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
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
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
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 Wesley Wu-Yi Koo and Lizhi Liu
Behind China’s impressive economic rise is the biggest human migration in history. By 2013, some 269m rural residents had become migrant workers in cities, offering cheap labour and sustaining urban growth. However, unable to register and settle their family members in the cities, these migrant workers are forced to leave behind children, spouses, and old people in the villages. This has taken a tremendous toll on the rural society.
Today, there are 61m “left-behind children” and 40m “left-behind elderly” in Chinese villages. Some 79 per cent of the left-behind children are under the care of grandparents, who are often uneducated and lack parenting resources and energy. As a result, the academic scores of 88 per cent of these children fall below what would be the passing line in cities. Read more
Noticeable progress has been made recently in Chinese companies in the areas of capital structure, management and employee incentivisation.
It is has long been said – with some justification – that aligning interests between stakeholders in China was almost impossible. Consequently the majority holder, historically the government in most instances, would dictate expansion plans based on broader economic objectives rather than narrower shareholder return motivations. Read more
China is in the early stages of a domestic M&A boom unlike any other elsewhere in the world. Deal pricing, timing, terms, financing and structure are all markedly different than in other major economies, with likely consequences, good and bad, for global corporations and buyout firms eyeing M&A transactions in China.
For these two, as well as companies wishing to find a buyer in China, the game now is to learn the new rules of China M&A and then learn to use them to one’s advantage.
Chinese companies mainly pursue M&A for the same reasons others do – to improve margins, gain efficiencies and please investors. The main difference, and it’s a striking one, is that in most cases domestic Chinese corporate buyers, especially the publicly-quoted ones who are most active now trying to do deals, have no money to buy another business. Read more
Arguably the most revealing English translation of the French verb ‘étonner’ – at least in the context of Napoleon’s famous quip about China – is ‘to astonish’. “Ici repose un géant endormi, laissez le dormir, car quand il s’éveillera, il étonnera le monde” so the Corsican is said to have noted. “Here lies a sleeping giant, let him sleep, for when he wakes, he will astonish the world.”
Some 200 years later, that giant has awoken and Napoleon was right: China is now astonishing the world. In the past three decades, it has roused itself from a slumber to a state of almost unimaginable vibrancy. The roll-call of economic trophies it now claims is daunting: largest exporter, importer, foreign exchange reserve owner, commodity consumer, luxury goods market, most car sales, most internet users, even (in purchasing power parity terms) biggest economy. Read more
Over many years, China has gained acclaim as the world’s manufacturing powerhouse. But today, innovation is flourishing in the world’s most populous nation, which is rapidly becoming a trendsetter with the potential to disrupt business models globally.
On a recent research trip to China, we were struck by the huge enthusiasm for locally developed smartphones and the entrepreneurial spirit sweeping the country. Indeed, the number of patents filed by Chinese residents has surged in recent years, both locally and abroad, to exceed the world’s largest developed economies. Read more
The ever ingenious Chinese financial system has developed a new kind of shadow bank – insurance companies.
China’s $586bn stimulus package in 2009 caused a flurry of lending through the country’s financial arteries. Some of this money ended up leaking out of the banks into unofficial channels, including the country’s state banks and the giant provincially-owned pseudo banks called Trust Companies. By the end of 2014, these off-balance sheet loans accounted for 18 per cent of all financing, up from less than 2 per cent a decade earlier. Read more