China

By Jayant Rikhye, HSBC

To the list of emerging Asia’s economic powerhouses, add one more: South East Asia and its 625 million inhabitants.

Spanning countries as diverse as Vietnam, Indonesia, the Philippines and Singapore, the Association of South East Asian Nations (Asean) is often considered an “also-ran” that gets far less attention than China and India.

To underestimate the region, however, would be a mistake. Read more

The move to confer reserve status on China’s currency is part of a process that could lead to nearly $3tn being injected into the country’s bond and equity markets. We’ve taken a close look at where the money could come from.

On its own, the inclusion of the renminbi in the International Monetary Fund’s basket of reserve currencies, known as the Special Drawing Right (SDR), could lead to capital flows of $30bn into China within the next 12 months. Read more

“Living in a world strewn with the wreckage of the Soviet empire it is hard for most people to realise that there was a time when the Soviet economy, far from being a byword for the failure of socialism, was one of the wonders of the world – that when Khrushchev pounded his shoe on the UN podium and declared, ‘We will bury you’, it was an economic rather than a military boast”. Paul Krugman (1994)

When in 1959, Nikita Khrushchev visited the Unites States, the spectacular economic growth recorded by the Soviet Union was commonly regarded as a challenge to the supremacy of the western model of democratic capitalism. Impressive statistics, such as its manufacturing output of tractors, mesmerised western opinion formers. Newsweek warned that the Soviet Union might well be “on the high road to economic domination of the world”. Read more

By David Mann, Standard Chartered

Economic ties around the world are evolving fast, even during the current period of relatively sluggish global growth. For Asia – the world’s most open region to trade – the question of which of the major economies matters most for external sector growth is critical.

If we just look at which economies dominate global growth, back in 2000, the answer to this question was clearly the US, and particularly the US consumer. The US economy accounted for a quarter of global GDP growth. Meanwhile, China accounted for just 7 per cent of world growth, despite its rapidly growing economy.

However, by 2014, the US share of global GDP growth had fallen to 16 per cent, whereas China’s share had risen to 30 per cent – despite the country’s slowdown. Read more

How times change. President Xi Jinping has just become the first Chinese president to attend a climate change conference. His presence in Paris could hardly have been more symbolic of the dramatic shift underway in China, under its New Normal economic policy. After all, it was only six years ago, at the Copenhagen Climate conference, that China’s then premier Wen Jiabao single-handedly wrecked any chance of agreement.

What has caused this dramatic policy turnaround in the world’s second largest economy? One factor is clearly Xi’s oft-stated belief that today’s levels of pollution – and of corruption – represent an existential threat to continued Communist Party rule. Read more

Chinese premier Xi Jinping’s visit to Africa this week will certainly cause an uptick in the hubbub in the China-Africa cottage industry in Washington and London. Over the past 15 years, China’s commercial relationship with African countries has expanded, grown and deepened, as China’s total trade with sub-Saharan Africa has grown from around $10bn to over $200bn.

Yet, suspicion and unsubstantiated myths are riddling the discussion of Chinese involvement in Africa among business leaders, politicians and policy influencers. Perhaps these tendencies are spillover from the Cold War; maybe there is an attractive simplicity to a rivalry of great powers in faraway places; or it could be that, despite intentions of removal, colonial paternalism in Africa is still buried in the forefront of western thought? Whatever the reasons may be, this week’s Summit of the Forum on China-Africa Cooperation (FOCAC) in Johannesburg – a gathering of African presidents and Chinese leadership that happens every three years – provides an excellent opportunity to rationalise the China-Africa discussion and dispel five common myths that are unfortunately becoming assumptions even at the highest levels of policy-making. Read more

There has been much focus on the price of iron ore recently, and understandably so. Cooling Chinese demand at a time of surging Australian supply saw spot prices fall to a new nadir of $44 a tonne CFR (cost and freight) for delivery in North China on Tuesday, November 24, according to Platts data.

In an effort to survive this price environment, smaller iron ore miners are trying to diversify their portfolios, with some buying up cattle and dairy businesses to cash in on rising Asian demand for other commodities. At the same time, steel mills have been using this cost advantage, and structural supply surplus, to pour steel into the global market, as has been well publicised.

However, ferrous scrap – which accounts for around a third of steel production outside China – has been comparatively overlooked by commentators. Read more

Could a banking crisis erupt in China? The commonly accepted answer among western analysts is no, for the simple reason that China has huge State owned banks that dominate the country’s banking industry. But dig a little deeper and a different picture emerges.

It turns out that within China’s smaller cities, the market share of the big banks fades away. Instead, local banks take over. With few national branches, these local banks will have a much more difficult time spreading risk geographically, and are thus more prone to failure.

