China’s ruling State Council last month released a much-anticipated plan meant to kick the country’s huge state-owned enterprise (SOE) sector into shape. No small amount of kicking is required. Not all but many of China’s 155,000 SOEs are inefficient and often loss-making. Where SOEs do make money, it’s usually because of markets and lending rules rigged by the government in their favor.
Finding a truly good SOE, one that can take on and outcompete private sector rivals in a fair fight is hard. Gong He Chun is one. Customers throng daily to buy its high-quality products, often forming long queues. The employees, unlike at so many SOEs in China, are helpful and enthusiastic and take evident pride in what they are doing. Though local private sector competitors number in their hundreds, Gong He Chun has them all beat. Read more
Emerging economies have little to be cheerful about these days, and while it wouldn’t do to put all the blame on China, what’s going on there makes for some grim economic weather.
China has embarked on an irreversible transition from rapid, investment-led growth to slower, more balanced growth; a transition that is utterly necessary in order for China to avoid a financial crisis of its own.
But the result is that China now just needs less of the stuff – commodities and intermediate manufacturing inputs – that it had previously been happy to buy from other developing countries. China’s sunshine has given way to cloud. Read more
This weekend Narendra Modi, India’s prime minister, came to Silicon Valley to promote his Digital India initiative. His trip signals that the Indian government sees technology as critical to delivering on its development goals. One example is a programme called Pradhan Mantri Jan-Dhan Yojana (PMJDY), which Modi launched to ensure that all Indian citizens have access to financial services.
In the last year, the government has opened 175m bank accounts under the scheme, with deposits totalling more than $3.4bn. This progress is already a triumph of technology. Read more
Connecting the dots between disparate trends can help unearth surprising opportunities in emerging markets. In our view, the impact of infrastructure investment on healthcare is a little-known link with big implications.
India provides a fascinating case study. Last year, the new government led by prime minister Narendra Modi set an ambitious target to increase national highway construction from two kilometres a day to 30 kilometres a day within two years at a cost of five trillion rupees. We believe the biggest impact can be found beyond the obvious. In our view, improvement in healthcare will enjoy a huge boost from the highway campaign because better roads make it much easier – and cheaper – for hundreds of millions of rural workers to access better doctors, clinics and hospitals. Read more
By Edward Tse, Gao Feng Advisory Company
China’s recent stock market turbulence and currency devaluation has attracted enormous attention from around the world—with a disproportionate amount focused on whether we are seeing the end ofChina’s growth story.
True, many people lost a lot of money (though doubtless some also made a lot) and the reputation of the country’s economic managers has been badly damaged. The aftermath resulting from the meltdown will likely continue to be felt for at least several months, particularly by those private sector companies which have had to shelve plans to raise funds via initial public offerings. Read more
While the word has focused on China’s disastrous stock market bailout and the devaluation of the currency, a far larger crisis is brewing in China’s hinterland.
China’s property bubble has sagged in the big cities like Beijing and Shanghai – but it is on the verge of popping completely in the country’s heartland. After spending a week in Sichuan Province, it is clear that land sales, prices and transactions are all declining in double digits.
Sichuan province is one of China’s largest, in the heart of the country. We spent some time at a residential project called Universal City Centre, about 20km from Chongqing. The 1.08m sqm property has seen prices fall one-third from 4,000 to 5,800 psm one-third to 3,000 to 4,000 psm. Read more
By Herald van der Linde, HSBC
On the face of it, it makes no sense that the international flower industry should be headquartered in the Netherlands. The feeble sunshine and predisposition for a large number of rainy days would not make the Netherlands the first choice for anyone starting a flower-growing business today – if not for the fact that the business, and its integral supply chains, are already there. This is a huge competitive advantage for a new entrant, who can benefit from such things as the sophisticated Dutch flower auctions, the flower-growers’ associations and advanced research centres.
