China

News that Ikea is rolling out an online shopping platform in China – its first in the Asia-Pacific region – could be a sign that Western retailers are at last reacting to rising costs and shifts in consumer shopping behaviour. But what has taken them so long?

Despite operating online models successfully in the UK and other parts of Northern Europe, it has taken Ikea seven years to get to a similar point in China. With stores in major cities including Shanghai and Beijing, Ikea has followed a similar strategy to many other Western retailers; investing in bricks and mortar outlets in China’s thriving tier 1 and 2 cities.

However, consumer demand has been growing right across China and while rising costs remain an issue, Western retailers urgently need a strategy to develop this market potential. Read more

As anyone who reads these pages knows, China’s growth has slowed and its economy is, little by little, rebalancing away from investment and towards consumption. Yet many are also left scratching their heads by news that sales of a wide range of consumer products, from luxury cars to cheap local beer, are so sluggish. If consumption is so strong, why can’t we see it? The answer is simple: people are looking in the wrong places. Both high-end and low-end retail are faring poorly. But look at the middle tier, and the story could scarcely be more different. This is where the consumption boom is unfolding.

Start with the luxury segment. Its best days could well be over. Luxury consumption is slowing, weighed down by a decelerating economy, the ongoing crackdown on corruption and the ‘commodification’ of luxury goods — that is, the idea that Chinese buyers no longer see them as so special or unique. China’s luxury spending contracted for the very first time in 2014. This was just the tipping point. In 2015, Swiss watch exports to Hong Kong, a bellwether of Chinese luxury buying, fell 23 per cent. The sales of Rolls-Royce cars tumbled 54 per cent in China that same year. Read more

By Anthony Chan, Brad Gibson, Jenny Zeng, AllianceBernstein

Issues coming to a head in China’s corporate sector require its government to decide how much freedom to allow the markets and private business. The risk? That policymakers will duck the issues, leaving the economy to drift.

Let’s take a deeper dive into three notable developments that serve as a guide to the direction of China’s economy and its reform agenda.

Default Dilemma
Dongbei Special Steel (DSS)— a steelmaker majority-owned by the Liaoning provincial government— recently defaulted on a Rmb64.4m ($9.6m) interest payment on a privately placed Rmb870m bond issue. DSS is a serial offender: the company has defaulted on seven bonds, totaling Rmb4.8bn in principal. Read more

By Kevin P. Gallagher, Boston University

The Western-backed Multilateral Development Banks (MDBs) are talking a lot about moving ‘from billions to trillions’ of dollars to meet the Sustainable Development Goals (SDGs) and Paris Climate Agreement that aim to shift the world economy to a low-carbon and more socially inclusive and equitable future.

The MDBs talk the talk but do not walk the walk given that they have not increased their paid-in capital to meet the ambitious goals of the SDGs. By contrast, China’s development banks have been doing the walking—but not quite in the right direction. As it hosts the G-20 in September, China is poised to match words and action on sustainable development. Read more

By Raffaello Pantucci and Anna Sophia Young

The vast Chinese northwestern frontier region of Xinjiang may serve as a useful early indicator of how Beijing’s much-touted “Belt and Road Initiative” (BRI) is supposed to work – and how successful it may become.

The region, which is home to several muslim minority peoples, has been wracked by ethnic turmoil for decades, prompting Beijing to seek to nurture social stability by driving economic development through hefty investments.

But for this strategy to gain traction, Beijing realised that it needed to boost development in the region around Xinjiang by building commercial corridors to neighbouring Central Asian countries such as Kazakhstan, Tajikistan, Kyrgyzstan, Uzbekistan and Turkmenistan. Thus, Xinjiang was key motivator behind the BRI concept. Read more

Liao Min, China Banking Regulatory Commission

Amid increasing concern about risks in China’s banking sector, the latest banking data from Shanghai tells a story of resilience. The region’s non-performing loan (NPL) ration has declined for eight consecutive months to 0.79 per cent at the end of June, much lower than the 1.81 per cent ratio for China’s commercial banks as a whole. Outstanding NPLs shrank by Rmb3.6bn since the beginning of 2016.

