Heavy lifting - China Economic Review

Transcription

Steve Dickinson
october 2011 Vol. 22, No. 10
www.chinaeconomicreview.com
Foreign control of
Chinese internet firms
is winding down
Heavy lifting
China’s economy in a weak world
COMPANIES & SECTORS
Property developers
mind their hedges
FOCUS: RESIDENTIAL REAL ESTATE
contents
Published monthly since 1990
32
SPECIAL REPORT: ECONOMICS & TRADE
Trading partners hope Chinese demand will start
carrying more weight, but Beijing has different priorities
Publisher
China Economic Review Publishing
Editor
Pete Sweeney
Contributing Editors
Ana Swanson, Christopher Beddor
Research Manager
Ada Liu
Researchers
Juliet Zhu, Sarah Chen
Contributors
Paul French, Steve Dickinson, John G.
Whitesides
Art Director
Frank Zheng
Art Editor
Daisy Fang
Editor at Large
Graham Earnshaw
Associate Publisher
Gareth Powell
Director of Operations
Caroline Fontaine
CHINA ECONOMIC REVIEW
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COVER by Fu Chunqiang : Find the Beijing-based illustrator at edge.neocha.com
The house view
6 opinion
A new tax on foreign employees will hurt Chinese firms’
overseas expansion; Beijing’s flounders in Libya show the
need for a doctrinal revision
month in review
8 briefing
While Chinese IPOs overseas wait on foreign markets to
calm down, domestic listings heat up
10 sector news
10 china by numbers
11 china buzz
“Paying bribes was the old way, but now we’re in
China 2.0”
12 best of the web
12 second thoughts
More stock scandals; Wen Jiabao plays hardball in
Europe; who cares about bank balance sheets?
14 paul french’s diary
A coffee down under; are mining companies running
Australian foreign policy?
15 punditry
Nigeria ups renminbi reserves; business confidence survey;
interpreting the export figures
snapshot
16 question of the
month
Are Chinese small- and
medium-sized business really
going bankrupt? And is it the
government’s fault?
18 LOCAL VOICES
Chinese SMEs talk about the credit
crunch, private banking and coping with a labor shortage
20 companies: real estate
Diversification will save the big players, but small
developers will have a rough fall
22 PORTFOLIO
Soufun, Evergrande Real Estate
talking points
24 steve dickinson
Foreign investment in Chinese dot-com companies runs
into a regulatory wall
26 fat dragon
China’s infamous ghost cities will get filled up soon enough
28 John G. whitesides
China is using scientific exchanges as a diplomatic tool
30 question & answer: zhang kun, pptv
The vice president for corporate development at online
sports video site PPTV talks about piracy
spotlight: united kingdom
39 return on history
Beijing has locked UK banks in China out of increasing
their market share, but there are worse places to be trapped
than the premium niche
after the close
44 company index
44 expos & conferences
45 listings
48 economic indicators
50 book review
Understanding China’s Economic Indicators: Tom Orlik
of the Wall Street Journal offers a handy reference
work on lies, damned lies and Chinese
employment statistics
China Economic Review • October 2011
5
the house view
Embrace the strange
F
ear of the unfamiliar is a pan-human survival instinct, and Chinese people are no
exception. Indeed, Confucianism is almost
entirely uninterested in foreign ideas or foreign
peoples, focusing rather on the perfection of a
Chinese social order derived from the past. Even
invaders were incorporated into the Confucian
cultural structure and converted, post-invasion,
into “Chinese” dynasties.
Even in the face of demonstrated Western
technological and economic superiority during
the Qing dynasty, the reformers of that era nevertheless attempted to preserve an exceptional, and
superior, space for Chinese culture: “Use the West
for technology, but China for the essence.”
Chinese leaders still play on this sentiment
today, but it is a tricky balancing act. China cannot
allow its xenophobes to dictate policy so long as
the economy booms. But if China experiences an
economic correction – as it eventually must – the
extremists will gain more leverage; thus the leadership has carved out a fallback position in the hills
of ethnic nationalism.
Thus even as China’s economy integrates
with the global system, some Chinese politicians still feel it necessary to take occasional,
rhetorical swipes at foreign-ness, repeating the
canard that China can adopt foreign technology while ignoring the ideas that built it.
Nevertheless, despite accusations to the contrary, the central government has so far done a relatively good job of allowing foreigners to conduct
their business here. To attract foreign investment,
the government created a de-facto tax haven for
foreign companies and their foreign employees.
This was self-interested, of course: Without tax
Imaginechina
The new tax
on foreign
employees will
penalize
the overseas
expansion of
Chinese
companies
expat package: Barriers for foreigners are getting higher
breaks, the foreigners would not have come, and
neither would their money or their intellectual
property.
Penalty tax
But things are changing. In 2008, China eliminated most of the tax breaks for foreign firms.
Now Beijing is targeting the paychecks of foreign
workers.
On October 15, companies will be required to
deduct an additional 11% from foreign employee’s
salaries; employers will have to kick in another
37%. In exchange, foreign employees will get pension, unemployment and health insurance benefits
that the majority of them are unlikely to use. The
government also added (at the last minute) an
exemption for employees from Hong Kong and
Taiwan, sabotaging the government’s spin that
the tax is intended to benefit, not penalize, foreign
employees.
It must be noted that taxing people for services
they don’t use is not unusual. The US and many
Running interference: China must revise its approach to Africa
China’s strategy in Africa has drawn a lot of criticism in the West. Those critics are now having
their day in the sun. First, China saw its alliance
with Sudan’s Al Bashir rendered useless by the
partition of that state. The new nation of South
Sudan owes no particular debt to China, and in
fact has some cause to resent Beijing’s unstinting support for the regime that once oppressed
its people. But the attraction between oil and
money is constant; South Sudan and China will
manage to get along.
The mess in Libya, however, is of a slightly
different magnitude. The experience in Sudan
should have taught Beijing that power does
change hands, and there’s a value to staying
6
Beijing later
admitted that
Chinese weapons
manufacturers had
met with Qaddafi’s
government in
the midst of the
insurrection
in with the outs. But even after a protracted
Arab Spring that resulting in the high-profile
toppling of Mubarak in Egypt, Beijing still
seemed to be caught off balance by the Libyan
civil war. It sat out on military intervention but
endorsed sanctions: The former is consistent
with its ideology of non-interference, the latter is contradictory.
In the early stages of the Libyan conflict,
China made statements about “stability” that
many interpreted as a coded call for Qaddafi
to crack down. Worse, Beijing later admitted
that Chinese weapons manufacturers had
met with Qaddafi’s government in the midst
of the insurrection. At best this meeting was
European countries do
Foreign multinationals it too. But in China,
this tax is likely to proin China have been
duce unwanted results.
the percentages
relentlessly localizing While
for Chinese and foreign
their workforces
workers are roughly
the same, foreigners
without any
here tend to earn much
encouragement from more than their local
peers; meaning the cost
Beijing
increase to employers
will be higher.
If the rule is meant as a form of affirmative action to encourage companies to prefer local Chinese workers, it is completely
unnecessary. Most multinational firms prefer to hire local residents anyway. They are cheaper, they are fluent in Chinese, and
they are familiar with the culture; multinationals in China have
been relentlessly localizing their workforces without any encouragement from Beijing.
Those foreigners who are still employed here earn a premium
compared to their Chinese coworkers for a reason; they have
skills the local market cannot provide. Conversely, foreign college graduates with no experience or particular skills are discovering that their market value has plummeted thanks to competition from bilingual locals.
Going outward
Given the need for Chinese firms to expand into overseas markets, now is the worst time to encourage local firms to keep their
headcounts parochial. Foreign employees (including returnees
with foreign passports) can make a critical difference as domestic companies navigate foreign cultures, attract foreign consumers and manage overseas subsidiaries. The same goes for foreign
consultancies and law firms.
The last thing outward-looking Chinese private firms like
Alibaba, Huawei, and Suntech need is encouragement to run
multinational ventures from parochial headquarters. Chinese
labor markets are working just fine; Chinese “essence” does not
need policy protection; it’s time to embrace the strange.
bad judgment and atrociously timed; if it happened behind the
government’s back, it demonstrates a serious shortage of civilian control over China’s weapons industry.
Finally, China waited until almost the bitter end to recognize the rebels, acknowledging the rebel leaders’ authority even
while Qaddafi was still in the country. This may have been pure
pragmatism on Beijing’s part – the writing was certainly on the
wall, and rebels had already threatened to cut China out of future oil contracts – but the decision sabotages China’s claim
that its non-interference policy is about more than self-interest.
Absolute non-interference is an impossible doctrine for
countries that engage in global trade; money is influence, and
influence interferes. But there’s plenty of room to “interfere”
without sanctioning air strikes. China needs to reframe its diplomatic approach to reflect the reality of its wider interests. If it
wants to claim the moral high ground, however, taking a position against weapons sales to developing economies would be
an excellent place to start.
7
month in rev iew • BRIEFIN G
monthinreview
$34,500: Price of 500 kg of panda excrement tea
Also in this section
SECTOR NEWS, p10
china by numbers, P10
china buzz, P11
‘A foreign tycoon
wants to buy
300 sq km of
Icelandic land.
This has to be
discussed’
best of the web, P12
second thoughts, P12
More scandals
on stock
markets; Wen
and the EU
paul french, P14
editor’s inbox, P15
8
Imaginechina
DreamWorks
opens, Gaopeng
closes, CIC
reorganizes
briefing
Carrying the torch
Hostile markets are deterring new listings around the world. In
China, however, the IPO machine still roars
I
t was mid-September, and Chinese automaker Great Wall Motors was courting
institutional investors for its initial public
offering (IPO) on the Shanghai Exchange.
Though the fall of 2011 would hardly seem
to be the time for aggressive fundraising, the
company would not back down on its price. It
announced plans to raise up to US$1.05 billion
in what would be one of the country’s largest
offerings of the year.
Great Wall’s enthusiasm shows just how
sharply the mood in China’s IPO markets
contrasts with that of the rest of the world.
New listings have lumbered nearly to a halt in
most places since the end of July, when gut-
wrenching volatility deterred even the most
hardened equities investors.
China is not entirely insulated from global
woes: The Shanghai Composite Index has lost
roughly 10% of its value since January, and the
number of IPOs in Shanghai and Shenzhen is
down from the previous year. Comparatively,
however, the country remains an incongruous
bright spot.
The strength of this market stems in part
from the mainland’s pent-up liquidity, said
Joseph Schuster, the managing director of
IPOX Schuster: It’s almost as hard for Chinese
to get their money out of the country as for foreigners to get their money in. In addition, Chinese investors have grown accustomed to some
of the most spectacular day-one increases,
month in rev iew • sec tor new s
POP! IPOs on ChiNext are heating up
or “pops,” in the share price of newly
listed companies.
“You see companies being underpriced, and the average IPO pops
20-30%,” said Schuster. “That just incentivizes people to participate again and
again … For investors who buy at the
IPO price, the returns are actually quite
substantial.”
Increasingly, many of these offerings
are taking place outside of Shanghai:
Twice as much equity capital has been
raised on Shenzhen’s smaller market this
year. That’s because Shenzhen is home to
the ChiNext, a NASDAQ-type exchange
for high-tech start-ups that was launched
in late 2009. As elsewhere in the world,
much new financing in China is going
into technology and internet companies.
There’s likely to be plenty of demand
for mainland markets in the months
to come; surveys show seven out of 10
Chinese companies would prefer to list
in their own country. In other markets,
activity will probably be slow for at least
the rest of the year, said Nick Einhorn, an
analyst at IPO investment firm Renaissance Capital. “That said, sentiment of
US investors toward Chinese companies has traditionally been very quick to
change.”
One thing is certain: Chinese
companies seeking capital abroad
must price their offerings
modestly. Bargains are the
only way to tempt
long-term investors
back to market.
Economics and trade
Annual growth in the Consumer Price
Index slowed to 6.2% year-on-year in
August from 6.5% in July, signaling that
government measures to curb inflation
are finally taking effect. China’s trade
surplus shrank to US$17.8 billion in
August from US$31.5 billion in July as
a sharp increase in imports outpaced
continued growth in exports. Foreign
direct investment rose 11.1% year-onyear in August, down from 19.8% growth
in July. The Purchasing Manager’s Index,
a gauge of industrial activity, rose to 50.9
in August after the reading hit a two-year
low of 50.7 in July.
Consumer
DreamWorks Animation plans to open
a new operation in Shanghai to target
China’s booming film market. Swedish
furniture retailer IKEA said it plans to
spend US$626 million to build a fourth
location in Shanghai. It will open its
second retail outlet in Wuhan in 2014
and its third in Beijing in 2015. Starbucks
said it plans to open 1,500 new retail
locations in China by 2015, up from a
current 470.
Imaginechina
Imaginechina
sectornews
Investment
Beijing modified regulations governing
foreign investment in Chinese internet
firms, closing a loophole that has
allowed foreign firms to invest in
mainland dot-com companies, putting
mergers and acquisitions in the online
space under greater regulatory scrutiny.
chinabynumbers
Price of 500g of panda
excrement tea
China-focused private equity funds
raised US$10.3 billion in the first half
of 2011, representing 45% of global
fundraising.
Banking, finance & markets
Beijing announced plans to restructure
its US$300 billion sovereign wealth fund,
China Investment Corporation (CIC), by
spinning off the accounts belonging to
Central Huijin Asset Management, its
domestic investment arm, and creating
a new entity, CIC International, to handle
investments overseas. The Hong Kong
Exchange announced new guidelines for
the more than 1,400 companies listed
on its bourse to raise renminbi through
share placements and rights issues. A
senior Shanghai official underscored
the difficulties of launching Shanghai’s
international board,
contradicting
earlier reports that the first foreign
firms may be allowed to float shares
before the end of the year.
tech, media & telecom
Gaopeng.com, a joint venture between
mainland web portal Tencent and USbased group buying site Groupon, said
it would reduce staff by up to onethird to 2000 and close the majority of
its China offices due to a shortage of
1.11m
$34,500
10
hiii-yaaaa! DreamWorks will
launch operations in Shanghai
Number of millionaires
in China in 2010
China’s 2010 investment
in HIV research
$18m
month in re view • B uzz
chinabuzz
Imaginechina
Wang Jinlong, Starbucks’ Asia
Pacific president, on China and
coffee:
“The problem with China is that the
country just isn’t caffeinated enough.”
free cash and lack of investment from
Tencent. Google added a new program,
dubbed “Shihui,” to its China site to
aggregate group-purchase deals in
the mainland. At its annual customer
convention, e-commerce giant Alibaba
Group announced plans to increase the
combined transaction volume on its
Taobao Marketplace and Taobao Mall
to US$157 billion in 2012 from US$62.8
billion last year.
An unnamed Chinese
government official on graft:
“Paying bribes was the old way, but
now we’re in China 2.0. Helping a
government official meet his social
target is what brings him promotion,
so anything that helps him to do that
is a means to an end.”
Fu Ying, China’s vice foreign
minister, on political unrest:
“When Western governments suffer
economic crises, do you worry about
your own political system? So why
should we have such worries?”
Zhang Yungping, a Kunming furniture store worker, on IKEA’s
accusations of copyright theft:
“If two people are wearing the same
clothes, you are bound to say that
one copied the other.”
Francois Curiel, president of
Christie’s Asia, on art in China:
“They see works of art on their
[peers’] walls and think, ‘If I want to
be not just a millionaire but someone
who plays with the big boys, I’d better be someone who collects art.’”
Wu Fang, a migrant worker in
Beijing, on her status:
“If they want us to go to school, we’ll
go. If they say we can’t, we won’t ..
We have no power, no status and no
rights.”
Ogmundur Jonasson, Iceland’s
interior minister, on a Chinese
business tycoon’s plans to buy
0.3% of Iceland:
“A foreign tycoon wants to buy 300
sq km of Icelandic land. This has
to be discussed and not swallowed
without chewing.”