Academic Michael Porter uses this very example to illustrate his cluster theory of trade development, whereby whole supply chains “cluster” together. Another well-known cluster is the auto manufacturing industry in Michigan in the US. Over 50 per cent of North American auto companies are based in Michigan, and 46 of the top 50 global auto suppliers have operations in the state. Further south in the US, around Dalton in Georgia, over 90 per cent of all functional carpets are produced. It is why Dalton is called the “carpet capital of the world”. Read more
By Hayden Briscoe, AllianceBernstein
The visit to the US later this month by China’s President Xi Jinping comes at a politically sensitive time, with volatility in China’s markets — widely attributed to the effect of policy decisions — rippling globally. In our view, however, China deserves more credit than blame for its recent actions.
As China attempts to make the transition to a more open economy, two things are virtually inevitable: market volatility and difficult policy decisions, many of which need to be taken in the heat of the moment.
A case in point is the government intervention that followed the initial correction in the A shares market in July. This was widely interpreted outside China as a panicky reaction. But China’s share market is largely retail driven, and the need to maintain social harmony is of paramount importance to a single-party state. In light of this, the government’s response makes sense. Read more
The global commodity super-bubble is coming to an end. It is exactly a year since we forecast that a Great Unwinding of stimulus policies was underway, due to a major slowdown in China. As we warned on beyondbrics:
Oil and commodity prices are falling sharply as supply/demand once again becomes the key driver for prices; the US dollar is strengthening and liquidity is tightening across the world; equity markets risk sharp falls, as investors realise they have overpaid for future growth and rush for the exits; China’s economy is slowing fast as the new leadership implements the World Bank’s ‘China 2030’ plan; interest rates are becoming volatile as some investors seek a ‘safe haven’, while others worry that stimulus policy debt may never be repaid.
Today, it is clear that risks are rising in all these areas. And fewer people now believe that the problems can be magically wished away by a further round of stimulus – even if this was economically and politically possible. Read more
Wherever we look in the world, there are dark clouds overhead. The global economy remains fragile. Violent extremism is putting lives and stability at risk. Old tensions and divisions between nuclear powers have been re-awakened.
These divisions have again brought into sharp focus the terrible dangers that nuclear weapons pose to our world’s survival. Despite recent welcome reductions in the number of warheads, those that remain could destroy humanity many times over. This threat has been made far worse by the active pursuit of weapons of mass destruction by violent extremists who would not hesitate to cause unimaginable death and destruction.
It is against this sombre background that there have been, in recent weeks, two powerful signs of hope. Read more
By Derek Scissors, American Enterprise Institute
Stock market volatility and a small currency devaluation have in the past few months caused the financial community to take note of Chinese economic weakness. A natural question is what effect this weakness will have on the rest of the world. The answer is very little, with most important reason being that China has not truly contributed to the global economy for at least four years.
The idea that Chinese weakness threatens the world economy melds a number of misconceptions. The first is that the weakness is a new phenomenon. It was actually the initial stock market climb and a rising renminbi that were somewhat surprising; the ensuring partial corrections were late in coming, if anything. Read more
By John Davies, Standard Chartered
China is the second-largest investor in US government bonds (or US Treasuries), trailing only the US Federal Reserve, but as the renminbi becomes more international, Chinese demand could drop, with significant implications for US yields.
The International Monetary Fund (IMF) is scheduled to decide later this year whether to include the RMB in its Special Drawing Rights (SDR) currency basket. In our view, China’s currency now meets the technical requirements for SDR inclusion, and we see a better than even chance that the IMF will add the renminbi.
Beijing appears to have taken up the challenge of the SDR review this year by accelerating the liberalisation of China’s capital account. However, this liberalisation cannot be achieved with a fixed RMB, so China, as this month’s move by its central bank has demonstrated, is likely to be heading towards a floating currency regime. Read more
Red is a lucky colour in China, which is why share price displays go red when prices are rising. A green display means prices are falling, the opposite to stock markets elsewhere. There is a similar discontinuity between the short-term impact of China’s recent 30 per cent stock market collapse and the concern of some western analysts that the government may see this as a reason for reversing President Xi’s New Normal programme of economic reform.
We do not expect this to happen. Rather, we see the aftermath of the collapse as a further playing out of the on-going factional struggle between the Princelings represented by President Xi and the Populists represented by Premier Li. If anything, it will strengthen Xi’s hand over the medium term, as the stimulus policy of the Populists is further discredited. Read more
By David Daokui Li, Tsinghua University
For most economies in the world, a 30 per cent drop in the stock index within a span of three weeks would certainly be considered a crisis. Certainly, the Chinese stock free fall (32 per cent at its peak) is a significant concern in China.