Special-mention loans — a classification for loans that might be at risk of becoming NPLs — also decreased in Shanghai, both in volume terms and as a ratio of total loans. Thus, it’s clear that NPL figures aren’t being manipulated by hiding bad loans in the special-mention category.

 Read more

By Sebastian Heilmann, Mercator Institute for China Studies

A wave of investment from China is breaking across Europe. Chinese takeovers of technological leaders have raised fears of a sell-out of our economies’ competitive advantage. In Germany, the Chinese Midea group’s offer to buy a controlling stake in the Bavarian robotics manufacturer Kuka has triggered fierce resistance.

Midea is the wrong target for the current backlash. But the debate over how to deal with Chinese investors is overdue. China’s state-guided outbound industrial and technology policies, aimed at technological leapfrogging through acquisitions, pose a formidable challenge to national investment regimes and EU competition policy. Read more

While China’s rapidly rising debt incites worries among many, China’s leadership seems so determined to meet overly ambitious GDP growth targets that leverage is set to continue to increase steadily. The government targets credit growth of 16 per cent this year, once changes in local government financing are taken into account, and credit expansion so far this year has broadly been in line with that target. Read more

Every country is touchy about some topics, especially when raised by a foreigner. Living in China for almost seven years now, and having been a student of the place for the last forty, I thought I knew the hot buttons not to press. Apparently not.

The topic at hand: high-tech innovation in the People’s Republic of China and why it seems to lag so far behind that of neighboring Taiwan. The current issue of one of China’s leading business publications, Caijing Magazine, published a Chinese-language article I wrote together with China First Capital’s COO, Dr. Yansong Wang, about Taiwan’s outstanding optical lens company Largan PrecisionRead more

China continues to dominate discussions about the health of the world economy. Many are concerned about the country’s slowing growth and its ability to manage the difficult transition from a controlled economy dominated by manufacturing to a more open economy with greater reliance on domestic consumption. Some policy decisions last year also scared the market.

While the risks are many and real, they are manageable and well-understood by China’s policy makers. This is not the time to sell China short. Read more

Speculation is rife that Amazon is soon to establish itself as a global shipping and logistics expert, in a move coined internally as project ‘Dragon Boat’.

While this bold strategy has the potential to significantly increase margins and position Amazon as Chinese businesses’ gateway to the West, a considered and phased implementation is essential if the firm is to gain share of the cross-border e-commerce market from industry leader Alibaba. Read more

By Ken Wong, Eastspring Investments

There is an even chance that, this summer, China’s A-shares will be included for the first time in a key emerging market investment index operated by MSCI, the index provider. If it happens, it will be a welcome development, for the simple reason that it will make the benchmark a more accurate reflection of the emerging market corporate universe.

While the immediate impact of inclusion would be quite small, the longer-run potential for A-shares – which are the stocks of companies listed inside mainland China – to grow in importance within the index is enormous.

Two obstacles to inclusion have been largely removed – reforms to a quota system on investment inflows from abroad and a shortening of the delay in repatriating capital out of China. Read more

You don’t hear much these days about capital outflows from China. The renminbi seems well behaved, and China’s foreign exchange reserves have stayed stable in the past couple of months. Sure, the economy itself faces a bunch of challenges, as the government hasn’t quite found a way to maintain rapid growth rates without a dangerous degree of reliance on credit. But you don’t get the sense that the Chinese are falling over themselves in a rush to buy dollars.

The Fed might take heart from this. On two occasions in the past year, the US Federal Reserve’s intentions to raise interest rates have been confounded by financial turbulence caused by large outflows from China. The first was last summer, when the Fed was forced to postpone rate hikes following a surge in flows from China after the People’s Bank of China (PBoC) introduced a new regime for fixing the renminbi on August 11th. The second was this winter, when another surge in outflows that coincided with the Fed’s December rate hike made it impossible for the Fed to keep doing so. Read more

By Michelle Chan, VP of Programs, Friends of the Earth US

As chair of this year’s G20, China is mounting an ambitious campaign to promote ways that the banking sector can not only green the Chinese economy, but the global economy too.

