high-stakes contest for this business is unfolding. A USD20.4-billion deal, signed in December by a South Korean consortium for four nuclear power plants in the United Arab Emirates, could create 110,000 jobs and USD40 billion in economic value for Korea over the long term. That deal marked Korea's entry into the world of nuclear plant technology exporters, but it isn't just governments that have seen the promise in this. In Japan, both Toshiba and Hitachi have made nuclear power a core plank of their business strategies. Read more… The opportunity for stock investors lies with companies that have carved out a niche for themselves at different stages of the process. Japan Steel Works, for example, holds 80% of the market for so-called pressure vessel components, which are critical to a nuclear reactor. In China, meanwhile, the push for nuclear power will favor domestic players. Three state-owned companies that provide nuclear power plant equipment and have a listing—Shanghai Electric, Dongfang Electric and Harbin Power—should benefit. But there are critical risks to consider. Politics could make financing these long-term projects a challenge, the IEA cautions. For example, although it is planning an ambitious ten-fold increase in nuclear power capacity by 2020, India won't allow private companies to directly invest in its reactors. Setbacks could also stem from bottlenecks in the supply of key components. . Even China's desire to foster a domestic competitive nuclear power equipment industry brings a reason to worry. Unlike Korea and Japan, China lacks an experienced nuclear power labor force. Project execution could suffer as Chinese firms learn the ropes, not to mention the risk of accidents due to human error. Source: The Wall Street Journal Asia

POLITICS PROSECUTOR GENERAL CALLS FOR DISMISSAL OF ANTI-CORRUPTION AGENCY HEAD The State Prosecutor General has sent a letter to Parliament requesting it to dismiss Mr. Ch.Sangaragchaa, head of the Anti-Corruption Agency (ACA). He has charged Mr. Sangaragchaa with― overstepping his authority on many things, including financial and investigative matters; misusing funds allocated to the agency from the budget; and making false statements‖ to the Prosecutor General's office. However, the prosecutor's office refused to disclose detailed charges against the official, saying the matter was a "state secret". The ACA head holds the move is ―a conspiracy‖ against him and has called it ―a politically motivated vendetta‖, after the agency had refused to drop corruption cases related to some of the country's top officials and a lawmaker. According to him the law allows Agency staff to receive a one-time allowance to buy an apartment. ―There has been no violation of the law in giving 16 of our 90 workers this allowance,‖ he told journalists.

Source: Ardiin Erkh

COALITION GOVERNMENT IS MAKING PARLIAMENT IRRELEVANT, SAYS SPEAKER Speaker D.Demberel has said it is difficult for Parliament to take independent decisions uninfluenced by extraneous factors on its own, because many MPs are in the Government and the two principal parties are partners in Government. In such a situation, the priorities of the Government are too powerful for Parliament to dispute or ignore, he said. Mr. Demberel has regretted that Parliament has failed to identify issues and insist on discussing them. The concentration of power in the hands of the Government does not bode well for the country. He feels that a strong opposition is essential for Parliament to work with a purpose, to debate issues fairly and to monitor the performance of the Government. If any of the principal parties needed input from beyond its ranks, it could seek help from a smaller party, but the two big parties working in tandem renders Parliament irrelevant.

Source: Udriin Sonin

TALK OF DEAL BETWEEN PARTIES TO REMOVE TWO MINISTERS The latest tidbit churned out by the political rumor mill says certain MPs in the two parties of the coalition government are working on a deal to successfully demand the resignation of two high-profile ministers, one from each party. Minerals Minister D.Zorigt is not a political person and party operators are uneasy with his growing popularity among the people. The talk is that enough MPRP MPs would support a DP demand for the removal of Mr. Zorigt on the ground that he has permitted New Asia Mining Group, a Chinese company, to build and 100% own for 30 years a power plant at the coal deposit in Tsetserleg district of Khuvsgul province. In return the DP would not back Finance Minister Bayartsogt when the MPRP accuses him of violation of budget law. This will allow the MPRP to lay claim to the important Ministry, which they were unhappy to lose when the coalition was formed. Two DP MPs, Mr. Ts.Sedvanchig and Mr. L.Gundalai have already submitted a demand for Mr. Zorigt‘s dismissal to Prime Minister S.Batbold. They claim the Minister‘s decision runs counter to State budget laws of 2009 and 2010. The Government had initially decided to build the power plant with its own funds and to provide Zavkhan and Govi-Altai provinces with the electricity generated. The 2009 budget allocated MNT 3.8 billion for a feasibility study and this year‘s budget has MNT10 billion to start the construction work on the plant and on setting up power transmission lines. Now Mr. Zorigt has asked the Chinese group to build the plant, and has decided to use the budgeted funds to install transmission facilities. He has also given more money than planned for the work on the first stage, and has changed the area to be fed the power. The Auditor General has told a Standing Committee that the Minister‘s decisions are ―improper‖ and three MPs elected from Khuvsgul province have threatened a popular movement.