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11
month in rev iew • SECON D THOUGHTS
BEstoftheWEB
Unsubtle points
Reactions to the recent amendment
to China’s marriage law, which excluded some property from divorce
settlements, Chinasmack.com
More scandals on the stock markets; Wen Jiabao
wants quid-pro-quo for supporting the euro
“The balance has been upset ... What men
were originally supposed to provide in a marriage they can now perfectly legitimately not
provide.”
onths ago we said that the
drama of sordid scams
and unscrupulous auditors
emerging from Chinese companies
listed on foreign exchanges would
wind down soon. Wrong, wrong,
wrong. Graft is apparently the gift
that keeps on stealing. This week
we had AutoChina, an outfit our
Company Reports team was already
flogging on the basis of its stated
financials, trying to get away with
not stating financials. Exchange
regulators laughed off the company’s request to delay reporting on
2010’s performance until the very
end of 2011, and instead told the
company it would be delisted as of
September 19 unless it appealed. It
appealed, and the story goes on.
Next, there was yet another
attack by short-seller Muddy
Waters (in cooperation with shortselling Borg collective “Alfred Little”) on Chinese miner Silvercorp.
Silvercorp stands accused of falsifying its financials – the Torontolisted company reported a profit in
Canada and a loss in China for the
same period – and fabricating customers. Particularly suspicious is
the “National High-Payin’ SilverBuyin’ Win-Win Take Innovation
as Key Link Corporation,” headquartered on the forest moon of
Endor. The icing on the cake is the
fact that Silvercorp is the subject
of two separate investigations, one
by the British Columbia Securities
Commission and another by the
Royal Mounted Police! Has Silvercorp been smuggling whiskey
“What’s wrong with China’s women, where
even having a child is a bargaining chip in a
transaction with men? Truly very sad.”
“It looks like a law protecting male citizens,
but actually it is pushing us male comrades
into the abyss.”
“If you guys truly love each other, would you
really be afraid of the Marriage Law not being fair?”
“If we don’t depend on the law and only depend on morality, just how many people are
actually that dependable?”
“Why not also bring [our laws governing] infidelity in marriage or divorce in line with foreign standards by giving us alimony! Are all
the men who drew up and enacted this law
keeping mistresses?”
Imaginechina
“Of those who made this law, which one of
them doesn’t have several houses? They are
simply protecting their own assets.”
M
chinabynumbers
Percentage of
Chinese PC users
using illegal
software
86
12
60k
Number of
pornographic
websites shut down
in China in 2010
Provinces that have
raised the minimum
wage by over 20%
this year
13
When it comes to EU
bonds, who can blame
Beijing for being a bit
skeptical?
into US speakeasies?
Finally, and tangentially, we
have another variation on the
“let’s assume foreign regulators
are drooling morons” strategy:
Three senior executives of Chinese
resource investor Hanlong Mining were detained in Australia for
apparently investing in the stock
of a company Hanlong intended
to buy shares of just before the
sale was announced. Subtle as a
car bomb. Perhaps they will be
exchanged for Stern Hu.
Help yourself!
In other news, the EU continued its
steady march into the abyss – the
good news being that, with discussions of a Greek default metastasizing through the opinion-sphere, the
crisis may be nearing some kind of
resolution. On Tuesday, markets were
bolstered by reports that China and
Italy were holding secrets talks over
bond purchases.
But Grandpa Wen, lovable as
he may be, shattered those hopes on
Thursday when he told the World
Economic Forum in Dalian that
China wasn’t ready for a long-term
commitment. Europe has some issues
to deal with – like cutting its deficits
32
Arrests made in
China’s crackdown
on “gutter”
cooking oil
Number of pop songs
on China’s new
internet blacklist
100
month in re view • Secon d Thoughts
and opening its markets – before China
would be willing to take the plunge, he
said.
Then Wen really stunned the crowds
by going for the shake-down: If the EU
wanted to, let’s say, give China market
economy status, then the money tap
might flow. Wen’s attitude, however
warranted, represented a sharp shift
in rhetoric. It was only June when he
toured Europe speaking of pandas,
sunshine and jingji hezuo. Since then,
China has not really put its money
where its mouth is; analysts suggest that
it has bought only limited amounts of
EU sovereign debt.
But China’s cooperation with the
EU has always been in its commercial
interests, and not an act of generosity.
When it comes to EU bonds, who can
blame Beijing for being a bit skeptical?
As the Financial Times has pointed out,
many Chinese think it’s ludicrous to bail
out decadent Europeans only a few generations after their colonies were pushed
out of the country. Unless, of course, the
bonds would be a good investment. At
this point, however, the good ship Europe
is not looking particularly seaworthy.
BESTOFCHinaeconomicreview.com
From “Chinese banks: The metrics don’t matter,” Christopher Beddor,
August 31
It’s that time again: first half financials
by China’s big four banks.“We continue
to see decent results,“ said an analyst
who wished not to be named. “But the
numbers will not convince the bears
that there isn’t a problem with non-performing loans.”
Plenty of financial analysts bemoan
how investors are unnecessarily bearish
on Chinese bank debt. They say: Have
you seen the loan-to-deposit ratio/capital buffers/loan-loss coverage ratio?
What does that have to do with anything? I won’t even begin to poke holes
in these metrics (Tsinghua University
professor and CER contributor Patrick
Chovanec does that very nicely). My
point is more macro: These aren’t real
banks, so investors shouldn’t price their
equity like real banks.
Yes, investors should still price their
equity at the discounted present value
of anticipated future dividends. But
whereas the value of future dividends
in Western banks depends on their ability to efficiently allocate resources to
maximize future profitability, the value
of future dividends in Chinese banks
depends to an overwhelming degree on
government policy.
Chinese government policy is, in
turn, dictated by a plethora of factors,
the most important being to keep the
economy humming along. With inflation
at over 6%, lots of murky debt outstanding, the odds of another US recession at
40% and the eurozone in turmoil, is it so
crazy to discount the future profitability
of Chinese banks this year?
This week’s earnings announcements still haven’t shifted market sentiment, because investors didn’t buy into
a Chinese company. They bought into
Chinese policy.
ONLY
globa event
focu lly that
and p ses on risk
analy erforman
ce
sis i
invest n China’s
mana ment
gem
mark ent
et
• Main Conference: 30 November & 01 December 2011
• Post Conference Workshops: 02 December 2011
• Venue: Renaissance Shanghai Pudong Hotel, China
• 主会议：2011年11月30日至12月1日
• 会后研讨会：2011年12月2日
• 地点：中国, 上海淳大万丽酒店
Developing Effective Performance and Risk Management Strategies to Facilitate the Rapidly Growing Chinese Investment Management Market
发展高效的绩效评估与风险管理策略以适中国高速发展的投资管理市场
Wanying Bi
Chief Risk Officer
Harvest Fund Management
毕万英, 首席风险官
嘉实基金管理有限公司
Yizhi He
Director Risk Management
Hua An Fund Management
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华安基金管理有限公司
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13
month in rev iew • diary
Selling tea to China
Chinese coffee,
shoppers in
Australia;
Miners as
nation states
S
ometimes in this diary I like
to get out and about beyond
China. Recently I spent some
time down under in Australia but as
the Godfather used to say, “Just when
I thought I was out … they pull me
back in.”
T
he top end of Melbourne’s Collins Street is rather ritzy with
some nice European-style architecture,
known as “Little Paris” to some. No
surprise then that this is home to those
ubiquitous brands almost as prevalent
in China as Ten Ren’s Tea! I refer of
course to Louis Vuitton, Prada, Gucci, and Bally. These stores are all
elbourne is most definitely
packed with Chinese shoppers. I have
a coffee town. Long Blacks,
THE DIARY
yet to see a blue-eyed, blonde-haired
Short Whites – they take their coffee
Paul French is chief China
Aussie surfer-type emerge from one
very seriously in this burg, and there’s representative
of Access Asia
of these shops - it’s all Asian, all the
nary a Starbucks or Costa in sight.
The vast majority of stores are lovely little inde- time - more “nihao” than “g’day.” And that increaspendents where they take the coffee more seriously ingly applies to the employees. No luxury shop on
Collins is complete without a Mandarin-speaking
than the corporate profit margins.
This converted even a confirmed drinker of staff member. And even the incredibly strong Aus“English Breakfast Tea” like myself a bit of a cof- sie dollar doesn’t deter those looking to arbitrage
their sale and avoid those pernifee aficionado. But wherever there
cious mainland taxes.
are dominant trends so too there
must be a backlash and an alterna- My sense is that
tive. And in Melbourne the good
y sense is that there’s about
fight for tea drinking is being led there’s about to
to be a rumble in the outby none other than Ten Ren’s Tea, be a rumble in the back over the mining industry’s toa well-known Chinese chain. These
tal domination of the whole China
guys are ladling out the green, jas- outback over the
debate in Australia. Most people I
mine, Oolong, ginseng and pu’er to mining industry’s talked to who have an interest in
Chinese Melburnians and any other
China were pretty angry that AusAussies looking to get the coffee- total domination
tralia’s entire China strategy seems
addiction monkey off their back!
to be run by the two giant mining
And it seems they are doing pretty of the China
companies down under. When it
well at it.
comes to prices and terms, Beijing
debate
talks to them, not Canberra, as
if they were independent nation
s are another chain called
Oriental Tea House, who have decided to states. The mining companies’ representatives in
sex-up the whole tea and yum cha concept with China appear to be more important and influsome really neat stores, great decor and advertising ential than Australia’s official diplomats. Back in
harking back to pre-1949 graphic design. Indeed, Oz there are a number of parasitical types – the
a bit of the old chinoiserie is “in” in Melbourne at lawyers, consultants and “advisers” – who hang on
the moment, it seems. Coffee and sandwiches cafe to the coattails of the miners and relentlessly push
chain Villa & Hut Kafe has not only launched the the argument that anyone criticizing China is
“Shanghai Chai” in Australia but has opened their threatening Australian people’s incomes. This is a
first overseas branch in Pudong (though in the bad state of affairs for a democracy and my feeling
decidedly un-chinois China Merchants Tower!) is that tempers are reaching a boiling point among
bringing Shanghai Chai from South Yarra to, errr, many who want the elected government to take
back control.
Shanghai.
Paul
French
M
M
A
chinabynumbers
87
Year-on-year growth
of China’s online
shopping industry in
2010
14
Number of Chinese
people short of
drinking water in
China this summer
14m
31m
China’s projected
annual automotive manufacturing
capacity by 2013
Percentage of birth
defects in China
14
2
Percentage of
Chinese colleges
that passed recent
tobacco-control
checks
month in rev iew • editor ’s inbox
“The Central Bank of Nigeria (CBN) intends to diversify its
foreign exchange reserves, eventually switching as much
as 5-10% of current FX reserves into Chinese yuan (CNY).
Given the lack of CNY convertibility, the move at this stage is
largely symbolic. Nonetheless, it may serve as an important
precursor to eventual FX reserves diversification by other
African countries, as well as wider adoption of the CNY for
trade settlement, signaling the beginnings of an important
new phase in Chinese-African economic engagement.
While Nigeria hopes to boost the returns it currently
earns on its FX reserves, benefiting from higher nominal
yields and expectations of CNY appreciation, for the moment
the amounts to be transacted remain small. Existing constraints on diversification suggest that Nigeria’s FX reserves
will remain dominated by the US dollar (USD). Currently, the
USD accounts for an estimated 79% of its FX reserves, with
the Swiss franc, British pound and euro thought to make up
the rest. Policy makers have hinted that they might reduce
EUR holdings to make way for more CNY.
Nigeria’s intent to diversify its reserves has a broader
significance. As an oil producer obtaining most of its FX
receipts in USD, with relatively little Chinese involvement in
the country’s hydrocarbons sector, Nigeria is not the most
obvious African candidate for CNY “reserve-ification.” However, the country’s large population and the strength of its
import demand mean that it already ranks among China’s
top five trading partners in Africa, despite the absence of
more significant Chinese involvement in Nigeria’s oil sector.
The size of its FX reserves grants Nigeria policy options
that may not be open to other African countries. While
smaller economies with fewer external reserves are likely
to find the non-convertibility of the CNY more of a binding constraint, Africa’s oil producers – with larger external
resources – are in a different position. They are more likely
to deploy a small proportion of reserves in a non-convertible
currency.
There has been some talk of Nigeria eventually invoicing
for oil in CNY – a move that might open the way for the trade
settlement of other commodities in CNY. This could conceivably lead to other African sovereigns increasing the levels of
CNY held in their FX reserves. For China, encouraging the
use of CNY for trade invoicing and settlement is likely to be
a more immediate policy aim than promoting the CNY as a
reserve asset. In Africa, the sequencing of events, dictated
by the small amount of global external reserves held in the
region, suggests that more widespread trade settlement in
CNY is likely to precede the adoption of the CNY as a reserve
asset. For most sub-Saharan economies, ensuring the convertibility of FX reserves is more important at present than
investing for a higher return.“
Imaginechina
From “Nigeria – CNY reserves
diversification,” Wing Lo, Razia
Khan, Standard Chartered
Global Research, September 15
From “Reuters News Asia Corporate Sentiment Survey,” September 14:
“Business sentiment at Asia’s top companies fell in the third
quarter to its lowest since the fourth quarter of 2009, weighed
down by growing doubts over the strength of the global economy. The Reuters Asia Corporate Sentiment Index fell to 63
from 71 in the second quarter of 2011. Weak US economic data
and worries about defaults in the euro zone have clouded the
outlook for the global economy, weighing on sentiment across
the board.
China remains one of the most optimistic countries
in Asia with 12 of 16 companies responding saying they
maintained a positive outlook. Indian companies remain
concerned about government policies. Japan was markedly
gloomier than China with 19 of 26 companies responding
maintaining a neutral outlook, with many exporters being
hammered by a strong yen.
The auto sector was bullish, a marked improvement over
the second quarter when Japanese automakers were suffering
from supply problems as a result of the March earthquake.
Eight of 18 companies responding from the tech sector were
neutral while seven were positive, roughly in line with the
second quarter.”
From “ANZ China Data Alert, August Trade Data,” Liu
Li-Gang and Zhou Hao, September 10:
“Both China’s exports and imports remain generally healthy in
August, suggesting the economy is staying on track despite the
global slowdown. Notably, imports accelerated, led by iron ore
(+32.4% y/y), indicating that China’s domestic demand maintained a strong momentum. The trade statistics are consistent
with other real activity indicators released on last Friday. As
such, the risk of a hard landing has decreased significantly.
The first two months of Q3 have registered an average
monthly trade surplus of US$24.7 billion, indicating strong
capital inflows. This will be translated into higher domestic
monetary aggregates and an increase in inflationary pressures, should the PBoC not fully sterilise the inflows. This
continued pressure on liquidity and inflation will somewhat
offset the PBoC’s tightening efforts. It is unlikely for the
PBoC to lower the reserve requirement ratio any time soon.
As trade performance remains robust, RMB will continue its gradual appreciation in the foreseeable future. We
maintain our forecast that RMB will strengthen by 5-6%
versus USD this year, leading to a year-end rate of 6.28-6.30.
US$/RMB trading band could be widened as well.”
15
SNAPSHOT • q ue stion of the mont h
snapshot
Imaginechina
‘Real estate, love it or hate it, is a very
effective way to generate wealth’
Grasp the small
local voices, p18
Chinese SMEs
sound off on the
credit crunch
companies, P20
Real estate
markets are
cooling off fast
portfolio, P22
Soufun,
Evergrande
16
Chinese small- and medium-sized enterprises are short on
credit and facing bankruptcy. What else is new?
T
he plight of Chinese small- and
medium-sized enterprises (SMEs) may
be old news, but recently their prospects
have worsened. Their already-thin margins are
being crushed by intensifying competition,
high commodity prices and skyrocketing wages.
Now the central government’s attempts to slow
down the economy by restricting credit growth
are making it even more difficult to get loans to
keep operations afloat. These factors, combined
with downward trends in the export sector, have
lead many pundits to forecast a “wave of bankruptcies” for Chinese SMEs.
In fact, some say the wave is already underway. Zhou Dewen, head of the trade association
for SMEs in the famed entrepreneurial hothouse of Wenzhou, made headlines when he
claimed that nearly one-fifth of the city’s SMEs
were at risk of going bankrupt. Zhou expects
that figure to increase to 40% by the next Chinese New Year.