Over the past decade, China has prioritised sustainable finance policies as a means of preventing and controlling pollution via its banking sector, leading many to hope that China can lead the world on a greener path towards sustainable finance. The members of the G20 Green Finance Study Group, meeting next month in Xiamen, are certainly betting that China does have something to offer when it comes to green finance.

But have such Chinese finance policies actually led to concrete improvements for the environment? Read more

For some, China represents a positive scenario of structural reforms returning the country to its position as the engine of world growth. Not only do we think this is unlikely, we actually believe China poses a systemic risk of historic proportions.

It is now clear that China is not smoothly passing its growth baton from exports and investment to the service sector. Official GDP data still show growth, but this has decelerated significantly despite numerous interest rate cuts and massive fiscal support. Read more

By Sarah Lain, Royal United Services Institute for Defence and Security Studies

The Silk Road Economic Belt (SREB) builds on China’s long-standing economic investment in Central Asia, and it has the potential to further develop Central Asian economies. However, China’s historical track record of investment engagement in the region raises concerns that the SREB could instead exacerbate economic inequalities and poor governance.

China has long been a key driver of infrastructure investment and construction in Central Asia, covering a wide range of sectors. It has invested heavily in the region’s natural resource extraction, with gas, oil, uranium, gold and copper making up key exports from the region. Read more

By Philippe Le Corre and Joel Backaler

This year has all signs of becoming another bumper year for Chinese overseas mergers and acquisition activity. In the first three months alone, the total value of cross-border deals nearly reached 2015 annual totals ($101bn and $109bn, respectively).

High-profile deals from the last three months include: Dalian Wanda’s $3.5bn acquisition of Legendary Pictures, a US media company, Haier’s $5.4bn takeover of GE’s appliances unit and most notably ChemChina’s record-setting $43bn bid for Syngenta, a Swiss-based agri-business group.

However, all of this overseas business activity is occurring against a backdrop of a Chinese domestic economy that is facing myriad challenges with a slower GDP growth forecast of 6.5 per cent, reduced domestic demand and decreasing industrial profits not to mention industrial overcapacity. Read more

Every day an estimated 150,000 new Chinese shoppers join the ranks of the hundreds of millions in the country who have discovered ecommerce. Penetration will double by 2020, according to our estimates, with the total value skyrocketing to Rmb 10tn ($1.5tn).

But this dramatic adoption of online shopping is not the biggest news to emerge from Bain & Company’s latest study of China’s ecommerce market, conducted in partnership with AliResearch, Alibaba Group’s research arm. The unexpected finding is how ecommerce is shaping consumer behaviours and the profound influence those shoppers are having on online sellers. Despite its massive growth, China ecommerce is rapidly evolving to become more than a numbers game for both consumers and sellers. Read more

Markets used to cheer when China’s exports rose, believing this showed the global economy was in good shape. They are still hopeful today, despite the 25 per cent fall in February’s exports. But closer analysis of China’s important refining and petrochemical sector shows that a paradigm shift is under way.

No more is China’s economy based on importing raw materials and exporting low-cost manufactured goods. Instead, the focus is on using the new capacity built during the 2009–13 stimulus period to maintain employment and boost China’s self-sufficiency. Read more

US penalties handed down on ZTE, the Chinese telecoms giant, are a reminder that despite January’s partial lifting of sanctions on Iran after UN nuclear inspections, they can still bite.

Previously, the Bank of Kunlun, set up to handle oil for loans and infrastructure deals between Beijing and Tehran during the embargo, had been cited for violations. Chinese commercial and policy banks nonetheless were gearing up last year for legal business, supported by a flurry of official initiatives.

 

China’s “One-Belt One-Road” outward investment campaign envisions a tenfold increase in Sino-Iranian economic engagement over the next decade to $500bn; Iran took a tiny 2 per cent founding share in the Asian Infrastructure Investment Bank; and the countries discussed bilateral currency swap lines. Read more