Source: Udriin Soniin

DP GROUP WANTS POWER PLANT AGREEMENT CANCELED The DP group in Parliament was not happy with the explanation of Minister of Minerals and Energy D. Zorigt on why a Chinese company has been asked to build a thermal power station based on the coal mine in Khuvsgul province near Mogoi River and also with the terms of the agreement on its use. The group wants the agreement canceled, especially as MPs Ts.Sedvanchig and L.Gundalai, both of whom were elected from the province, are against it. The MPs want foreign ownership of the plant to be no more than 49 percent, and feel that full ownership should be transferred to Mongolia earlier than the proposed 30 years. They also called for a new estimate of the costs now fixed at USD110 million and also to make sure that enough Mongolians are employed at the plant, during and after construction, instead of foreign workers being imported in large numbers. Source: English.News.mn

MINISTER SAYS ORGANIZERS WERE “PATHETICALLY IRRESPONSIBLE” ON JULY 1, 2008 The Ulaanbaatar police department has acquired bulletproof vehicles, water cannon, protective shields and smoke screens and organized special training in crowd control and related issues for its personnel, following lessons learnt during the events of July 1, 2008. This was revealed by Minister for Internal Affairs Ts.Nyamdorj while he was answering media questions on the second anniversary of the tragic incidents where five people were killed in police firing, for which no one has yet been brought to book. Denying that his Ministry had tried to cover up the police action, Mr. Nyamdorj said the State Prosecutor General has directed that the issue of police firing, so far investigated by the police themselves, would now be transferred to the investigation department of the General Prosecuting Authority. He also wondered if those ―who harped on police violation of human rights were not actually protecting the rights of those who committed acts of violence‖. Asserting that one ―cannot judge some incidents in isolation from all that happened that night‖, he asked, ―You must have seen the photograph of protesters attacking policemen with pointed iron rods taken from fences. Why does nobody talk about that? Was everybody who joined the protest peaceful or were only some stones thrown? Criminals certainly have their rights, but how can we forget that law keepers were also badly injured?‖ He was blunt that ―politicians who organized the protest must bear the primarily responsibility‖ for the violence that ensued. They took ―no measures to keep the protest peaceful and when things went out of control, loudly shifted the blame‖. He urged such politicians to reconsider their strategy and policy. ―You cannot be so pathetically irresponsible as to light a fuse and then run away,‖ he said. Source: English.News.mn

PARLIAMENT APPROVES RAIL LINK WITH RUSSIA The Mongolian Parliament last week approved plans for a rail line link with Russia to help tap large coal deposits in the south, the latest move in the long-delayed project that will help make the nation less dependent on exporting to China. Lawmakers voted nearly unanimously in favor of building the line and making it broad gauge, referring to the distance between the rails, so it could link up with Russia's rail network. There were concerns that if the rail were standard gauge like China's rail system, too much of the commodity would end up flowing to coal-hungry China at bargain prices. China currently takes about two-thirds of Mongolia's exports. The deposits are located only about 200 km from the Chinese border, but Transportation Minister Kh.Battulga said Mongolia would rather sell processed coal to Japan and South Korea. "The policy will greatly boost the economic development of Mongolia. Instead of shipping raw materials directly to one market, jobs and value-added production will be created in Mongolia," he said. The 1,100-km railway will connect Tavan Tolgoi to the Russian border, the minister said. The country will invite international bidding for the railway's construction, which is expected to be completed in two years. Source: CanadianBusiness.com

RAILWAY POLICY SEEN AS FAVORING RUSSIA OVER CHINA MPs took two sessions of discussion before approving the railway policy, developed mainly by the Ministry for Road, Transportation and Urban Development. The plan is to build four railroads. The first will cover the 400 km connecting Tavantolgoi-Tsagaan Suvarga-Zuunbayan. The second will be 350 km long, and link Sainshand and Baruun-Urt. The third, 290 km long, will connect Baruun-Urt with Khuut, and the last will be laid along the 150 km connecting Khuut with Choibalsan. The whole plan seems to be more advantageous to Russia. The track to Choibalsan will be connected to the Russian railway system through Vanino and Habarovsk. Commodities will be exported from there to South Korean and Japanese markets. This way of entering the world market is significantly longer than the route through China, but the MPs agreed with the Government that without a railway, the heavy industry complex proposed to be built in Sainshand will be isolated and ineffective. This line of thought ignores the view of many who urged the Government to arrange for strategic minerals to enter marker circulation as soon as possible. A railway in the southern regions, with access to the Chinese railway network will now not be built until the west-to-east railroad is constructed. After the vote in Parliament, the Government presented every MP a memento saying, ―Thank you for your contribution to Mongolian development.‖

Source: Ardiin Erkh

PRESIDENT WANTS PROBE INTO JUDGES‟ QUALIFICATIONS The President‘s Office has sent a letter to Mr. S.Batdelger, Judge General of the Supreme Court and also Director of the General Court Council. The letter seeks an investigation into the details of the legal training and qualification of 13 judges appointed between 2001 and 2009. The President has asked Mr. Batdelger to ensure that the council follows a minimum standard of requirements before a judge takes office. The move from the President comes after a review by a committee of several complaints about the way the judges functioned and the apparent arbitrariness in their judicial work. The committee investigated case documents and also the educational and professional diplomas of the judges. It was found that some of the judges were enrolled in advanced centers of education without meeting the admission requirements and also graduated in two and half years, while the minimum course of study for a judge is 4 years. Their General Court Council forwarded their names for a judgeship and these were approved by the President at the time. The President has asked the court council to report back to him within 30 days.