While there is very little information on local finances, we examined the IPO prospectuses for several banks about to list in Hong Kong and unearthed a treasure trove of information on the geographical breakdown of China’s banking system. Read more

By Gilliam Collinsworth Hamilton, NSBO

From Uber ratings to credit scores, the world has increasingly grown comfortable with the idea of assigning grades to human character. Behavioral quantification has become ever more fine-tuned, with online services using big data to predict recommendations and personalise the upsell.

Last year, China’s State Council (cabinet) released a planning outline for the “Construction of a Social Credit System,” the main objective of which is to establish “the fundamental laws, regulations and standard systems for social credit” by 2020, a vague term that is meant to encompass an individual’s personal, professional and financial history.

The point of the credit score is to judge your character, as well as your potential for contribution to society as a whole. Read more

Auto manufacturers, their suppliers and investors need to prepare themselves for a triple shock from China’s slowing economy.

The first shock is already under way. As the chart below shows, China’s slowdown has caused passenger car volumes to decline in the Bric economies – which accounted for one in three global sales last year. Volumes in Brazil and Russia have collapsed as their commodity exports have tumbled: Brazil’s sales are down 23 per cent and Russia’s down 33 per cent (January – September 2015 versus 2014). China’s market has also clearly plateaued. New car sales have fallen in three of the past four months and inventories are close to record levels. India’s sales are the only bright spot, up 7 per cent this year, but India’s market is just a tenth of total Bric volume. Read more

By Ronald Cheng, Bingna Guo, Sean Wu, O’Melveny & Myers

Chinese companies are by no means immune from the cyber attacks plaguing firms all over the world. More and more are suffering data breaches, which can result in the leakage of customer information, the denial of service, and the prospect of litigation. In July 2015, the national cyber-security emergency response unit received reports of some 11,800 “cyber incidents”. Xi Jinping, the president, has made cyber security an issue of national security.

Partly in response to such mounting cyber security issues, the Chinese government adopted the National Security Law on July 1, 2015. The law for the first time addressed the concept of cyber security and advocated the prevention and punishment of online crime, but did not specify particular measures or punishments. In addition, the law mandated the “national security review and oversight” of all “internet information technology products and services,” naming a pretty broad swath of industries that could be facing more government scrutiny. Read more

Emerging market stocks, as measured by the MSCI EM Index, have seen more than a quarter of their value wiped out in the past four months, led by the travails of the Chinese stock market. We are not saying that now, or next week, or next month will represent the ideal buying point. We believe there is further disruption ahead, with suggestions that the devaluation by the Chinese central bank in August did not go far enough, and with others calling for a more profound market-clearing event to cleanse the final remnants of the price inflation seen earlier this year.

Many have been trying to call the bottom of the market; what we would say is that we are beginning to see tentative indications of discrete, selective buying of the babies that have been thrown out with the bathwater. We don’t think there is ever a bad time for rigorous, bottom-up analysis of companies exhibiting strong fundamentals. We do think that now looks like a particularly good moment to put old-fashioned research skills to work, and particularly in China. Read more

In all likelihood, the IMF will announce next month that the renminbi is set to become one of the currencies – along with the dollar, euro, yen and sterling – used by the Fund to underpin the Special Drawing Right, or SDR, its own reserve asset. As a result, the RMB will be informally crowned with the status of a ‘reserve currency’. But what exactly is in it for China?

In the near term, the biggest pay-off for China is that reserve status for the RMB could act as a catalyst for capital inflows from the world’s central banks, who might be tempted to increase the share of their reserves that are invested in China. Read more

China’s economic growth surprised on the upside in the third quarter. Yet markets will probably remain fixated on the economy’s slow-down and on the devaluation of the renminbi in August. We are in a world where volatilities rule, economic opinions differ and geopolitical conspiracy theories abound.

The mainstream view on the Chinese economy is that it will slow considerably, and only return to healthy growth if it can be “rebalanced” away from investment and exports to a household consumption-driven model. This view is incomplete at least, and misguided in some aspects.

The Chinese economy, over the next two decades before China becomes a high-income country, will be driven by four engines. Read more

Multinational corporations (MNCs) have been an essential part of China’s fast economic growth over the last three decades. They introduced new technologies, nurtured local managerial capabilities, created jobs and upgraded China’s export competitiveness. In return, MNCs found a new source of revenue by extending the life cycle of their mature technologies and products.

MNCs, however, got into a new playing field from the mid 2000s, with the preferential market access and tax benefits they previously enjoyed substantially reduced. The challenge from local competitors has become increasingly fierce. MNCs have had to adjust their strategies and market positioning to maintain a competitive advantage. Unfortunately their adjustment to the reality in China has not been working well. Read more

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