Outsize influence
A crisis among SMEs would have serious macroeconomic implications; they generate about
60% of GDP and employ two-thirds of Chinese workers. But it remains difficult to verify
Zhou’s figures, or anyone else’s.
While various ministries have produced
statistics that show SMEs are doing fine, Victor Shih, a political economist at Northwestern
University, pointed out that the National Bureau of Statistics’ definition for “large enterprises” was recently revised upward from RMB5
million in revenue per year to RMB20 million,
banishing untold numbers of Chinese compa-
nies from many statistical surveys: “We
cannot rely on the statistics any more.
Anecdotally, SMEs are suffering, and I
tend to believe it,” he said in a written response to questions.
Put in context, of course, SMEs are
always suffering. In the US, about half of
small businesses vanish within the first
five years of being founded, many due
to bankruptcy. “Small private companies
go bankrupt all the time, in China as in
other markets,” said Andy Rothman,
chief China macro strategist at CLSA.
He said CLSA regularly surveys a group
of SMEs across the country, and only
around 6% of them said that more SMEs
had gone bankrupt in their area than
usual.
Under-leveraged
While the general understanding of the
health of China’s SMEs remains murky,
it is undeniable that access to credit is a
challenge for most Chinese private firms
– and not just the small ones. “For [Chinese] public sector firms, the leverage ratio is eight to one. For private listed firms,
it’s four to one,” said Frank Yu, professor
of finance at China Europe International
Business School (CEIBS). “That’s pretty
constrained.”
“The companies we invest in definitely need more money, and they need
the lowest cost of capital possible,” said
Chauncey Shey, executive managing director at SB China Venture Capital.
Yu of CEIBS also noted that better access to credit can encourage stateowned enterprises (SOEs) to enter new
markets and crowd out the private sector:
“If [SMEs] have access to loans maybe
they can go out and expand, but if they
don’t, the state-owned firms can step in.”
Some argue that this crowding-out
effect is, in fact, a tacit policy goal. After
all, this is a communist government,
and Party leadership has repeatedly and
clearly stated that it intends to preserve
an economic leadership role for the state,
and by extension state firms.
But Beijing does not want to destroy
the private sector, and politicians certainly don’t want to be blamed for a
policy-induced “wave of bankruptcies.”
Even so, helping SMEs is tricky. Like
the small farmer, the small businessman
is a sentimentally popular figure. But he
is also a risky man to lend to. His business is unstable, he lacks collateral, and
his reputation for innovation – if one
excludes inventing schemes to evade
In the US, about half of
small businesses vanish
within the first five years
of being founded, many
due to bankruptcy
regulations – is almost certainly exaggerated. Thus state-owned banks have
been reluctant to lend to SMEs, despite
frequent urging from the central government. Meanwhile, policy-backed support
for SMEs like micro-loans and subsidies
– neither of which has been a panacea in
other economies – have proven clunky to
implement here.
What has worked best in China so
far has been the country’s trillion-dollar
“back-alley” banking system, with channels ranging from the semi-legal to the
criminal: friends and family, loan sharks,
domestic private equity funds, and illicit
loans from cash-sodden SOEs looking to
get a higher return on their savings.
Since many of these ventures are
semi-legal at best, they have come under
fire from Beijing. Vice Premier Wang
Qishan recently called for a crackdown
on “illegal financial activities,” which
some read as targeting back-alley banks.
But while shutting down loan sharks
is politically popular, such parasites stay
in business because they meet a genuine demand. Such a campaign, however
morally satisfying, threatens to damage a
critical, if expensive, funding mechanism
for high-risk enterprises.
There is one solution. Business
demand for hybrid products like the
Alibaba Group’s AliLoan program,
which doled out around US$3.75 billion
in credit to small businesses (in cooperation with partner banks) last year, has
boomed in this environment.
There is plenty of innovation in the
works. “We are seeing a major surge [in
lending] from the private sector,” said
Shey of SB China Venture Capital.
“Private capital is enough to tackle
the problem in Wenzhou,” said Hu Minghuan, a manager at Wenzhou HEC
Fashion International. “Wenzhou companies have accumulated lots of it.”
The best policy, perhaps, would be
to cut back on loans to the inefficient
but well-connected state champions and
leave the SMEs to fend for themselves.
17
SNAPSHOT • Local Voices
Man in the middle
G
iven widespread reports that Chinese
small- and medium-sized enterprises are
facing bankruptcy due to credit tightening, China Economic Review informally surveyed a selection of SME managers in Dongguan
in Guangdong, Wenzhou and Hangzhou in Zhejiang, and two in cities in the interior: Wuhan in
Hubei and Xi’an in Shaanxi.
Jason Long, owner and general manager
of Bright Star Manufacturing, which makes
components for the auto and telecom sectors with a sideline in pharmaceuticals
Our small companies are in urgent need of money
for new product development and production
expansion. Most firms opt for inter-company
funding, borrow from relatives and friends, or use
property to obtain a mortgage. Only a few choose
to borrow from a guarantee company [a class of
private lender] due to their high interest rates,
which are typically 15-20% or higher.
Although the government has said it will help
SMEs, there are few practical policies to support us. Companies that have been relying on
bank lending for a long time may face the risk
of closure. The companies which have adapted
to growth without borrowing from banks will be
fine. The Chamber of Commerce in Dongguan
has not been as successful in helping its member companies get funds as those in Zhejiang
and Fujian provinces. I would only opt for bank
lending if the risk is low. I estimate that less than
50% of SMEs in Dongguan lack money. A labor shortage has forced around 30% of all companies in Dongguan to operate at half capacity.
Owner of a bathroom cabinet manufacturing company with 55 employees based in
Hangzhou
I get funding through relatives and friends. I also
borrow money from banks for production and
operation. SMEs in the bathroom product sector in Hangzhou often borrow a small amount of
money through mortgage loans. The average interest rate is around 10%. Private lending in the city is
not common. I am not worried that tight credit will
cause our company to shut down but it will slow
our development. Strict loan guarantee conditions
are the toughest issue we have to face now. Bank
lending is getting tighter. However, bank lending
is not the only reason SMEs are struggling with
development. Banks are profit-oriented and they
choose the companies which have potential. Since
there is a high risk that banks won’t profit much
from lending to SMEs, it is natural that SMEs
18
Imaginechina
Chinese
SME
managers
vent about
credit, labor
markets and
back-alley
lending
‘Bank lending is not the only
reason SMEs are struggling with
development. Banks are profitoriented and they choose the
companies which have potential.
There is a high risk that banks
won’t profit much from lending to
SMEs’
anonymous Bathroom fixture
manufacturer, Hangzhou
have problems with borrowing. Hangzhou Enterprise Guarantee, a state-owned company, helps
some companies with patents and financing by
lowering mortgage requirements, but our industry does not enjoy any such privileges here. And I
think only a few companies can meet the standards.
Yang Bo, general manager at CIIC Education
International Xi’an, with 40 employees
Because we provide overseas education services,
customers pay in advance and we use this money
to maintain business operations. At present, 80%
of companies operate with debt. Though we do not
need to borrow money, many SMEs face tough
funding problems, mainly because they are not
able to obtain mortgages. Some seek help from
friends and relatives but the amount they are able
to borrow is usually less than RMB10,000. Others ask their local chamber of commerce or other
organizations for funding. The amounts lent can
be between RMB5 million and RMB10 million.
Although the Chinese bank lending model is not
mature, I still prefer to apply for bank funding
because the interest rate is around 9%, while at other
organizations it is above 10% and the risk is higher.
Mr Wang, managing director at Wuhan Roafe Sanitary Wares, with 50
employees
I prefer bank funding, which is safer, or
guarantee company loans, which are issued in cooperation with banks. Traditionally, however, we have higher trust in
banks. If I need less than RMB100,000,
I ask relatives or friends for help. The
interest rate in banks is around 7.6% in
Wuhan while at guarantee companies it
is higher.
I borrow money to open more stores,
buy more inventory and launch more
commercial events. Our company is at
risk of stagnating development due to
bank lending difficulties. For instance,
capital flows will be lower, inventory is
likely to decrease and I may not be able
to launch more promotional activities or
open more stores. I think many SMEs,
especially those who are not familiar
with alternative ways of capital management, will be forced to shut down.
Wuhan currently does not have an association to cooperate with banking institutions to help SMEs. However, I
heard the Qianzhou Chamber of Com-
‘Many SMEs, especially
those who are not
familiar with alternative
ways of capital
management, will be
forced to shut down’
Yang Bo, CIIC Education
International
merce in Hubei was planning to borrow
RMB100-200 million from the Agricultural Bank of China, but it seems the
two parties did not reach an agreement.
The main issue is that there is no clear
and standardized audit mechanism yet.
Hu
Minghuan,
information
manager at Wenzhou HEC Fashion
International
We have enough money so we use our
own capital and put property up as collateral. The money is used for trading,
manufacturing, buying land and building
new factories.
I think a few inefficient companies
with insufficient capital and high operational costs will go bankrupt in the face of
tight credit. In Wenzhou, corporate funding often comes from banks, but money
for personal investment often comes from
relatives and friends, with the maximum
amount borrowed around RMB10,000.
The worst solution is to borrow from a
guarantee company because the interest
rate is very high. The stricter guarantee
standard is currently the main difficulty
in terms of bank lending. Because of
tough bank regulations we would likely
lose orders, delay factory expansion, or
have to cut staff salaries.
Fortunately, there are large amounts
of private capital flows in the city as well.
In my opinion, the most effective way of
financing is borrowing from friends or
relatives. Cooperation between associations and banking institutions is still new
in Wenzhou – it appeared two years ago.
I think tight credit is not the reason why
50% of all companies in Zhejiang are operating at half capacity. The main reasons
are decreased orders and higher costs.
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19
SNAPSHOT • Companies & Sectors
Second course
In the property market, tightening measures are
kicking in; diversification will be key in coming months
F
or all the central government’s
attempts to cool the property sector, monetary tightening and loan
restrictions couldn’t keep the big boys
down. China Vanke, the country’s largest property developer by market value,
announced in August that profits for the
first half of 2011 were up 5.9%. But compared with competitors, Vanke’s earnings
were relatively unimpressive. Country
Garden’s profits surged 63% in the same
period. Evergrande beat expectations
with a whopping 147.9% year-on-year
rise in core business profits. Among the
65 Chinese listed property developers
who had reported first-half results by the
end of August, average revenues surged
11.75% and profits increased 19.92%.
Beijing’s crackdown on real estate speculation does not appear to have hurt developers’ bottom lines so far.
Down-market strategy
Part of the explanation for continued
growth is that Beijing did not extend
targeted property investment barriers
to lower-tier cities; nimble developers
with nationwide networks therefore followed equally buyers into those areas.
Sam Crispin, director at PwC, said diversification has spared margins for many
developers. “It’s not developers finding
loopholes; they’re developing nationwide
markets. Those developers posting higher
results are those that have successfully diversified geographically and moved into
commercial developments.”
Yet even as realtors prepare for
“golden” September and “silver” October,
the traditional high season in Chinese
residential markets, the smell of dead
leaves is in the air. The first harbingers of
winter are the restless markets. The TAO,
AlphaShares’ China Real Estate ETF
that tracks 47 Chinese real estate firms
on the New York Stock Exchange, is
down nearly 17% year-to date, compared
to a 5% decline in the Dow Jones Industrial Average.
Bond markets are also starting to look
queasy. Evergrande’s dollar-denominated
bonds, for example, have lost popularity
20
even on the back of its rising profits.
According to data from the US Financial
Industry Regulatory Authority, yields on
the company’s 13% notes due January
2015 climbed 3.17 percentage points to
14.92%, indicating increased skepticism.
The skepticism is based on a collection of headlines. Beijing’s efforts to
slow lending and property price growth
this year (including three consecutive
reserve-requirement ratio hikes and two
deposit and loan interest rate hikes) are
already having some effect on residential
property prices in first-tier markets, and
will continue to apply downward pressure to lending for the rest of 2011. That’s
bad news for smaller developers that have
failed to diversify. Of the 26 out of 65
listed Chinese developers that reported a
decline in profits in H1, ironically most
were smaller players in lower-tier cities,
who appeared unable to compete with
nationwide developers.
The central government is now saying
it plans to extend existing loan restrictions
into lower-tier cities; at the same time, it
plans to create a nationwide home ownership database to prevent speculators
from evading mortgage restrictions by
buying second and third (and eighth and
twelfth) homes in disconnected markets.
Financial regulators are also increasing
their supervision of banks to crack down
on new innovative financing channels
– such as Banker’s Acceptance notes
– that have been used to skirt reserve
requirements. Some of these loans have
presumably found their way into property
markets.
There are other worrying signs:
The Way of the TAO
AlphaShares China Real Estate ETF (TAO)
$25
1,200,000
$20
1,000,000
800,000
$15
600,000
$10
400,000
$5
$0
200,000
Sep 10 Oct 10 Nov 10 Dec10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11
Close
Volume
Source: NYSE
0
Among listed developers, inventory
increased nearly 40% in the first half of
the year. According to data from Knight
Frank, the residential land bank among
developers is expected to grow by 51%
to 140,000 hectares by the end of 2011.
Such an overhang will take between five
and 10 years to profitably digest.
“The golden month will not be that
booming,” said Regina Yang, director of
research at property consultancy Knight
Frank. She predicted that while transaction volumes may increase month-onmonth due to the seasonal effect, they
will likely decrease year-on-year.
Not an emergency
But developers’ prospects – big developers, that is – may be better than they
appear. The last time the central government slammed the brakes on the property
markets in 2007, it overcorrected, with a
negative effect on wider economic performance. As frothy as the China market may be, Beijing knows that pushing
prices too far down would be a mistake.
“A 15% correction is desirable, 30-50% is
not,” said Crispin of PwC.
This time policy-makers appear to
be proceeding more carefully, and the
recent slowdown in inflation and soft-
Imaginechina
ening in export markets will only make
them more cautious. In fact, despite all
the noise, Beijing may not get around to
enforcing new restrictions in lower-tier
cities if the wider macroeconomic picture
remains volatile.
Meanwhile, consumer demand is still
strong. A report from CLSA claims that
90% of Chinese homebuyers are not, in
fact, speculators, but are buying a place
they plan to live in – many are likely
upgrading from smaller, cheaper apartments, a far more sustainable source of
demand. And part of the price increases
is no doubt due to improvements in the
quality of housing being sold today – better bathrooms, higher water pressure and
parking spaces. CLSA reports that onethird of buyers pay with cash.
Buy to sell
Most of the large developers are also sitting on plenty of cash, and the smart ones
are moving it into commercial real estate.
Michael Klibaner of real estate consultancy Jones Lang Lasalle noted that demand for top-shelf office space in China
is particularly strong these days – but he
also said that credit shortages are slowing
new investment.
Other parts of the commercial property sector are even more attractive, in
particular those that offer exposure to the
China consumption story.
“If you can get a good tenant mix,
I believe retail is the best asset you can
have,” said Yang of Knight Frank. “Even
in the second- and third-tier cities, where
office rents may be only RMB4-5 per
square meter per day, retail rent rates
may be as high as RMB20-30 per sqm
per day.” She said companies like Dalian
Wanda are building mixed-use residential/commercial complexes, selling off the
condos and keeping the stores.
Despite a lingering chill in the air
from government restrictions, property
developers appear equipped to outlast
the winter. Profits from residential may
slow for the rest of the year, but the wellhedged will endure it. The secret to their
success is the Chinese fondness (madness?) for property; until there’s something better to do with their money,
Chinese will endure big penalties to keep
buying in. “Real estate, love it or hate it,
is a very effective way to generate wealth,”
said Crispin of PwC.
21
PORTFOLIO • soufu n, evergra nde
Soufun (SFUN.NASDAQ)
Being a bellwether for the property industry can only be bad news
tions on property have spooked would-be
investors.