In fact, I was told the occupants of China’s Zongnanhai (the equivalent of the U.S. White House) endured the ensuing weekend with no rest, relentlessly laboring over rescue measures. In the final analysis, however, this was not a real “crisis” but a scary and revealing fire drill. Most likely, the stock market will be stabilized before long. Read more
Major structural change is under way in China’s passenger car market. New car sales grew just 1.2 per cent in May, as the country develops a used car market for the first time in its history. Buyers in the world’s largest auto market now have much more choice when it comes to buying a car, and are no longer forced to buy a new car.
By Spencer Lake, HSBC
Chinese companies have been stepping up their global investment spree in the past 12 months. Mergers and acquisitions by private Chinese investors are becoming the key drivers of the country’s outbound direct investment.
In what has been called the ‘Third Wave’ of China outbound direct investment (ODI), the focus of investment has been on companies in the developed economies in high-tech and services. Previous ‘waves’ have focused on supporting developing economies and investing in commodities and extraction industries. Read more
Last year, Bangladesh Prime Minister Sheikh Hasina announced that her vision for the Bangladesh ready-made garment (RMG) sector was to reach $50bn in exports by 2021. It is an important and ambitious goal for a nation that has worked hard to develop a brighter economic future. With the RMG sector accounting for 81 per cent of Bangladesh’s overall exports, reaching such a milestone could help the nation substantially reduce poverty and strengthen economic outcomes for millions of people.
Transforming industries and economies requires dedication and commitment from numerous stakeholders, ranging from the government to the private sector. That’s why the Alliance for Bangladesh Worker Safety and the Accord on Fire and Building Safety in Bangladesh—two coalitions of brands that source garments from Bangladesh—have undertaken an enormous and unprecedented effort to inspect every factory from which their members source, and to ensure that safety issues are thoroughly addressed. Read more
A month ago, in the largest military parade held on Red Square since the days of Stalin, one foreign guest drew as much attention as the fearsome hardware on display. While leading the celebrations of the 70th anniversary of victory in what Russians call “the Great Patriotic War”, Vladimir Putin had by his side the congenial Chinese president, Xi Jinping.
President Putin hoped Xi’s presence would symbolise a new, multipolar world order, with Moscow and Beijing playing leading roles. Ultimately, Russian strategic thinking continues to assume, as it has since the days of the Tsars, that military and geopolitical power precede and largely determine a nation’s wealth and prestige. Read more
By Simon Currie and Stephen Begley, Norton Rose Fulbright
India is the latest in a string of markets to witness a solar energy boom. Solar power currently accounts for just over one percent of India’s total installed power capacity of 261 gigawatts (GW) and the government’s new target is to add a staggering 100 GW of solar capacity by 2022.
Traditional markets for solar, like Europe, don’t offer the same growth prospects making India one of the next big stories for the global solar industry. It has already come a long way from just under 12 megawatts (MW) of installed solar capacity at the end of 2010, to 3,743 MW as of March 2015. This has largely been achieved through federal reverse auctions, with the first tranche of the next round eagerly awaited later this year; a significant 1000MW will be up for grabs. Read more
By Lee Cashell, Asia Pacific Investment Partners
Mongolia’s economy had a bruising year in 2014 with barely a week passing without the currency hitting a new low against the US dollar and foreign investment dropping by a precipitous 74 per cent year-on-year. But last month’s announcement that the Mongolian government has broken the deadlock in negotiations with Rio Tinto for the development of the second phase of the Oyu Tolgoi copper mine signals that a new round of foreign investment will begin flowing into the country.
Saikhanbileg Chimed, the prime minister, has been building a clear case that Mongolia’s economic growth will stall without foreign investment, appearing on national television in January to hold an X-factor SMS style vote on the question of whether Mongolians want austerity or prosperity. The majority of the country’s 3m citizens texted “prosperity” which he has taken as a mandate turn the green light back on for foreign investment. Read more