By Martin Fischer, Alaco
A series of recent Chinese takeovers of Germany’s top tech companies has unnerved many Germans who fear the trend could undermine the economy. Germany has always been more comfortable as an investor than a recipient of investment, with the Chinese shopping spree sparking a wave of protectionist sentiment, which some German politicians are looking to exploit.
Germany has emerged as the preferred destination for Chinese takeovers in Europe. In the first half of 2016 alone, EY, an accountancy firm, reported that Chinese investment in Germany exceeded $10bn – more than the combined total for the previous five years. But Germans are nervous about the influx of cash, primarily because the companies being acquired are small and medium-sized enterprises that form the backbone of the economy. Read more
By Max J. Zenglein, Mercator Institute for China Studies
China’s leaders place high hopes on the vibrancy of the economy’s service sector, but in reality it has not been able to fill the void left by the decline of manufacturing. The inability of services to pick up the slack in turn creates a temptation for the government to delay overdue structural reforms while maintaining a reliance on investment-driven growth. Read more
The end is in sight for Google’s seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple as one of the most profitable tech companies there.
This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets, these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.
The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back. Read more
By Bruno Lannes, Wei Yu and Jason Ding, Bain
Yoghurt is flying off the shelves in China. The value of yoghurt sold in 2015 grew by more than 20 per cent. Meanwhile, instant noodles are suffering a slump. Consumers in China bought 12.5 per cent fewer containers of instant noodles in 2015 than they did a year earlier.
It seems that China’s market for fast-moving consumer goods (FMCG) now operates at two distinct speeds: slow and fast.
The engine behind two-speed China is the government’s official “new normal” policy, which is managing GDP growth at 6.5 per cent to 7 per cent, shifting focus from manufacturing to services and consumption, and pushing for innovation-led growth over investment-led growth. Read more
By Jenny Huang and Ying Wang, Fitch
It’s clear that China is embracing “supply-side reform” to reduce excess industrial capacity and shed unviable assets because its debt-driven growth policies were not working. The shift is essential for battling the middle income trap, but the reform’s effectiveness remains uncertain.
While Chinese leaders have set the tone to let the market play a decisive role, many reform policies have deviated from this principle in light of hefty social and financial costs.
One of the greatest reform challenges is employee settlement in heavy industries plagued by overcapacity including steel, coal and aluminium. More than 2m workers may be affected. Read more
By Eric Lascelles, RBC Global Asset Management
China now commands the world’s attention, having transformed itself into an economic superpower that generates a startling one-third of global economic growth. In a growth-scarce world, the thought of losing even a smidgen of this is unsettling.
For this reason, it is of crucial important to track the constellation of vulnerabilities and unknowns that orbit China. Among these, the country’s housing market is a subject of disproportionate importance. This is due to its centrality, its sheer heft, and also its seeming vulnerability.
Housing acts as something of an economic fulcrum that exerts an outsized influence over China’s banks, heavy industries, builders and households. We figure it is directly or indirectly responsible for a whopping 19 per cent of China’s economic output. Read more
By Luke Nolan, Student.com
China’s magnetism as a destination for international students is intensifying as Chinese universities climb the global rankings and the number of people who study the Chinese language in their home countries also rises.
You need only look at the figures from last year to understand the extent of the boom. A record-breaking 397,635 international students flocked to China for their studies in 2015, which solidified the country’s position as the third most popular destination for overseas students. The US and UK still dominate the market, but China is chasing hard on their heels. Read more
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.
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.
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 Precision. Read 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