Some argue that Soufun is more insulated to the downturn than your average
property developer. Chen Jie, a professor with the Center for Housing Policy
Studies at Fudan University, has said that
Soufun faces lower risks from regulation
because it provides information, rather
than buying and selling property.
But a closer look at Soufun’s business
suggests its risks are just as high, if not
Out in the cold
Closing price and trading volume, Sep 2010 - Sep 2011
4000
30
3500
2500
20
2000
15
1500
10
1000
5
500
0
US$
25
3000
‘000
L
ast year, Soufun conducted one
of the most successful IPOs by a
Chinese business in the US. The
company, whose real estate website drew
more mainland visitors than any other in
2010, saw its shares surge 73% on its first
day of trading as bankers touted its combined exposure to China’s fast-growing
internet story and the property sector.
Since then, however, the stock has
born little resemblance to other Chinese
internet companies whose valuations
have been lifted by a wave of investor enthusiasm. Soufun’s stock price
has swung between highs and lows in
a classic “head and shoulders” pattern
– its price slowly building, leveling out,
soaring to new highs, and then retreating again in stages, before repeating the
process again. The stock’s volatility stems
from the company’s connection with an
increasingly unloved segment: the property sector, where Beijing’s tough restric-
0
5-Oct-10 1-Dec-10 28-Jan-11 28-Mar-11 24-May-11 21-Jul-11 16-Sep-11
higher. The company makes most of its
revenues (74.7% in 2010) by selling ad
space on its website to property developers, agencies and home furnishings companies. That makes Soufun vulnerable:
When companies meet hard times, ad
spending is one of the first things to go.
Property developers may be cash-rich,
but they are still likely to scale back on
advertising in what is universally perceived to be a slow sales period. Rumblings among ad agencies support this
outlook. Many industry professionals
expect weak spending in 2012 from both
real estate and auto advertisers, typically
the two biggest customers for online
advertising. Soufun has posted strong
revenue growth – in the second quarter,
its revenues nearly doubled year-on-year
to US$80.6 million, while its profits
jumped to US$22.9 million from US$2.9
million the previous year – but that clip
will be hard to maintain in a downturn.
Evergrande (3333.HKG): Well-positioned to weather the storm
Evergrande Real Estate, China’s secondlargest property developer by sales,
stunned analysts this summer with its
first-half results. In a period of artificially restricted demand, the company
doubled its sales volume year-on-year to
RMB42.32 billion (US$6.71 billion), while
its underlying profit rose 147.9% annually to RMB4.81 billion.
The secret to Evergrande’s success was its diversification: All told, the
Guangzhou-based developer has a presence in 101 cities, including the new economic centers of the country’s west, like
Chongqing, Wuhan and Hefei.
Unrestricted
Restrictions on property purchases and
mortgages have succeeded at reining in
price growth in first-tier cities, especially
Shanghai and Beijing. However, property
markets in less regulated lower-tier cities have actually heated up, as investors
stymied in the first-tier cities snap up
houses in smaller urban centers.
22
This trend has not escaped the notice
of regulators, who have recently begun
discussing plans to extend restrictions to
smaller cities.
Any such move, when it occurs,
would present a risk to Evergrande’s
business. That’s one reason why investors are jumping ship on the company’s
Stock snapshot
Stock price
52-week range
Outstanding shares
Market cap
Average volume (3m)
Earnings per share*
As of September 19
HK$3.79
US$2.52-US$6.27
14.89b
HK$56.3b
97.9m
HK$0.60
Price/earnings ratio*
6.36
Mean analyst
recommendation**
1.28
Analyst 1-yr target
estimate
HK$5.40
* Trailing twelve months
** 1.0 = strong buy, 5.0 = sell
stock, reducing its value by nearly 40%
between mid-July and mid-September.
That decline is unwarranted, and
presents a buying opportunity. Even if
regulations are extended, Evergrande
will remain better-positioned than its
competitors, many of whom own much
of their property in the vicinity of their
headquarters. The company has plenty
of projects – 62 in all – ready for launch
in the second half, mostly in the fourth
quarter.
Evergrande’s continued expansion
has pushed up its net debt ratio from 53%
at the end of 2010 to 73% within the last
six months, but its cash also expanded
44%, helping to secure its financial position. In addition, management has promised to slow expansion and start selling,
after Evergreen added 49 million square
meters to its land bank in the first half.
It now has a land bank of 135 million
square meters with 181 projects – meaning that its stock is trading at a hefty discount to its net asset value.
Talking P oints
talkingpoints
“We have a contract to show NFL American
football games, starting this season”
Dot-not anymore
The era of indirect foreign ownership of Chinese internet
companies is coming to an end
C
faT DRAGON, p26
China’s “ghost
cities” will soon
be full
john g. whitesides, P28
Science as a
tool of Chinese
diplomacy
Q&A, p34
Kun Zhang, VP of
video site PPLive,
on online sports
24
hina continues to bar foreigners from
ownership in many sectors of the economy that are considered particularly
sensitive from the standpoint of national security. The internet is one such sector where direct
foreign ownership is prohibited.
Yet it is well known that virtually the entire
internet sector has been funded by initial public
offerings (IPOs) in overseas markets, making
foreign investors the owners of many companies in this sensitive sector – in direct violation
of the clear provisions of the law. New regulations recently promulgated by the Ministry of
Commerce (MofCom) suggest that this unusual situation has reached its end.
This trick was managed by use of what is
known in the US as a Variable Interest Entity
(VIE). Under a VIE structure, a Chinese internet provider is effectively owned by a foreign
entity through the use of a complex set of
contractual arrangements rather than through
ownership of stock. The control is so total and
complete that the arrangement is considered
the equivalent of ownership under US accounting rules.
New internet order
On September 1, the Regulation of the Ministry of Commerce on the National Security
Review System for Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors
(the Regulations) became effective. The regulations provide the long-awaited procedures
for national security review for foreign-related
merger and acquisition activity that is required
under the recently promulgated PRC AntiMonopoly Law. To the surprise of many, the
Regulations also took direct aim at the VIE
procedure.
The provisions are deceptively simple. Article 9 of the Regulations provides that it is not
The clarity of the
regulations means that
there is no longer any place
to hide by claiming that the
Chinese law on these issues
is ambiguous or unclear
permitted to make use of “contractual controls”
to evade the requirements of Chinese law that
would otherwise restrict or prohibit foreign
investment in a sensitive sector. This is a clear
prohibition against the use of VIE structures.
Since the whole goal of VIEs here is to hide
foreign investment from Chinese regulators, it
is likely that such structures will not be caught
by national security review at the outset of the
investment.
To deal with this issue, Article 10 of the
Regulations provides that where such contractual controls are used but not reported to
the Chinese regulators, the parties involved
have the independent duty to immediately
terminate the offending conduct. If the par-
Steve Dickinson
is a partner with
Harris & Moure
PLLC in Seattle,
Washington and
Qingdao, China
Sudden impact
The immediate impacts are numerous
and serious. First, IPOs in the internet
sector that explicitly rely on a VIE structure are clearly under a cloud and are
quite properly being delayed or cancelled.
Many investors have proposed
expanding the VIE structure for foreign
IPOs in other restricted sectors of the
Chinese economy, such as telecom and
medical services. It is now clear that this
expanded use of the VIE structure in
China will not succeed.
The Regulations show that existing
foreign investment in the internet sector is built on a shaky foundation. It is
Istock
ties do not take action on their own, the
regulators have the authority to order the
immediate termination of the offending
investment by whatever means necessary.
What does this mean for foreign
investors in China? Many investors persist in the belief that existing VIE structures are sound and that such arrangements can still safely be used in the future.
This has always been a mistaken analysis
of Chinese law, and the new regulations
make that clear.
clear that Chinese regulators have the
legal authority to step in and order that
all of these investments be terminated.
Even if this drastic step is not taken, it
is equally clear that existing contractual
arrangements are in violation of Chinese
law. This renders the contracts unenforceable and VIE structures essentially
meaningless.
None of this is actually new; these
risks have long been known. However,
the clarity of the Regulations means that
there is no longer any place to hide by
claiming that Chinese law on these issues
is ambiguous or unclear. Where Chinese
law says that ownership by foreigners is
restricted or prohibited, the law means
what it says.
Foreigners who invest in violation of
the law are making a bet that the violation will be ignored. In today’s China, this
is extremely unlikely.
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25
Talking P oints
Believe in ghosts
Fat Dragon is
China Economic
Review’s house
pundit on the
Chinese
political
economy
26
C
hina, we are constantly told by know-itall critics on Wall Street, is a giant bubble
waiting to burst. Just go to any Chinese
city and the evidence is apparent in thousands of
empty apartment blocks and ill-conceived government megaprojects.
The ultimate symbols of investment gone mad
are China’s “ghost towns” – gleaming new cities
without inhabitants. Nouriel Roubini, the gloomy
critic of excessive consumption and dodgy lending
practices in the West, recently cited the proliferation of empty cities as evidence that China was
heading for its own financial crisis and years of
anemic, Japan-style growth.
The trouble with this analysis is that it ignores
the reality on the ground. Urbanization pressures,
housing demand, and prior experience suggest that
China’s so-called “ghost towns” will not remain
empty for long. Sure, there are plenty of problems
with China’s investment model – but building
ahead to satisfy future demand for millions of new
homes is not one of them.
The poster child for critics who argue that
China’s building boom has become unmoored
from reality is Ordos, a municipality in Inner
Mongolia where local officials have built an empty
city in the middle of the Gobi Desert. Almost all
the 100,000 apartments have been snapped up
by local investors, but 90% remain empty. Ordos
appears to be a classic example of investment racing far ahead of demand.
Yet Ordos, which claims to sit on one-sixth of
the nation’s coal deposits, is anything but representative. Flush with coal money, Ordos can afford
to flash its cash on risky investment projects. If
its gamble fails, developers and investors will lick
their wounds and move on; any impact on China’s
property market will be miniscule.
Meeting real needs
The vast majority of China’s “ghost towns” are new
districts built on the edges of expanding cities, not
mini-Dubais in the desert. And these new suburbs
are prepared to serve multiple sources of new demand; both providing much-needed housing for
people relocating from older, smaller homes in the
city center, and housing rural migrants looking for
cheap housing closer to the industrial zones on the
urban outskirts.
In larger cities, they also provide space for new
campuses to house China’s exploding university
population. Take Zhengzhou, the capital of Henan
province, which has been criticized for building a
huge new district on its eastern edge. Zhengzhou’s
student population quadrupled to more than
600,000 over the past decade, and its new urban
district will soon house 250,000 students and
Imaginechina
China has
built massive,
empty cities
with stimulus
money. Not a
problem, writes
Fat Dragon
Living room: Ordos, a ghost town
financed by Inner Mongolia mines
Almost every major city in
China contains a thriving
neighborhood that was once
empty. China’s cities must
build ahead to accommodate
millions of new urbanites
teachers in 15 new campuses.
Inevitably, new urban districts will not fill up
immediately after they are built. It takes time to
attract a critical mass of inhabitants. But China’s
cities need to absorb 20 million new urbanites
every year in a country that already has an estimated shortfall of 75 million housing units. Most
“ghost towns” are merely new suburbs that people
have not moved into yet.
Pointing at a handful of empty urban districts
as evidence of a giant property bubble ignores the
reality that China has a huge and growing demand
for new housing. Almost every major city in China
contains a thriving neighborhood that was once
empty. China’s cities must build ahead to accommodate millions of new urbanites, and it makes
sense to house them in new districts, rather than
hope that congested old neighborhoods can bear
the strain.
Of course, plenty of ill-conceived projects will
fail along the way, and some developers and investors will lose money. China’s urbanization process
is riddled with inefficiency and waste. But, in time,
The country’s empty cities will fill up – just as
Shanghai’s Pudong district, once the biggest ghost
town of them all, filled up over the past decade.
Talking P oints
Better diplomacy, better science
China is using
scientific
cooperation
agreements
as an effective
diplomatic tool;
writes John G.
Whitesides
Professor John
G. Whitesides,
PhD, is the
director of the
International
Studies
Program at
the University
of Colorado,
Denver. He
is currently
working on a
book on science
and American
foreign policy
28
S
peaking to the American journal Science in
2008, Chinese Premier Hu Jintao admitted that China’s science and technology
research efforts need to be “more integrated with
those of the world.” Such integration, so appropriate today given China’s global position, was not
always possible. Thanks to internal instability and
the Cold War, Chinese science and technology
remained locked out of collaborative relationships
for decades, causing the country’s scientific community to fall far behind its European, American
and Japanese counterparts.
However, as détente shifted global relationships in the 1970s, scientific exchanges quickly
became one of the most successful components
of China’s opening. Within a decade, China was
America’s largest bilateral scientific partner – a
position the country has retained ever since. Today,
China maintains scientific agreements with over
150 countries, and those agreements are being
used not only to further the advance of human
knowledge but also as a means of political influence and diplomatic negotiation.
Cooperative carrots
Science and technology have long been a part of
Chinese diplomacy. The Shanghai Communiqué
of 1972 proposed scientific exchanges years before
the existence of formal US/China relations; similar
exchanges occurred with France and West Germany. Throughout the 1970s the US provided China
numerous scientific “carrots” to increase America’s
political and commercial influence, including providing launch services for a geosynchronous telecommunications satellite, germ plasm for recombinant DNA, seismic survey ships from US oil
firms, a Landsat groundstation, and the fabrication
of a synchrotron for high-energy physics.
Indeed, by 1985, President Reagan could
proudly note that “maturing science and technology cooperation with China, a cornerstone of our
expanding relationship, is now in its eighth year
and is our largest government-to-government
program ... we credit the doors opened by our successful science and technology program with contributing positively to the recent reforms made by
the Chinese.”
The past two decades witnessed the maturation
of Chinese science and technology at home and
abroad. At home, the “wu ke” – namely the Ministry of Science and Technology, the Chinese Academy of Sciences (CAS), China Association for
Science and Technology, the Chinese Academy
of Engineering Sciences and the National Science
Foundation of China – actively direct Chinese
R&D, with the Ministry of Science and Technology the primary funder of international science
While Chinese scientific
output may have little to
offer established scientific
powerhouses, to developing
nations, cooperation with the
Chinese science establishment
represents opportunity
collaboration (its 2005 budget included US$200
million for such activities). Abroad, China looks
to international scientific collaboration to provide
it with both prestige and access to cutting-edge
research. For example, China completed about 1%
of the International Human Genome Project and
agreed in 2007 to pay around 10% of the costs of
the ongoing International Thermonuclear Experimental Reactor project.
However, although China invests heavily in
R&D and maintains a high annual R&D growth
rate (around 18% between 2002-2007) as well as
being a prime recipient of global venture capital,
its role in international science remains limited.
International collaboration is concentrated on five
nations - the United States, Japan, Germany, the
UK and Canada, which together account for nearly
three-quarters of internationally co-authored
Chinese papers.
Chinese scientific output as such may have little to offer established scientific powerhouses. To
developing nations, however, cooperation with the
Chinese science establishment represents opportunity.
For example, perhaps borrowing from its experience with the West, China currently uses its own
science and technology to gain influence, resources
and market access in Africa.
The Forum on China-Africa Cooperation
(FOCAC), established in 2000, is the primary
Chinese vehicle for such ventures. Contracted
through the state-owned China International
Trust and Investment Company (CITIC), Beijing
funds significant science and technology projects,
including investing US$600 million for hydroelectric power in Ghana and US$938 million for an
aluminum smelter in Egypt.
As Sino-African trade grew to US$100 billion annually, FOCAC launched new initiatives in
2009 in 49 different countries. The 100-plus demonstration projects funded by FOCAC included a
research hospital in Nairobi, Kenya; an S&T center in Thyolo, Malawi; and the “Africa Technologi-
No alternative
This Chinese alternative to Bretton
Woods-style development worries critics,
who emphasize the poor quality of Chinese assistance, the lack of local participation, and the state-centered approach to
modernization. Nonetheless, many African countries consider China a useful
partner; even a World Bank report concluded in 2008 that “China’s investments
ease Africa’s poverty.”
Science and technology will play an
ever-larger role in future Chinese foreign
Imaginechina
cal City” near Khartoum.
