Motorola («www.businessweek.com»; $17.95)

Downgrades to 3 STARS (hold) from 4 STARS (buy)

Analyst: Todd Rosenbluth

We have less confidence in Motorola’s ability to turn itself around in 2008, following its second-quarter pre-announcement and executive changes. With handset shipments now having likely declined to 35.5 million, 8 million below our estimate, revenues and EPS should be weaker than we had expected. In advance of full second-quarter results, we are reducing our 2007 operating EPS estimate by 5 cents to 30 cents and our 2008 estimate by 21 cents to 79 cents, but see benefits from operating margin expansion and share buybacks. While we see the seconmd quarter as the trough for Motorola, we also lower our 12-month target price by $2 to $20 on a relative analysis.

Sallie Mae («www.businessweek.com»; $53.27)

Maintains 3 STARS (hold)

Analyst: Stuart Plesser

The shares are up this morning after a sharp drop yesterday on legislation passed by Congress that called for further slashes of subsidies to student lenders. If this becomes law, it would further cut into SLM margins and may be grounds for investor group led by J.C. Flowers to back out of their agreement to buy SLM at $60. Although we do not believe that J.C. Flowers’ ability to terminate the deal is clear, we do think the legislation would result in a lower purchase price. As a result, we are reducing our 12-month target price $6 to $54, 10% below the current buyout price.

Alcan («www.businessweek.com»; $89.60)

Reiterates 3 STARS (hold)

Analyst: Leo Larkin

Shares of Alcan are up sharply in pre-market trading on news that the company agreed to be acquired by Rio Tinto plc («www.businessweek.com»), one of the world’s largest mining companies, in a transaction valued at $38.1 billion, or some $101 a share. The proposed takeover by RTP exceeds Alcoa’s («www.businessweek.com») hostile bid of $28.8 billion, or $76 a share. We are raising our 12-month target price to $101 from $85 to reflect our expectation that the merger will occur. In our view, it is unlikely that Alcoa will be able to top Rio Tinto’s offer given the latter’s stronger finances.

CNOOC («www.businessweek.com»; $119.44)

Downgrades American Depositary Shares to 3 STARS (hold) from 5 STARS (strong buy)

Analysts: L. Tan, CFA, L. Cang

The downgrade is based on valuation. The recent run-up in the ADS price accompanied a strong rise in crude prices, which we think will only be sustained by supply shortfalls and geopolitical disruptions. While we believe CNOOC will benefit most among its China peers from rising crude prices, our downgrade reflects valuation following the sharp rise in the ADSs. We are cutting our 2007 earnings per ADS estimate to $9.33 from $9.71, with projected higher costs and taxes outweighing higher crude prices. However, we are raising our 12-month target price to $128 from $115 on potential A-share listing and higher crude prices.

It’s political pageantry time in China’s capital once again. The annual meeting of China’s National People’s Congress opened on Mar. 5 in Beijing’s cavernous Great Hall of the People on the west side of Tiananmen Square. Premier Wen Jiabao presented a report on the work of his cabinet in 2006, and its policy plans for the rest of this year, to the almost 3000 assembled delegates.

With a target of 8% gross domestic product (GDP) growth, Premier Wen signaled that the Chinese government will try to control the red-hot economic expansion that clocked-in at 10.7% last year. But even as Beijing tries to slow growth in the cities, China’s leader made it clear that the goal is to boost development in the countryside and help create a more balanced consumption-driven economy. “Urban and rural development and development among different regions are not balanced,” warned Wen. “We need to greatly improve the quality and efficiency of economic growth.”

Wen also expressed concern over the jobless rate, outlining plans to keep urban unemployment below 4.6% (it was 4.1% in 2006) and the need to create 9 million new jobs in Chinese cities. “We must pay closer attention to promoting social development and improving people’s well-being. We must put people first.” Taking a Stand?

All of this, as might be expected, went down well with the delegates. Wen’s speech, over two hours long, was repeatedly interrupted with ritualistic applause from Parliament members, who travel from across the country to pass bills and approve the budget and new party promotions, during the approximately two week-long session.

Although real policy-making happens earlier, during meetings of China’s top leaders, the Congress is important as a means to put the official imprimatur on—as well as publicize—government goals and policies. That’s largely a rubber-stamping function, but in recent years delegates have increasingly registered their independence by voting (albeit in small numbers) against unpopular policies and promotions.

Premier Wen laid out a key goal for the government this year: narrowing the income gap and boosting buying power in the countryside. With rural incomes averaging $448 a year, or less than one-third urban incomes, protests by distressed farmers and angry workers are surging. That’s sparking fears that social unrest could derail China’s economic growth. In 2005 the number of protests reached 87,000, compared with 11,000 a decade ago, “Income disparity has come to a very alarming point, and it keeps increasing,” says Li Ping, chief representative of the Beijing office of the Rural Development Institute, a Seattle nonprofit that focuses on rural land issues. Creating Consumers

Beijing knows that it can’t reverse the income gap without fixing stagnant growth in rural China, so it is redirecting government funds to rural areas, ending many rural taxes, and introducing new agricultural technology. “This year’s work related to agriculture, rural areas, and farmers will focus on accelerating the development of modern agriculture and effectively promoting the building of a new socialist countryside,” Wen said. “We must focus on developing the rural economy and increasing rural incomes.”