Source: English.News.mn

MONGOLIA, SAUDI ARABIA TO BOOST MINING COOPERATION Ali bin Ibrahim Al-Naimi, the Saudi Arabian Minister of Petroleum and Mineral Resources, has said his country is ready to help train Mongolian oil specialists and create opportunities for Saudi businessmen to invest in Mongolia. The Minister, leading a delegation to Mongolia, met with Prime Minister S.Batbold and later said that his visit aims to explore opportunities for mutual cooperation and investment in the mining sector and that the Saudi Chamber of Commerce and Industry looks forward to strengthening bilateral cooperation with Mongolia.

Mr. Batbold told the visitors the two countries needed to step up their cooperation in the mining and minerals sectors as there is great potential for successful and mutually beneficial cooperation. He stressed the need to raise current bilateral cooperation to a new level, especially in the mining and minerals sectors, which are the two countries' most dominant economic sectors and added that Mongolia could learn from Saudi Arabia's experience in oil exploitation, capitalization and management.

Source: Xinhua

CIVIL MOVEMENT LEADER JOINS POLITICAL PARTY Ms. G.Uyanga, among the front-line leaders of the recent people‘s movement to force Parliament and the Government to fulfill several promises made to the people, has announced that she has joined the National New Party. Defending her decision to become a politician, after being so critical of them during her time as a civil movement activist, Ms. Uyanga said she had thought deeply about the matter during her recuperation at hospital following a 14-day hunger strike to press for the demands made during the agitation. This convinced her that non-political movements, no matter how justified they were, would never be able to command long-term and sustained political support. Only a political party had the means and the reach to harness popular backing in a fight with the authorities in power, and her present decision would only help her to achieve more for the ordinary people whose interests continued to mean the most for her. She urged her supporters not to believe stories being planted about her motives and insisted that she was indeed taking a step forward in her career of fighting for causes not compromised with her principles.

Source: Onoodor

MPs WANT STRICTER WATCH ON FOREIGN CITIZENS The Standing Committee on Legislation has decided to submit to Parliament for discussion a draft law on the status of foreign citizens. The draft calls for improving the system of keeping tabs on foreign citizens, especially on what they do while in Mongolia. MPs felt this has become important because of the anticipated increase in the number of foreign citizens following the expansion of mining. In 2009, 38,000 visas were granted and 2,575 foreigners were deported.

Source: Udriin Soniin

ANNOUNCEMENTS

”BSPOT" on B-TV

BTV (Business TV) now telecasts a 10-minute English-language news program called BSPOT every evening from Monday to Friday at 21:30, taking most of the stories from the BCM NewsWire.

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“MM TODAY” on MNB-TV BCM is pleased to announce that Mongolian National Broadcasting continues its cooperation with BCM on ―MM Today‖. This English news program is aired every Friday for 10 minutes and is scheduled for 21:15 tonight. Tune in to watch this program that reports stories from today‘s BCM NewsWire.

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NEW POSTINGS ON BCM WEBSITE‟S „MONGOLIAN BUSINESS NEWS‟

The draft Tavan Tolgoi Investment Agreement which was submitted by the Government to Parliament is posted to BCM‘s websites (www.bcmongolia.org) and (www.bcm.mn), ‗Mongolian Business News‘ for your review.

As some of you might have noticed, we are now posting some news stories and analyses relevant to Mongolia on the BCM website's ‗Mongolian Business News‘ as they come, instead of waiting until Friday to put them all together in the weekly NewsWire. The NewsWire will, however, continue to be issued on Friday, and will incorporate items that are already on the home page, so that it presents a consolidated account of the week‘s events.

SPONSORS

ECONOMIC INDICATORS

INFLATION

Year 2006 6.0% [source: National Statistical Office of Mongolia (NSOM)]

Year 2007 *15.1% [source: NSOM]

Year 2008 *22.1% [source: NSOM]

Year 2009 *4.2% [source: NSOM]

May 31, 2010 11.6% [source:NSOM]

*Year-over-year (y-o-y)

CENTRAL BANK POLICY LOAN RATE

December 31, 2008 9.75% [source: IMF]

March 11, 2009 14.00% [source: IMF]

May 12, 2009 12.75% [source: IMF]

June 12, 2009 11.50% [source: IMF]

September 30, 2009 10.00% [source: IMF]

May 12, 2010 11.00% [source: IMF]

CURRENCY RATES – July 1, 2010

Currency name Currency Rate

US dollars US 1,367.27

Euro EUR 1,671.62

Japanese yen JPY 15.43

British pound GBP 2,057.74

Hong Kong dollar HKD 175.64

Chinese yuan CNY 201.40

Russian ruble RUB 43.74

South Korean won KRW 1.12

Disclaimer: Except for reporting on BCM‘s activities, all information in the BCM NewsWire is selected from various news sources. Opinions are those of the respective news sources.