Funded by cheap Chinese loans, such
projects are naturally packaged as a “winwin” for both sides, offering China access
and investments while benefiting local
African societies.
Vasco Lino, research and innovation
director for Mozambique’s Science and
Technology Ministry explained in an
article in Nature magazine: “They bring
everything, they set everything in place;
infrastructure, expert assistance. We never
see the money, everything is handled by
them. It’s very easy and fast. In one year,
they finished everything.”
relations. For example, during the First
Trilateral Korea-Japan-China Ministerial Meeting on Science and Technology
Cooperation, which took place in Seoul
in 2007, the three regional powers agreed
to create a bioinformatics network to
share findings in the life sciences, increase
regional corporate R&D investments,
and collaborate on natural disaster prevention and mitigation.
The Chinese Academy of Science’s
Roadmap to 2050 imagines the country as
the world’s “science center.” Whether this
is achievable and in what time frame is
an open question – the domestic research
system still suffers from institutional
development challenges – but internal
weakness means scientific cooperation
is even more critical to China’s rise as a
global power.
Cooperation provides China with
access to cutting-edge research, and such
exchanges provide a friendly basis for
regional partnerships. Chinese science
already operates as a diplomatic and economic tool in the developing world, and
will likely play an even greater role in the
future.
29
Talking P oints • Que stion & Answer
Sporting good
Zhang Kun, vice president
of corporate development
at online sports video
site PPTV, on football,
Wimbledon and piracy
P
PTV (also known as PPLive) is
one of China’s online video success stories, due in part to its focus
on one particular kind of content: sports.
Founded in 2004, the website offers a
wide variety of video programming –
most of it sports-related – over streaming video servers that operate according
to a distributed peer-to-peer model that
reduces costs by reducing bandwidth
expenses.
In addition, PPTV viewers tend to
watch for relatively longer periods of
time: Football games are longer than
cat videos. This makes it popular with
advertisers. Zhang Kun, PPTV’s new
vice president of corporate development,
spoke with China Economic Review
about the company’s business model and
growing out of a dependence on content
piracy.
Q
: Can you talk a bit more specifically
about hosting sports videos online
as opposed to other kinds of content? It
seems like there is an advantage there;
people prefer to watch sports live.
A
: Yeah, there’s no point of watching
a DVD. Sports were what the company started with, and it seems like we
have really gotten into people’s minds.
When people think of watching sports,
they come to PPTV. We do spend a lot
of money in this particular area, especially for acquiring rights like those for
the World Cup and Wimbledon.
Q
: What about import barriers? There
are restrictions on foreign movies
and such in China. Are there any restrictions on sports content?
A
Q
A
: The whole industry in China has
seen these kind of issues in differing
degrees. I would say that before 2009,
the majority of the content came from
[pirated] sources. But since 2009 it has
been getting better. Look at the cost
of content. before 2009, online media
rights for a TV series were probably sold
for RMB2,000 [US$310] per episode
or less. Now it is easily RMB100,000,
or sometimes even RMB200,000 per
episode – and we are talking about nonexclusive rights. Piracy is now considered
a crime, not just an “issue.”
Q
A
: Do you have a license to show
NBA basketball games? What other
kinds of sporting events are you licensing
here?
A
: We have a contract to show NFL
American football games; starting
this season, we are showing three games
: So how does this play out with
PPTV and sports?
: You know sports has an advantage
in that area. As I mentioned earlier,
no one buys a sports DVD. Most people
watch it live. That’s the nature of that
sort of programming. You can buy a
movie DVD on the street and upload
it. But for sports licensing and content,
you have to get it through an accredited
source. You can’t just get the signal from
anywhere and then show it.
Q
A
per week. For the NBA, I am not sure.
: Some have accused your website
of hosting a large amount of pirated
content.
: None that I am aware of. It just
depends on user demand for a given
sport. NBA basketball is very popular.
Hockey? Many Chinese people don’t
know what this sport is.
Q
30
It just depends on user
demand. NBA basketball
is very popular. Hockey?
Many Chinese people
don’t know what this
sport is
: You can’t? When people are
complaining about pirated content
on your website, aren’t they complaining
about live sports?
: I think they are complaining more
about video-on-demand content like
dramas and movies uploaded to our site.
If you are a content owner, if you find a
problem, let us know. That’s the proper
way to address the issue.
China Investment Conference 2011:
Chengdu and Shenyang
The Must-Attend Conference of the Year
Chengdu - October 13 / Shenyang - October 25
China has thousands of high-growth, profitable
private enterprises in the market that are
seeking financing. Today, Chinese companies
face more choices for raising capital than ever
before, including listing on US, Hong Kong,
German and other exchanges, or receiving
investment by private equity or venture capital
firms.
China Economic Review invites you to attend
an investment conference in two of China’s
fastest-growing second-tier cities, Chengdu
and Shenyang. This conference is targeted
at companies which are interested in raising
capital and the industry experts who can
advise them. The conference will both provide
the management of local companies with
information and perspectives from top industry
advisors on the best strategies for raising capital,
and introduce industry experts to successful
private Chinese companies which are seeking
financing
Shenyang
Chengdu
Sponsors:
Who should attend?
• High level management of Chinese companies
seeking financing
• Investment banks
• Law firms
• Accounting firms
• Investor relations firms
Media partner:
Sponsorship opportunities are available.
Please contact:
Caroline Fontaine
E-mail: caroline.fontaine@sinomedia.net
Tel: +86 21 5385 9061
Organizers:
The Financial Service Office of Shenyang
The SME Service Center of Chengdu
The SME Service Alliance of Chengdu
Co- organizer:
China Economic Review
special report • econ omic growth
Before
the storm
An economic winter
looms in the West,
but the real threat to
China’s economy
is internal
bears vs. bulls, p36
Skeptics and
supporters of the
China growth story
face off
W
ith the prospect of a further
recession looming in much of
the developed world, China
appears to be a safe haven. Clashes over
bailouts for debt-ridden economies
threaten to unravel the EU; in the US,
stock markets swing wildly and unemployment remains near record highs.
Economists who foresaw a quick recovery
several years ago now warn that any global
resurgence is a long way off. Meanwhile,
China’s economy continues to grow at a
clip of more than 9% annually, which has
some commentators openly speculating
whether an apparently vigorous China
will help shoulder the recovery of the
world economy.
But skeptics believe that China’s outward strength conceals internal illness. The
country’s economic model, they say, continues to systematically misallocate – and
sometimes waste outright – the nation’s
wealth. The system leverages China’s high
household savings rate to provide cheap
capital to local governments and stateowned enterprises, which then invest in
assets and infrastructure. As a means to
rapidly bootstrap China out of poverty,
the strategy worked well, but critics claim
it is now time to set it aside: It produces
too much debt and too much waste, and
it delays the arrival of a more sustainable form of growth in which consumers
would play a larger role.
Adrenaline shot
How the country will continue to grow,
and by extension how and where it will
drive the global economy, hinges largely
on its internal policies. Those policies will
be tested again in upcoming months as
China looks to navigate a minefield of
risks: softening markets for its exports,
32
persistent consumer price inflation, overcapacity among manufacturers and froth
in its property market.
If past performance indicates future
results, the record of China’s economic
planners does justify a degree of optimism. Over the past few years, Beijing
has maneuvered quickly and effectively
to sustain the country’s growth. As stock
markets around the world plummeted in
late 2008, the government swooped in
with a US$586 billion stimulus package
that dwarfed most policy responses in the
West.
While an unknown amount of this
spending was actually rolled over from
previous projects, the huge price tag had
its intended effect: Banks opened the
floodgates to borrowers, and consumer
Boom times
Contribution to GDP growth
16
14
12
10
8
6
4
2
0
-2
-4
2001
Source: CEIC
2002 2003
Net exports
2004 2005 2006 2007
Gross capital formation
2008
2009
2010
Imaginechina
LEFT BEHIND: Critics say China’s economic
system unfairly suppresses consumption
confidence remained high. The plan was
arguably better at boosting investment,
especially in infrastructure and clean
technology, than in spurring consumption, although it also included subsidies
for cars and appliances. But then again,
building infrastructure to better bind the
nation’s interior to its more-developed
coastline was unquestionably necessary.
The surge in spending helped to cushion the economic decline both within
China and around the world. The InterAmerican Development Bank estimates
that the stimulus added 2.6 and 0.6 percentage points to China’s GDP growth in
2009 and 2010, respectively. The pick-up
in construction and consumption also
benefited countries like the US, Australia,
Japan and Korea that export the products which China demands: high-valueadded products, industrial commodities
and agricultural goods.
This outpouring of liquidity had obvious benefits, but it also fueled inflation
and sharply increased debt. Total government debt rose from just above 40%
in 2008 to more than 50% of GDP in
2009 and 2010, according to official data
– which many analysts believe signifi-
33
Imaginechina
would such [additional stimulus] be
given serious consideration,” said Roach
of Morgan Stanley. “In the event of a further global slowing, which is expected to
stop short of recession, I would expect a
more passive response from Chinese policy makers – namely, slowing the rate of
renminbi appreciation and limiting any
further hikes in policy interest rates.”
‘The biggest
misconception
people have about
China is that it’s an
export-led economy’
ANDY ROTHMAN, CLSA
cantly underestimates the real volume
of debt in the system.
Sea change
But both those critics and fans of the
2008 stimulus package agree in one
respect: China should not repeat the
exercise. Some say another burst of stimulus would send both inflation and nonperforming loans to unsustainable levels.
Stephen Roach, a board member
of Morgan Stanley Asia who formerly
served as the bank’s chief economist, believes a further round of fiscal or monetary
stimulus is unlikely, given the continued
need to tame inflation. Andy Rothman,
China macro strategist at CLSA, says
stimulus is unnecessary regardless: China
is already insulated against a slowdown
34
in developed markets, partly because it
is less dependent on exports than it was
three years ago.
“The biggest misconception people
have about China is that it’s an exportled economy,” said Rothman. “It’s not.
Exports right now are a trivial driver of
GDP growth. Disproportionately important to employment, sure – I’m not saying exports don’t matter – but they’re
not nearly as important as domestic consumption and domestic investment.”
It’s true that many of the world’s
products are assembled in China’s factories, but the total value added to the products is usually just a fraction (often 5%
or less) of the finished product price. In
2010, exports fueled just 9% of the country’s GDP growth, compared with 37%
for consumption and 54% for investment.
Export industries remain an important
source of jobs, but that is also changing.
In 2008, factory layoffs in China’s export
coastal hubs incited riots. In 2011, those
same factories are having trouble finding
enough workers to run at capacity.
Because exports make up a minor part
of the economy, China’s policy response
to further weakness in the West is likely
to be muted. “Only in the unlikely event
that the world tips back into recession,
Off-balance
But that doesn’t mean Beijing can rest
on its laurels. Skeptics argue that the
stimulus package was only superficially a
success – and that it may have even been
counterproductive. By encouraging further investment growth, they say, China’s
quick fix has actually exacerbated economic distortions that could encumber
future growth.
At the heart of this debate lies a
much-publicized initiative that China’s
leaders have christened “rebalancing.”
Rebalancing refers to a long-term shift
in economic growth from a model that
relies on investment and lower-end manufacturing toward one that is driven by
domestic consumers and service industries.
President Hu Jintao often speaks
about making growth more “inclusive,”
a catchphrase for more moderate growth
that will deliver more benefits to the
lower and middle classes. Premier Wen
Jiabao, meanwhile, has been an advocate for rebalancing since 2007, when he
called the Chinese economy “unstable,
unbalanced, uncoordinated and ultimately unsustainable.”
The 12th Five-Year Plan lays out initiatives for rebalancing investment-driven
excesses, such as boosting the contribution of the services sector to GDP by four
percentage points to 47% by 2015. This
is a critical transformation for China’s
model. Compared with manufacturing,
the services sector typically pollutes less,
consumes less resources, pays its workers more, and employs about 25% more
people per unit of GDP created. The plan
also includes steps to expand welfare services like pensions, healthcare, education
and subsidized housing. These programs
not only return wealth to lower-income
people, but also encourage them to consume by relieving them of the need to
save heavily in case of emergency.
Unfortunately, the stimulus package,
which prioritized infrastructure, actually tipped China’s economy even further away from consumption – the very
opposite of rebalancing. Since 2007, consumption has fallen as a share of GDP,
as has labor’s share of GDP compared to
that of capital. If regulators slow currency
appreciation and limit interest rate hikes
to steady the economy in the coming
months, as Roach of Morgan Stanley predicts, rebalancing will be further delayed.
So much for Robin Hood
Rebalancing is necessary, critics say, because China’s current economic model
channels vast amounts of capital from
households to governments and stateowned enterprises – effectively taking
from the poor and giving to the rich.
Michael Pettis, a professor of finance
at Peking University, argues that three
main factors direct this flow of capital:
wage levels, the value of the currency
and interest rates, all of which have been
held at artificially low levels. Until last
year, for example, wages were growing
more slowly than productivity; good for
business, because the cost of labor has
dropped, but bad for worker consumption. An undervalued currency, meanwhile, similarly acts a consumption tax,
by making the value of goods Chinese
Over-invested?
Share of GDP growth
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
2001
2002
2003
Final consumption
2004
2005
2006
2007
Gross capital formation
2008
2009
2010
Net exports
Source: CEIC
people buy relatively expensive compared
to the goods they produce.
Finally, suppressed interest rates
ensure a steady flow of cheap money to
businesses and other borrowers. Banks
are now required to maintain a floor of
6.56% on lending rates and a ceiling of
3.5% on deposit rates. The system guarantees them a profit of 3% on their loans,
which in turn gives them motivation to
lend readily. But this cheap capital comes
at the expense of households, who are
limited to a nominal return of 3.5% on
their saved wages. That’s far lower than
the current inflation rate of 6% – meaning
that most households are paying interest
of 2.5% annually just for the privilege of
lending their wealth to the bank.
All these factors mean households
consume less. Worse, artificially low
interest rates also encourage an unknown
amount of bad investments. While interest rates are very low, non-performing
loans are not immediately troubling –
and inflation effectively drives down the
real value of debt. However, the wealth
such loans destroy will someday need to
be subtracted from GDP numbers.
Pettis explained: “Let’s say I have
two investments. In both cases I borrow
US$100 and invest them, and in one case
I create US$105 of value and in the other
one I create US$95 of value. Both of
those things will show up the same way
in the GDP numbers, but in the first case
I’m actually getting richer, and in the second case I’m actually getting poorer.” As
soon as capital becomes more expensive,
GDP growth will decrease – although by
how much, no one knows.
A matter of timing
The implication is clear: Rebalancing
must take place at some point, both to
avoid a dangerous misallocation of loans
and to reward Chinese people for their
35
sacrifices. But economists are fiercely
divided over the proper pace of reform.
Raising wages, appreciating the renminbi, and hiking interest rates, if handled
improperly, could push businesses into
default or bankruptcy, causing a disastrous spike in unemployment.
“The risk is, if you adjust too quickly,
you adjust via rising unemployment and
negative growth, and of course that’s the
one thing everyone wants to avoid,” said
Pettis of Peking University. Rebalancing too slowly, however, would also be
destructive, he said. “Any distortions that
exist in the economy are going to keep
growing, and the most dangerous distortion is an unsustainable increase in debt.”
In Pettis’ view, it may already be too
late: He forecasts that GDP growth may
decline as early as 2013 as non-performing
loans begin to surface, and then slow to the
low-single digits by the end of the decade.
More bullish commentators, however,
see the system as sustainable, and argue
that rebalancing can happen gradually.
They expect growth to moderate in the
coming years in line with central targets,
but think further infrastructure investment and a roaring consumer economy
can keep growth in the high single digits
for years to come.
“I think the rebalancing part is just
going to happen automatically as we go
through the next phase in development,”
said Rothman of CLSA. “Once infrastructure is largely built out, which is just
about where we are now, the growth rate
in that spending will slow down, and by
default consumption will be a larger share
of the economy.”
He disagrees with the idea that the
consumer economy is suppressed, pointing out that retail sales are already growing rapidly. “How do you get retail sales
to go faster than 17% year-on-year? Do
you give out money on the street corner?