Beijing also hopes that more buying power in the countryside will boost consumption and help wean China from its heavy reliance on exports. That should lessen growing trade frictions abroad too. With last year’s trade deficit with the U.S. setting a record of $232.5 billion, there is a louder call in Washington for China to open its markets more and allow the yuan to further appreciate. “We’re dissatisfied with the speed with which China is appreciating its currency,” said U.S. Treasury Secretary Henry Paulson, Jr. on Mar. 1, just a week before his planned visit to Beijing.

It might sound like something from another century, but Beijing’s new socialist countryside policy is aimed at building the infrastructure to deal with modern-day headaches. “It’s trying to emphasize domestic demand, trying to reduce foreign trade dependency, trying to reduce the trouble China makes overseas,” says Wen Tiejun, dean of the School of Agricultural Economics and Rural Development at People’s University in Beijing. Cost of Labor Protections

Also on the agenda, the likely passage of a ground-breaking property law that will put private ownership on equal footing with public ownership, and a second law equalizing corporate income taxes that has drawn foreign investors’ attention. The tax law is expected to bring foreign and domestic companies’ income tax to a common 25%, reversing years of preferential tax policies for foreign companies.

Laws governing labor contracts, employment, and labor disputes also are being discussed, both inside the Congress and by nervous foreign investors. With the laws’ emphasis on strengthening Northern European-style labor protections, including making it more difficult to hire and fire, they are likely to raise costs for employers in China, says Jiang Junlu, a partner at Beijing law firm King & Wood.

“German labor law is very influential in China,” says Jiang, who also serves as chair of the labor law committee of the All China Lawyers Assn. The laws “will put new restrictions on employers,” he says (see BusinessWeek.com, 3/12/07, ).

That’s not something Beijing seems much worried about. The new leadership these days, wants to emphasize its populist credentials, rather than woo investors—foreign or domestic. China must “protect the lawful rights and interests of workers,” and must “ensure that all of the people share in the fruits of reform and development,” said Wen. As the annual political ceremony that is the National People’s Congress gets under way, Beijing is busy signaling that, at least in rhetoric, the people come first.

After being arrested in March, Zheng Xiaoyu, 62, the former head of the State Food amp; Drug Administration, confessed that he had accepted over $850,000 in bribes from eight drug companies. Below, in a written confession, he admits to the crimes and asks for forgiveness from the Communist Party. His letter is also a plea for lenient punishment. Two months later, however, he was sentenced to death for corruption and dereliction of duty. His lawyer pleaded to have his sentence commuted to life in prison, which is common for government officials who receive the death sentence in China. But on June 22, the court rejected his plea. And on July 10, he was executed. Below is a translation of parts of his confession. The text was translated by Rujun Shen.

“How I Look on My Mistakes,” By Zheng Xiaoyu

March 15 and 16, 2007

The Communist Party has criticized and educated me and told me about the policies. I started to reflect on myself seriously and painstakingly. Thinking back on what has happened these year, I start to see the problems clearly. For example, why are the friends who gave me money all bosses of pharmaceutical companies? Obviously, because I was in charge of drug administration. Another example, Ive known these old friends for a long time, why did they give me money only after 1998? Obviously, because the State Drug Administration was established in 1998 and then I was given bigger power. Although these friends gave me money partly because of our friendship, they actually were thinking about my power. I am confessing here that I loosened self-discipline, ignored the bottom line. It is bribery if a civil servant receives money from a business.

Some money wasnt given to me directly, but through [my wife Liu] Naixue and [my son] Hairong. Naxiue was retired and stayed at home. Hairong was just a student. So their target was still me. Indirect ways were easier for me to accept. So I agreed, consented. This was bribery.

Once I accepted the money, the justice of power certainly became problematic, the image of the civil servant was undermined, and the image of the Party and government was affected.

The Party and people nurtured me, trusted me and assigned me to such an important position. I didnt live up to the Partys expectation. I loosened ideological reform, loosened self-discipline, harmed the Party and the people, committed crimes, for which I feel regretful. Now I have to treat the issue seriously, conduct a thorough self-examination, confess my mistakes, and treat the punishment and education as an act of saving my soul.

Inspired by the policy that honest confession should be rewarded lenient punishment, I have overcome all sorts of wrong excuses and honestly confessed to the Party the fact that I accepted bribes from [pharmaceutical executives] Ge Mengya, Wang Maoxing, Du Lihua, Zhao Buchang, Xu Rongxiang and Fan Minhua; that I knew that Zheng Jun, Yu Wenyong, Wang Xianyu had given bribes [to my wife and son]. I am willing to promise to the Party again that I will help retrieve every penny. If what has been retrieved doesnt match the amount [I accepted in bribes], Ill sell my own assets and borrow money from family and friends to make it up. I will also cooperate with the [Supreme Peoples] Procuratorate Court to clarify the problem, and strive for lenient punishment. I hope the Party will give me the opportunity and a way out.