Do you hand farmers credit cards? …
This is already the world’s best consumption story.”
Zhang Jun, a professor of economics
at Shanghai’s Fudan University, argued
that infrastructure spending can continue
to sustain the economy for years to come.
The country has embarked on a massive
urbanization plan that involves moving
another 300 million rural residents to cities by 2025, and the country will need far
more capital and infrastructure to accommodate that migration.
That is undoubtedly true, but it’s far
from the full story, countered Damien
36
Two to tango
The financial crisis has seemed to be one long and painful lesson in our inability to
predict the future. But there’s still much at stake in trying. Economists’ views differ
wildly on the sustainability of China’s current growth model, as well as the ability of
the government to shift to a consumption-driven form of growth.
The bulls
Compared to the stagnant West, the
China growth story is often an easy sell.
Bullish analysts typically believe that
the country’s economic growth will slow
in coming years, but only gradually and
in line with central government targets.
Stephen Roach
Morgan Stanley’s former chief economist argues that rebalancing is an
urgent task. However, past feats by the
country’s economic planners have given
Roach faith in Beijing’s ability to carry
out this dramatic reform. “I am confident that China can rise to this aspect of
its challenge as well,” he said.
Lu Ting
The China economist at Bank of America – Merrill Lynch firmly believes that
China is headed for a soft landing.
Recent data has shown the country’s
economy to be quite resilient, Lu said,
leading her firm to maintain a forecast
for 9.3% GDP growth in 2011.
The World Bank
In a recent study entitled “Multipolarity: The New Global Economy,” the
World Bank forecast that China would
account for one-third of
global growth
by 2025, by far
the world’s
biggest driver.
However, the
assumptions
for the
bank’s
base
case
were big
ones,
like the
reform of institutions and
the emergence
of a strong
domestic
market for
consumer goods.
The bears
Commentators who see rebalancing as
both urgent and unlikely would counsel
companies and countries against tying
their success to the Middle Kingdom’s
continued growth. Naturally, there are
no investment bankers in this group.
Michael Pettis
A professor of finance at Peking University, Pettis argues that China is currently the beneficiary of a global increase in
underlying liquidity – just one of many
such surges in the past century. “Every
single one of them has ended,” he said.
Victor Shih
This Northwestern University professor
rose to bullish fame by arguing that official figures grossly underestimate debt.
Due to this leverage, he argues the biggest risk to the economy is capital flight;
that by moving just part of their wealth
overseas, the country’s rich could destabilize the financial system, triggering a plunge in growth as early as 2013.
Nouriel Roubini
‘Finance’s Prince of Darkness’ founded
a research company after
successfully predicting the financial crisis.
He has long
been bearish
on China’s
prospects,
especially decrying excess
construction.
“There is no
rationale for
a country at
[China’s] level
of economic
development to
have not just
duplication but
triplication of those
infrastructure projects,”
Roubini has said.
Ma, an analyst at the Eurasia Group.
“The point is not that more infrastructure
spending is not good, it’s to make sure
that each dollar is efficiently allocated,
so you get more bang for your buck. The
problem is if you’re just spending without
concern for adequate returns because it’s
easy, cheap money.”
Slow going
There are points of relative consensus. For
one, most agree that China is not nearly as
dependent on exports as popular wisdom
would suggest, and therefore economic
weakness in the West won’t derail China
in and of itself. Second, not even the most
bullish of the bulls argues that the current
growth model is sustainable indefinitely.
Some sort of rebalancing must take place.
But the question is when that will
happen, and how painful it will be.
Regardless of their necessity, substantial
changes seem unlikely in the near future.
First, by discouraging investment, rebalancing threatens to trigger a sharp decline
in growth. China’s economic planners are
notoriously cautious, and seem unlikely
to disturb domestic demand at a time
when exports offer no growth alternative.
‘If investment is
being misallocated,
then by definition
debt is rising at an
unsustainable pace’
MICHAEL PETTIS,
PEKING UNIVERSITY
Secondly, rebalancing goes against the
interest of some powerful factions that
have gained wealth and power through the
current system, including banks, property
developers and manufacturers, as well as
the ministries with ties to these industries.
These groups are sure to oppose rebalancing, and there is no evidence as yet that
Beijing is willing to sacrifice their interests.
“Of course the elites who have made
their money over the past years are going
to fight tooth and nail. They don’t want to
give their money away, why should they?”
said Ma of Eurasia Group.
This means that the Chinese consumer is unlikely to ride to the rescue of the
global economy anytime soon – although
the country will likely continue generating strong profits for consumer product
companies with good strategies. “China
cannot save the world, from an economic
standpoint,” said Shaun Rein, managing director of China Market Research.
“However, the Chinese consumer can
save consumer product companies.”
Of course, not all of China’s trading
partners mind its investment-heavy model. Resource-exporting countries around
the world continue to benefit from it. But
countries like Australia and Canada must
prepare for the day when China’s resource
demand begins to dry up.
Despite government rhetoric, economists say the numbers show no sign that
China has made a substantial movement
toward rebalancing yet. But if the task is
as urgent as Beijing has said it is, then reforms will have to begin soon – whether
leaders and businesses like it or not.
“If investment is being misallocated,
then by definition debt is rising at an
unsustainable pace,” said Pettis. “And as
some economist or the other said [it was
Herb Stein], if something is unsustainable, it will stop.”
37
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spotlight
spotlight • united kingdom
spotlight
Imaginechina
‘Chinese banks just have no idea
how to evaluate the creditworthiness of a company’
Return on history
British banks in China saw their market share decrease during
the global economic downturn, but the regulatory winds are
turning in their favor
trade relations, 2010
UK exports to
China: US$11.3
billion
UK imports
from China:
US$38.7 billion
China’s share of
UK trade: 2.7%
W
alking into any foreign bank branch
in China is usually a pleasantly
pampered experience. There are
typically few customers, plenty of staff, and no
lines. Each client is quickly ushered into an
office shortly after arrival. Staff are attentive,
the carpet is plush, and the coffee machines are
well-stocked with premium roast.
The reason for all this top-shelf treatment?
Foreign banks in China are unusually oriented
towards wealthy clients. All of their customers are either foreigners or members of China’s
upper-middle or upper classes. The minimum
deposit for an account at UK-based HSBC’s
China branches is RMB100,000 (US$15,654)
– compared with a paltry GBP1 (US$1.6) at
the bank’s branches in the UK.
Historical happenstance has allowed British banks in China to punch far above their
weight globally. Of the top three foreign banks
in terms of branch network and assets in the
mainland, two are British: HSBC and Standard Chartered. But foreign banking in China
is not as easy as it looks. The tightly regulated
environment starves banks of liquidity, and the
chaos of an emerging market often renders
their sophisticated credit models useless.
However, the market is slowly but surely
becoming more orderly, and there are reasons
to expect the market share of foreign banks
already established here will grow. At the same
time, thanks to the unintended consequences of
regulation, barriers to new entrants are about to
be raised again, leaving British banks to reap
39
the rewards of an odd form of protectionism.
False start
Along with the telecommunications
industry, banking was among the last of
China’s major industries to be opened to
foreign competition. Regulators did not
crack open the sector until forced to, as
part of China’s accession into the World
Trade Organization (WTO). Only in
late 2006 and early 2007 were foreign
banks allowed to incorporate locally and
provide renminbi banking services to
domestic clients for the first time.
At that time, foreign banks held
around 2.4% of total banking assets
in China. And expectations for future
growth ran high: In a PwC survey of
foreign banks in China conducted in the
first half of 2008, 85% of respondents
said that they expected that market share
would increase by 2.3% over the next few
years.
Such hopes were dashed during the
global economic downturn. Beijing channeled its impressive stimulus program
solely through domestic banks, pumping up both domestic bank assets and
lending, and thereby reducing the overall market share of foreign banks. Since
then, the market share of foreign banks
has rebounded slightly from 1.7% in 2009
to 1.83% in 2010, according to the latest
figures from the China Banking Regulatory Commission (CBRC), the country’s
banking regulator.
Still, it’s hard to escape the fact that
the market share of foreign banks in
China has basically not budged in the
almost five years since the system’s liberalization. “There’s no doubt they were
expected to have gotten a lot bigger,”
said Chak Wong, finance professor at
the Chinese University of Hong Kong
(CUHK).
Risky business
As many commentators pointed out
in 2007, foreign banks have significant
advantages over their mainland competitors, beginning with their ability to evaluate creditworthiness.
“The most important edge is that
[foreign banks] have the concept of
credit, which Chinese banks don’t,” said
Wong. “Chinese banks just have no idea
how to evaluate the creditworthiness of a
company.”
For example, if a Chinese construction
company wants to obtain a loan to build
40
‘It’s the wild, wild west
in terms of credit.
Foreign banks haven’t
adapted to this kind
of environment yet’
CHAK WONG, FINANCE
PROFESSOR AT THE CHINESE
UNIVERSITY OF HONG KONG
a high-speed rail project, it will first go
for approval to the National Reform and
Development Commission (NDRC), the
country’s economic planner. After it gets
the NRDC’s go-ahead, the company will
then apply for a loan at a Chinese bank,
which is unofficially required to approve
the loan request.
This means that domestic banks have
little experience actually gauging the risk
of a borrower default, or pricing loans to
correctly reflect that risk. By contrast, foreign banks often have decades’ worth of
experience refining their business practice and models to correctly measure and
price risk.
In theory, this competitive edge
should allow foreign banks to thrive by
maximizing risk-adjusted returns. In
practice, said Wong, it’s much trickier.
If Chinese banks mis-price risk, it usually means they under-price it, by offering loans that are much too cheap for
the risk involved. While this could prove
lethal to the economy in the long term, in
the here-and-now it means that borrowers will pass up expensive loans offered
by foreign banks to take (unsustainably)
cheap loans from Chinese lenders.
An exception is small- and mediumsized enterprises (SMEs). Due to Beijing’s loan quotas, SMEs often can’t get
loans from domestic banks at any price. In
Gaining little ground
Foreign banks market share in China
2.5
% market share
spotlight
spotlight • unit e d k ingdom
2
1.5
1
0.5
0
2003
Source: CBRC
2004
2005
2006
2007
2006
2007
2008 200820092009 2010
2010
Net exports
theory, foreign banks are capable of meeting this need, but unfortunately most of
these companies and entrepreneurs are
relatively new start-ups, and the country
lacks a central credit record system that
banks can use in their analysis.
“It’s the wild, wild west in terms of
credit,” said Wong. “[Foreign banks]
haven’t adapted to this kind of environment yet. For some strange reason they
think they can just send a whole bunch of
expatriates to China, do the same thing
they did back home, and expect it to
work. It doesn’t.”
Liquidity freeze
Another problem is that foreign banks
just can’t lend out that much money,
period. “A key challenge for foreign banks
in China is liquidity, stemming from the
difficulty in getting deposits,” said Jason
Bedford, a Beijing-based manager at
KPMG and author of a recent report on
banking in China.
Thanks to regulations introduced in
2007, foreign banks in China must have
a loan-to-deposit ratio of 75% or less –
meaning that they can lend out just threequarters of all the deposits they collect.
Because most banks were well above that
limit when the rule was introduced – the
average ratio for foreign banks in 2009
was about 150%, and in 2010 around
100% – the CBRC gave banks a five-year
grace period, ending this year.
Add in the high ratio of reserves
banks in China must set aside – 21.5%
of total deposits, compared to 10% in
the US – and it’s easy to understand why
banks are scrambling to attract deposits.
In less regulated markets, they could simply entice customers with higher interest
rates. But Beijing has a cap on deposit
rates, so banks must compete by other
means.
One strategy is to expand branch
networks, because steep ATM and competitor bank fees encourage customers to
choose banks with a wide presence. Not
surprisingly, therefore, this is how regulators indirectly manipulate the market
share of foreign banks. They must apply
for approval to open a new branch with
the CBRC, and the regulator has unofficial quotas in place – usually no more
than one or two per year.
“If the biggest challenge for foreign
banks is regulation, then the most important regulation is the limit on branches,”
said Hua Zhang, a Beijing-based banking, securities and investment analyst
at Celent, a research firm that tracks
foreign banks in China. “No branches, no
deposits. No deposits, no loans. No loans,
no profit.”
It’s also the reason why British banks
– HSBC and Standard Chartered in particular – are leading the pack. Xi Junyang,
a finance professor at Shanghai University of Finance and Economics, points
out that the two banks are much more
likely to garner regulatory approval for
new branches because they have been in
the country for far longer than other foreign banks.
The earliest banks in China came
with the former British Empire. HSBC
was established in Hong Kong and
Shanghai in 1865 (hence the bank’s full
name, Hong Kong and Shanghai Banking Corporation), and Standard Chartered founded its first branch in Shanghai
in 1858. Many industry insiders say it’s
no coincidence that they – along with the
Hong Kong-based Bank of East Asia –
have also been granted the most extensive
branch networks.
Taking it to the rich
Still, the branch networks of these companies remain tiny when compared with
their local competitors. Many foreign
banks have therefore opted for a strategy
of quality over quantity. About 98% of
retail deposits in China’s foreign banks are
from customers with over RMB250,000
(US$39,000) in their accounts. By going
for a select few wealthy clients, the banks
can maximize the impact of what limited
network resources they have.
Wealthy customers are also the most
likely to benefit from other advantages
offered by foreign banks, among them
quality of service. “The service at foreign banks is a lot better,” said Wong
of CUHK. “Service at Chinese banks is
pretty horrible.”
It also ties into another advantage:
Foreign banks have superior products for
both retail and corporate clients. “Foreign
banks have innovative products,” said
William Yung, a Shanghai-based partner
at PwC, adding that this is particularly
true of structured products and offshore
renminbi services.
For example, foreign banks have
a natural advantage for products that
cross borders. That includes facilitating
old-fashioned cross-border corporate
services, as well as the growing market
for renminbi trade settlement. Zhang
of Celent adds that Chinese insurance
42
China Foto Press
spotlight
spotlight • unit e d k ingdom
in the vault:
China’s central bank
companies have almost no choice but to
use foreign banks for derivatives products
that hedge their international risk.
On the retail side, it’s all about privacy: Many Chinese customers believe
foreign private banks will maintain client
confidentiality about assets held abroad
from Beijing better than the (often stateowned) Chinese banks. “Put it this way:
ICBC now does private banking in Hong
Kong,” said one banking analyst, who
asked not to be named. “Who’s going to
use them?”
The result is that while foreign banks
make up only about 2% of the market
share, their slice of the wealth management pie is double, at around 4%.
First-mover advantage
Wealth management services and fees are
part of banks’ non-interest income, which
as a proportion of total revenue is roughly
twice as high in foreign banks as their
Chinese peers, according to a KPMG
report. That’s a good thing because
it makes them less reliant on interest
spreads, which rise and fall at Beijing’s
command and which have hobbled profitability in the past.
Industry insiders also say that the
CBRC has become more comfortable
with the presence of foreign banks. Unofficially, some say the CBRC could now
be comfortable with foreign banks taking a 5% share of the market – more than
double the current level.
The winners of both increasing
sophistication and freedom of movement
will be existing banks. Breaking into any
new retail or corporate banking market
requires tremendous up-front investment, particularly for branding. The British banks – HSBC and Standard Chartered – are on top in part thanks to this
brand equity. These leading banks “have
been here longer, and they’ve been committing in terms of capital resources, relationships, customer connectivity, and so
on,” said Shirley Xie, a Hong Kong-based
partner at PwC.
And as Bedford of KPMG points out,
the end of the 75% ratio grace period is fast
approaching. Any new locally incorporated
bank will be forced to invest in branding and a branch network, attract massive
deposits, lend minimal amounts, and yet
stay in business – a very difficult feat.
“I expect the current lineup of foreign
banks to remain the same for quite some
time,” said Bedford. That’s good news
for British bankers in China, and it’s all
thanks to Beijing.
CONF ERENCES & EXPOS
Company index
Alfredlittle.com
12
Alibaba Group
11, 17
AutoChina
12
Bally
14
Bank of America-Merrill Lynch
36
Bank of East Asia
42
Bright Star Manufacturing
18
Celent
40, 42
China International Trust and Investment Company (CITIC)
28
China Investment Corporation
10
China Market Research
37
China Vanke
20
Christie
11
CIIC Education International
18
CLSA
17, 21, 34, 36
Costa
14
Country Garden
20
Dalian Wanda
21
DreamWorks Animation
10
Eurasia Group
37
Evergrande
20, 22
Gaopeng.com
10
Google
11
Great Wall Motors
8
Groupon
10
Gucci
14
Hangzhou Enterprise Guarantee
18
Hanlong Mining
12
HSBC
39, 42
Huawei
7
Huijin Asset Management
10
Agriculture
October 12-15
The 2nd China Int’l Electric Vehicle
Charging Station Construction
Exhibition
Beijing
China Int’l Exhibition Center
www.chinanacs.com
October 20-22
AgrochemExpo 2011
Shanghai
Shanghai Everbright Convention &
Exhibition Center
www.agrochemex.net
October 20-22
Fruveg Expo 2011
Shanghai
Exhibition Center
www.fruvegexpo.com
Consumer
October 10-12
2011 Shanghai Int’l Meat Exhibition
Shanghai
Exhibition Center
www.meatexpo.com.cn
October 24-26
Cashmere World 2011
Beijing
China National Convention Center
www.cashmereworldfair.com
October 25-27
The 8th China (Beijing) Int’l Glass
Industry Expo
Beijing
44
www.bcige.com
October 12-15
China Int’l Trade Fair for Household
Products and Accessories
Shanghai
Shanghai Exhibition Center
www.il-china.com
October 14-17
Guangzhou Hardware Home
Appliances Auto Parts Sourcing Fair
Guangzhou
Poly World Trade Center
www.gzsourcingfair.com
October 12-14
The 10th Int’l Trade Fair for Toys and
Hobby
Shanghai
Shanghai New Int’l Expo Center
www.china-toy-expo.com
October 12-14
China Int’l Baby Carriers & Baby
Articles Fair
Shanghai
www.china-kids-expo.com
Economic & Trade
October 21-26
The 8th China-ASEAN Expo
Nanning
Nanning Int’l Convention & Exhibition
Center
www.caexpo.org
Health Care
October 8-10
ICBC
IKEA
Inter-American Development Bank
IPOX Schuster
KPMG
Louis Vuitton
Morgan Stanley
Muddy Waters
NASDAQ
Oriental Tea House
PPTV
Prada
PwC
Renaissance Capital
SB China Venture Capital
Silvercorp
Soufun
Standard Chartered
Starbucks
Suntech
TCL
Ten Ren
Tencent
Villa & Hut Kafe
Wenzhou HEC Fashion International
Wuhan Roafe Sanitary Wares
Chinese Medicine Expo 2011
Guangzhou
Guangzhou Jinhan Exhibition Center
www.zycexpo.com
October 26-28
The 16th China Int’l Pharmaceutical
Industry Exhibition
Shanghai
www.chinapharmex.com
Manufacturing
October 13-15
The 2nd Suzhou Int’l Metalworking and
CNC Machine Tool Exhibition
Suzhou
Suzhou Int’l Expo Center
www.metaltechexpo.com
October 19-21
The 15th Int’l Exhibition on Heat
Treatment Beijing
Beijing
Beijing Exhibition Center
www.ht-event.cn
October 21-23
2011 China (Wenzhou) Mechanical
Equipment Exhibition
Wenzhou
Wenzhou Int’l Convention and
Exhibition Center
www.cwmee.cn
October 26-29
Int’l Conference on Pipelines and
Trenchless Technology, Beijing 2011
(ICPTT 2011)
Beijing
Beijing Int’l Convention Center
www.icptt.org
42
10, 11
33
8
40, 42
14
34, 35, 36
12
10
14
30
14
20, 21, 40, 42
10
17
12
16, 22
39, 42
11, 14
7
7
14
10, 11
14
17, 19
18
October 10-12
The 11th China Int’l Fluid Machinery
Exhibition
Shanghai
Shanghai Mart
www.fluid-sh.com
October 12-14
China Machine Tool Exhibition 2011
Nanjing
Nanjing Int’l Exhibition Center
www.cmte.cn
Transport & Logistics
October 14-16
China Int’l General Aviation Convention
Xi’an
Xi’an Greenland Pico Int’l Convention &
Exhibition Center
www.chinagacity.com
October 25-28
The PTC ASIA and CeMAT ASIA 2011
Shanghai
www.cemat-asia.com
Travel & Leisure
October 11-14
2011 Music China
Shanghai
www.musicchina-expo.com
October 13-15
China Int’l Professional Horse Sports &
Leisure Industries Exhibition
Beijing
www.chinahorsefair.com.cn
Co mpan y ListingS
Accounting Firms
LehmanBrown International
Accountants
www.lehmanbrown.com
Beijing
6/F, Dongwai Diplomatic Building,
23 Dongzhimenwai Avenue
Tel: +86 10 8532 1720
beijing@lehmanbrown.com
Shanghai
1501 & 1504
Wantai International Building,
480 Wulumuqi Road North
Tel: +86 21 6249 0055
shanghai@lehmanbrown.com
Guangzhou
Unit 3317, China Shine Plaza,
9 Linhe Road West
Tel: +86 20 2205 7883
guangzhou@lehmanbrown.com
Tianjin
Unit 2901-104, The Exchange
Tower 2, 189 Nanjing Road, Heping
Tel: +86 22 2318 5056
tianjin@lehmanbrown.com
Shenzhen
3206, News Building 2,
Shennan Road Central
Tel: +86 755 8209 1244
shenzhen@lehmanbrown.com
Hong Kong
Unit 1902, 19/F, Asia Orient Tower,
33 Lockhart Road, Wan Chai
Tel: +852 2426 6426
hongkong@lehmanbrown.com
Macau
16, A & B
Keng Ou Commercial Building,
367 Avenida da Praia Grande
Tel: +853 2835 5015
macau@lehmanbrown.com
Airlines
Air France - Shanghai Office
www.airfrance.com.cn
3901B Ciro’s Plaza,
388 Nanjing Road West
Tel: +86 21 6334 5702
mail.corporate.sha@airfrance.fr
International Schools
Beijing
Beanstalk International Bilingual
School (BIBS)
6 Dongsihuanbei Road, Chaoyang
Tel: +86 10 5130 7951
Beanstalk International
Kindergarten (BIK)
1/F, Building B,
40 Liangmaqiao Road,
Chaoyang
Tel: +86 10 6466 9255
Beanstalk International
Kindergarten - Wanda Plaza
Building No. 7
Jianguo Road No.93
Chaoyang
Tel: +86 10 5960 3997
Beanstalk International Middle/
High School
38 Nanshiliju
Chaoyang
Tel: +86 10 8456 6019
International School of Beijing
www.isb.bj.edu.cn
10 Anhua Street
Shunyi
Tel: +86 10 8149 2345
including:
• Long-term leasing
• Short-term car rental
• Airport pick-up / drop-off
• Business travel service
• Exhibition & Conference service
• Tourism trip service
B18, 3/F, 535 Hongzhong Road,
Shanghai
Tel: +86 21 5447 8361
Tel: +86 21 5447 8362
Fax: +86 21 5447 8369
info@risingsh.com
Anji Car Rental & Leasing
www.avischina.com
1387 Changning Road, Shanghai
Tel: +86 21 6229 1119
booking@avischina.com
Health Care
Hotels
Business Schools
Manchester Business School,
China Centre
www.mbs.ac.uk
Suite 628, West Tower, Shanghai
centre, 1376 Nanjing Rd.(W), JingAn
District, Shanghai
Tel: +86 21 6279 8660
Fax: +86 21 6279 5685
E-mail: mba@mbs-worldwide.ac.cn
China Europe Int’l Business School
(CEIBS) MBA
www.ceibs.edu
Tel: +86 21 2890 5555
Fax: +86 21 2890 5200
admissions@ceibs.edu
Euromed Management
www.euromed-management.com
Tel: +86 21 5230 1653
Fax: +86 21 5230 3357
Car Rental
Rising Shanghai Car Rental
www.risingsh.com
Provides professional service
HR/Recruitment
Beijing
Beijing Foreign Enterprise Human
Resources Service
www.fesco.com.cn
FESCO Building,
14 Chaoyangmennan Avenue,
Chaoyang
Tel: +86 10 8561 8888
DoWellJoin
www.dowelljoin.com
2505, Building 3, Wanda Plaza,
93 Jianguo Road, Chaoyang
Tel: +86 10 5128 8580
Shanghai
China Team
www.chinateam.com
6008 Novel Building,
887 Huaihai Road Central
Tel: +86 21 6474 7064
sh@chinateam.com
Heidrick & Struggles
www.heidrick.com
Shanghai
Parkway Health Medical
Centers
24 Hour Appointments and
Information Hotline
Tel: +86 21 6445 5999
www.parkwayhealth.cn
enquiry@parkwayhealth.cn
Gleneagles Medical and
Surgical Center
4/F, 389 Nanjing Road West
Shanghai Centre Medical
and Dental Centers
203-4 West Retail Plaza, 1376
Nanjing Road West
Specialty and Inpatient Center
2-3/F, 170 Danshui Road
Hong Qiao Medical Center
2258 Hongqiao Road
Jin Qiao Medical and
Dental Center
51 Hongfeng Road, Jinqiao,
Pudong
Mandarine City Medical Center
Mandarine City, Unit 30, 788
Hongxu Road
Jin Mao Tower Medical Center
J-Life, 1N01, Jin Mao Tower, 88
Century Avenue, Pudong
Courtyard by Marriott Beijing
www.courtyardbeijingnortheast.com
101 Jingshun Road, Chaoyang
Tel: +86 10 5907 6666
Tel: +86 400 888 5551
cy.bjsne.reservations@courtyard.com
Crowne Plaza Beijing
www.crowneplaza.com/beijingchn
48 Wangfujing Avenue, Dongcheng
Tel: +86 10 5911 9999
info@crowneplazabj.com
Hotel New Otani Chang Fu Gong
www.cfgbj.com
26 Jianguomenwai Avenue
Tel: +86 10 6512 5555
cfg@cfgbj.com
Sofitel Shanghai Hyland
www.sofitel.com
505 Nanjing Road East
Tel: +86 21 6351 5888/4088
sofitel@hyland-shanghai.com
Okura Garden Hotel Shanghai
www.gardenhotelshanghai.com
58 Maoming Road South
Tel: +86 21 6415 1111
rmresv@gardenhotelshanghai.com
The Westin Bund Center Shanghai
www.westin.com/shanghai
88 Henan Road Central
Tel: +86 21 6335 1888
revns-shanghai@westin.com
Language Schools
Ambassador Mandarin
Tel: +86 10 8449 2344
www.ambassadormandarin.com
45
Co mpan y ListingS
course@ambassadormandarin.com
Beijing
CBD Office
Unit 505, The Spaces International
Center, 8 Dongdaqiao Road,Chaoyang
Sanyuanqiao Office
Jingxin Mansion 222, 2A
Dongsanhuanbei Road, Chaoyang
New Concept Mandarin
www.newconceptmandarin.com
1903, Tower B, Ocean Express,
Yard 66, Xiaguangli,
Sanyuanqiao, Chaoyang
Tel: +86 10 8446 6455
beijing@newconceptmandarin.com
Dongguan
3/F, 15 Begonia Road, New World
Garden, Dongcheng
Tel: +86 769 2248 9240
dongguan@newconceptmandarin.com
Guangzhou
Unit 2001, Tower D Phase 2
Tianyu Garden, 138 Linhe Road
Central, Tianhe
Tel: +86 20 3893 4200
guangzhou@newconceptmandarin.
com
Shanghai
9H, Ladoll International
Building, 831 Xinzha Road, Jing’an
Tel: +86 21 5228 2950
shanghai@newconceptmandarin.com
TLI-IYU
www.bjtli.cn
40 Liangmaqiao Road,
Chaoyang, Beijing
Tel: +86 10 6461 2973
Tel: +86 10 6468 3311 ext. 3509
Economic and Tech. Dev. Zone
Tel: +86 10 6789 2800
Fax: +86 10 6789 2900
beijinginfo@grmchina.com
Guangdong
8 Qiufuilu District, Fumin Industrial
Park, Dalang Town, Dongguan
Tel: +86 769 8222 9922
Fax: +86 769 8222 9900
guangdonginfo@grmchina.com
Qingdao
1 Banghai Road South,
Sifang District
Tel: +86 532 8093 2200
Fax: +86 532 8093 2211
qingdaoinfo@grmchina.com
Real Estate/
Serviced Apartments
Modena Putuo Shanghai
www.modenaresidence.com
No.1 Lane 58, Tongchuan Road,
Putuo District, Shanghai 200333
Tel: +86 21 6147 8888
sales.putuoshanghai@
modenaresidence.com
Real Estate Agents
GVA
www.gvacurzon.cn
Unit 1003-1004, ASA Building,
188 Jiangning Road, Jing’An,
Shanghai
Tel: +86 21 3252 0685
Fax: +86 21 3252 0689
remiliatu@gvacurzon.com
Serviced Offices
PR Agencies
Ketchum Newscan Public Relations
Shanghai
218 Tianmu Road West
Tel: +86 21 6353 2288
Beijing
A6, Chaoyangmenwai Avenue,
Chaoyang
Tel: +86 10 5907 0055
Service Providers
GRM: Document Storage
Media Vault Storage
Certified Destruction
www.grmchina.com
Shanghai
Unit 2, Lane 271, Qianyang Road
Tel: +86 21 5270 3311
Fax: +86 21 5270 6631
shanghaiinfo@grmchina.com
Beijing
6 Shuangyang Road, Beijing
46
The Executive Centre
www.executivecentre.com
International Finance Center,
8 Century Avenue
Xintiandi, 159 Madang Road
CITIC Square, 1168 Nanjing Road West
The Center, 989 Changle Road
Chong Hing Finance Center,
Tel: +86 21 5116 9191
Vo_Shanghai@ExecutiveCentre.com
Regus Business Centre
Tel: +86 400 120 1205
info.asia@regus.com
www.regus.cn
Shanghai
Regus Aurora Plaza
11/F Aurora Plaza
99 Fucheng Road, Lujiazui
Pudong New Area
Regus Jin Mao Tower
31/F Jin Mao Tower
88 Shiji Avenue, Lujiazui
Pudong New Area
Regus Standard Chartered
Lujiazui
5/F Standard Chartered Tower
201 Shiji Avenue, Lujiazui
Pudong New Area
Regus Bund Centre
18/F Bund Centre
222 Yan’An Road East
Huangpu District
Regus Bea Finance Tower [New]
15/F BEA Finance Tower
66 Hua Yuan Shi Qiao Road
Pudong New Area
Regus Raffles City [New]
51/F Raffles City
268 Xizang Zhong Road
Huangpu District
Regus One Corporate Avenue
15/F One Corporate Avenue
222 Hubin Road
Luwan District
Regus Shui On Plaza
12/F Shui On Plaza
333 Huaihai Road Middle
Luwan District
Regus Silver Court [new]
3/F Silver Court Office Tower
85 Taoyuan Road
Luwan District
Regus Eco City [coming soon]
9/F Eco City
1788 Nanjing West Road
Jing’An District
Regus Nanjing West Road
18/F Shanghai Oriental Centre
Jing’An District
Regus Yueda 889 [New]
8/F Yueda 889
1111 Changshou Road
Jing’An District
Regus ShanghaiMart Hongqiao
2/F ShanghaiMart Tower
2299 Yan’An Road West
Changning District
Regus Silver Centre
1388 North Shaan Xi Road
Putuo District
Changning District
Beijing
Regus China Central Place [new]
9/F Tower 2 China Central Place
79 Jianguo Road
Chaoyang District
Regus China Life Tower
5/F China Life Tower
16 Chaoyangmenwai Street
Chaoyang District
Regus China World Tower 3 [new]
15/F China World Tower 3
Chaoyang District
Regus IFC [New]
10/F, IFC East Tower
Chaoyang District
Regus Kerry Centre
11/F Kerry Centre, North Tower
1 Guanghua Road
Chaoyang District
Regus Lufthansa Center
C203 Lufthansa Center
50 Liangmaqiao Road
Chaoyang District
Regus NCI Tower
15/F NCI Tower
12 A Jianguomenwai Avenue
Chaoyang District
Regus Pacific Century Place
14/F IBM Tower, PCP
2A Workers Stadium Road North
Chaoyang District
Regus Prosper Center [New]
6/F Tower 2, Prosper Center
No.5 Guang Hua Road
Chaoyang District
Regus Financial Street Excel
Centre
12/F Financial Street Excel Centre
6 Wudinghou Street
Xicheng District
Regus Zhongguancun Metropolis
Tower
7/F Metropolis Tower
2 Dongsan Street, Zhongguancun
Xi Zone
Haidian District
Chengdu
Regus Times Plaza
26/F Building A, Times Plaza
2 Zongfu Road
Jinjiang District
Chongqing
Regus Yangtze River International
Plaza [coming soon]
33/F Yangtze River International
Plaza
22 Nanbin Road
Nanan District
Dalian
Regus World Trade Center
12/F World Trade Center
25 Tongxing Street
Zhongshan District
Guangzhou
Regus Center Plaza
Tower A, 23/F Center Plaza
161 Linhe Road West
Tianhe District
Regus Teem Tower
13/F Teem Tower
208 Tianhe Road
Hangzhou
Regus Euro America Center
4/F Euro America Center
18 Jiaogong Road
Xihu District
Regus Foreign Economy & Trade
Plaza
8/F Tower B, Zhejiang FET
468 Yan’an Road
Xiacheng District
Shenzhen
Regus Futian Anlian
26/F Shenzhen Futian Anlian
4018 Jintian Road
Futian District
Regus New Times Plaza [coming
soon]
3/F Shenzhen New Times Plaza
1 Taizi Road
Nanshan District
Regus Panglin Plaza [new]
35/F Panglin Plaza
2002 Jiabin Road
Luohu District
Hong Kong
Regus Entertainment Building
[new]
30/F & 31/F Entertainment Building
30 Queen’s Road Central
Central
Regus One International Finance
Centre
20/F One IFC
1 Harbour View Street
Central
Regus The Center
62/F & 66/F The Center
Central
Regus 100 Queen’s Road Central
6/F, 12/F & 15/F 100 QRC
Central
Regus The Lee Gardens
45/F The Lee Gardens
33 Hysan Avenue
Causeway Bay
Regus Times Square [new]
31/F, Tower One
Times Square, 1 Matheson Street
Causeway Bay
Regus Central Plaza
35/F Central Plaza
18 Harbour Road
Wanchai
Regus Hopewell Centre
51/F Hopewell Centre
183 Queen’s Road East
Wanchai
Regus Shui On Centre
2/F Shui On Centre
6-8 Harbour Road
Wanchai
Regus International Commerce
Centre
12/F ICC
1 Austin Road West
Kowloon
Regus Millennium City 1
32/F Tower 1, MC1
388 Kwun Tong Road
Kowloon
Regus Miramar Tsim Sha Tsui
[new]
10/F, Miramar Tower
132 Nathan Road, Tsim sha tsui,
Kowloon, Hong Kong
Macau
Regus Macau No.39
17/F Central Plaza
61 Avenida Almeida Ribeiro
Taipei
Regus Taipei Manhattan
14/F Shin Kong Manhattan Building
Section 5, No.8 Xin Yi Road
Regus Walsin Xinyi [coming soon]
11/F Walsin Xinyi Building
1 Songzhi Road, Taipei
To have your company
featured in these pages,
please contact one of our
representatives at +86 21
5385 9061.
47
Econom ic indicators
Market indexes
Top overseas listings
Ticker
Listing Date
Price
Offering Amount
Media
TUDO
Aug 17
US$29.00
US$174m
Lead Underwriter
Auditor
Revenue
Growth (y/y)
Gross Margin
Credit Suisse; LLC;
Deutsche Bank
PwC
Zhongtian
US$14.00m
227%
21%
Halter USX China vs DJIA vs NASDAQ
8%
4%
Change
Tudou
Industry
0%
-4%
-8%
Tudou (TUDO.NASDAQ) is a leading online video company in China. Tudou.com was the first usergenerated content and video-sharing site launched in China. As of August 2011, Tudou hosted over
50 million video clips for over 90 million registered users. The company’s key rivals are Youku.com
(YOKU.NYSE), Sina (SINA.NASDAQ), Sohu.com (SOHU.NASDAQ) and NetEase.com (NTES.NASDAQ).
-12%
Aug 16
Aug 22
Aug 26
Sep 01
Sep 07
DJIA
Halter USX China
Sep 14
Nasdaq
Source: Halter USX China, Dow Jones Indexes and NASDAQ Composite
Top Domestic Listings
Sep 08
RMB42.00
Offering
Amount
RMB2.52b
Lead Underwriter
Auditor
Revenue
Growth (y/y)
Gross Margin
CITIC
Reanda
RMB1.14b
139%
43%
Beijing Jingyuntong Technology produces vacuum crystal-growing equipment, such as flexible
mono-crystal furnaces, poly-silicon directional solidification growers, float-zone crystal growers,
poly-silicon reactors and photovoltaic equipment. JYT‘s main competitors are Jinggong Science &
Tech (002006.SZ), GT Solar (SOLR.NYSE), Ferro Technology, ALD and China Electronics Technology.
Kaishan
Compressor
Industry
Ticker
Listing Date
Price
Offering
Amount
Technology
300257
Aug 19
RMB63.00
RMB2.27b
Lead Underwriter
Auditor
Revenue
Growth (y/y)
Gross Margin
CITIC
HPTJ
RMB1.63b
71%
23%
Kaishan Compressor, a subsidiary of the Kaishan Group, is the domestic market leader in gas compressor technology. The company has forged a relationship with Xi'an Jiaotong University. Atlas
(ACOA.FWB), Fusheng and Sullair are the firm's key competitors.
Industry
Jangho
Curtain
Wall
Ticker
Listing Date
Price
Offering
Amount
Service
601886
Aug 18
RMB20.00
RMB2.20b
Lead Underwriter
Ping An
Auditor
Revenue
Growth (y/y)
Gross Margin
HPTJ
RMB5.18b
24%
23%
Industry
Ticker
Listing Date
Price
Offering
Amount
Consumer Goods
002612
Aug 30
RMB35.00
RMB1.75b
Lead Underwriter
Auditor
Revenue
Growth (y/y)
Gross Margin
Ping An
Grant
Thornton
RMB559.00m
81%
57%
Lancy is a fashion design, apparel and sales company located in Beijing. It was founded in 2006. Lancy From 25, Mojo. S. Phine and Lime Flare are its major brands. The main
competitors are Ports (00589.HK), Marisfrolg (600693.SZ) and Moiselle (00130.HK).
Industry
Xiamen
Comfort
Science
& Technology
Group
Ticker
Listing Date
Price
Offering
Amount
Manufacturing
002614
Sep 09
RMB52.00
RMB1.56b
Lead Underwriter
Auditor
Revenue
Growth (y/y)
Gross Margin
Guangfa
Shu Lun
Pan CPA
RMB1.14b
67%
20%
Xiamen Comfort Science & Technology Group makes and sells massage appliances and products in
domestic and overseas markets.
Date: Aug 16 - Sep 14
48
11,100
20,500
10,800
20,000
10,500
19,500
10,200
19,000
9,900
18,500
9,600
18,000
9,300
Aug 16
Aug 22
Aug 26
Hang Seng
Sep 14
Sep 01
Sep 07
Hang Seng China Enterprises
Source: Hong Kong Stock Exchange
Shanghai Composite vs CSI 300 vs Shenzhen Component
11,900
3,200
3,100
3,000
2,900
2,800
2,700
2,600
2,500
2,400
2,300
11,700
11,500
11,300
11,100
10,900
10,700
10,500
Aug 16
Aug 22
Aug 26
Shanghai Composite
Sep 01
CSI 300
Sep 14
Sep 07
Shenzhen Component
Source: Shanghai Stock Exchange, Shenzhen Stock Exchange and China Securities Index
Beijing Jangho Curtain Wall is a provider of high-tech curtain walls that integrate R&D, engineering
and design expertise. The company exports to the US, India, Brazil and Russia. Its main domestic
competitors are Yuanda China Holdings (2789.HK), Meite Curtain Wall System and Sanxin Spl. Glass
Tech (002163.SZ), while its global competitors are Parmasteelisa and Schuco.
Lancy Co
Ltd
21,000
HSCI
601908
Price
SZ
Industrial Goods
Listing Date
Hang Seng
Beijing
Jingyuntong
Technology
Ticker
SH&CSI 300
Industry
Hang Seng vs Hang Seng China Enterprises
Commodities
Energy
Light sweet crude
oil (NYMEX)
Newcastle coal
index (globalCOAL)
Qinhuangdao coal*
Contract
Date
Close(US$)
Change(%)
Oct 11
Sep 14
88.91
-1.30
Sep 9
Sep 2
Aug 26
Aug 19
124.32
122.46
121.47
121.36
Date
Price for this
week (US$)
Price for last
week (US$)
Same Period
Last Year (US$)
Sep 14
825 - 835
825 - 835
715-725
* 5,500 kcal/kg thermal coal
Metals
Contract
Date
Close(US$)
Change(%)
Sep 11
Sep 14
388.50
-7.10
GC Gold (COMEX)
Oct 11
Sep 14
1,824.20
-3.30
SI Silver (COMEX)
Sep 11
Sep 14
4,046.90
-65.40
HG Copper (COMEX)
To receive weekly updates on initial public offerings by Chinese firms, sign up for CER’s China IPO update by emailing
chinaipoupdate@chinaeconomicreview.com
Key indicators
RMB exchange rates
Aug
2011
Jul
2011
2010
(full year)
Consumer price index (y/y % change)
6.2
6.5
3.3
Producer price index (y/y % change)
7.3
7.5
5.5
Retail sales (US$b)
230.0
225.5
2,345.9
Retail sales growth (y/y % change)
17.0
17.2
18.4
Industrial output growth (y/y % change)
13.5
14.0
15.7
Exports (US$b)
173.3
175.1
1,577.9
Exports (y/y % change)
20.7
20.4
31.3
Imports (US$b)
155.6
143.6
1,394.8
Imports (y/y % change)
Foreign reserves (US$b)
Foreign reserves (y/y % change)
25.1
22.9
38.7
-
-
2,847.3
-
-
18.7
New bank lending (US$b)
85.8
77.1
1,206.7
New bank lending (y/y % change)
16.4
16.6
-17.2
Urban fixed-asset investment (y/y %
change)
25.0
25.4
24.5
Actual FDI inflows YTD (US$b)
8.5
8.3
105.7
Quarterly GDP
GDP [US$b]
GDP growth [y/y % change]
Q2 11
Q1 11
Q4 10
Q3 10
1,605.1
1,475.1
1,930.0
976.2
9.5
9.7
9.8
9.6
Sep 15 2011
Aug 15 2011
Change (%)
USD
6.388
6.395
-0.11
JPY
0.0832
0.0831
0.20
EUR
8.777
9.146
-4.03
GBP
10.068
10.419
-3.37
FTSE/Xinhua China 25 Index
Highest performers for the month to September 15, 2011
Name
Price (HK$)
Change (%)
China Unicom
17.26
18.22
China Petroleum & Chemical
7.46
10.19
China Telecom
5.17
8.84
China Mobile
79.90
6.75
Top investment deals
Target
Target
sector
Acquirer
Value
(US$m)
Aug 31
China Three-First
Batch Asts
Energy
China Yangtze Power
1,196.8
Aug 19
Speedy Hill Investments
Real Estate
China
Resources
Land
934.5
Aug 29
Top Globe
Autos
China ZhengTong Auto
Svcs
861.9
Sep 7
Shengjing Bank
Financials
Founder
Securities
234.7
Date
Domestic M&A
Source: National Bureau of Statistics, The People's Bank of China
Purchasing managers’ index
PMI manufacturing
Aug 11
Jul 11
PMI manufacturing [overall]
50.9
50.7
New orders
51.1
51.1
Production
52.3
52.1
Employment
50.4
50.5
Supplier delivery
49.9
50.3
Raw material inventory
48.8
47.6
New export orders
48.3
50.4
Purchases
51.2
52.0
Finished goods inventory
48.9
49.2
Buy-up prices
57.2
56.3
Imports
49.7
49.1
Overstock orders
47.6
46.5
PMI non-manufacturing
Business activity
57.6
59.6
New business
54.1
55.6
New export orders
54.1
56.5
Business expectation
66.0
67.0
Input price
60.2
63.1
Inbound M&A
Aug 18
Ever Bliss International
Energy
Investor Grp
(CA)
263.2
Aug 25
Chongqing Kehua
Hldg Grp
Manufacturing
TCC Int'l
Holdings
(HK)
250.4
Aug 31
Shandong Ruyi Science & Tech
Consumer
ITOCHU (JP)
200.0
Sep 4
Beijing Jiahua
Xinguang
Media
China Oriental Culture
Grp (HK)
194.1
Outbound M&A
Sep 1
CBMM (BR)
Mining
China
Niobium
Investment
1,950.0
Aug 15
Manassen Foods
Australia (AU)
Consumer
Bright Food
Grp
416.0
Aug 20
Austria ATB Drive
Tech (AT)
Manufacturing
Zhejiang
Wolong Shunyu Invest
144.7
Aug 25
Proserpine Coop
Sugar Milling (AU)
Consumer
Tully Sugar
125.6
Date: Aug 15-Sep 13, 2011
Source: Thomson Reuters
Source: China Federation of Logistics & Purchasing
49
book review • Unders tanding China’s Economi c Indi cat ors
Number cruncher
Tom Orlik of the Wall Street Journal provides a
handy reference for Chinese statistics
R
Understanding China’s
Economic Indicators:
Translating the Data
Into Investment
Opportunities
BFT Press, 2011
US$37.39
eading through any
Chinese investment
prospectus, one is
inevitably treated to at least
15 pages of macroeconomic
data detailing astonishing
historical growth, graphs
with upward-pointing
arrows, and myriad bigpicture theses for selling the
farm and buying China.
But those claims to economic fame and fortune can
be just as quickly dispelled
by China bears, who argue
that these economic figures
are manipulated by politically-motivated
numbercrunching goons. Statisticians are simply painting a
pretty picture of consistently
improving lives among the rosy-cheeked Chinese laobaixing, they say.
At one point in history, those accusations
would undoubtedly have been true. During the
Great Leap Forward, for example, officials engaged in rampant falsification of data, reporting
grain outputs that were 10 times the optimal
yields. But the country has changed dramatically,
and, as Wall Street Journal correspondent Thomas
Orlik’s “Understanding China’s Economic Indicators – Translating the Data into Investment
Opportunities” illustrates, the truth behind the
numbers is now far more nuanced.
The proof is in the pudding
Organized as an instruction manual for any
would-be China economy wonk, Orlick’s book
sorts one-by-one through a laundry list of indicators and publicly available data. Around 50 indicators are covered; biggies such as GDP, trade data,
the Consumer Price Index, government revenues,
industrial value added, and money supply are of
course discussed in detail. However, the book also
touches upon less visible but potentially useful tidbits, like the Market News International China
Business Survey.
Readers learn where and when data is published, the significance of the information in context of the broader economy and financial markets,
and what is known – not always comprehensive –
50
about the data compilation methodology. There is
no shortage of Orlik’s own well-reasoned analysis,
supported with plenty of examples and illustrative
charts.
In the process of presenting the structure of the
data, broader exposition on the Chinese economy
flows naturally and keeps the text engaging. The
author (thankfully) is not a statistician, and aside
from the occasional flat joke, he does an excellent
job of maintaining a lively tone in what could have
been an otherwise dense 224 pages.
An inexact science
Orlik is clear about where the data is flawed and
to what extent one should exercise caution. In his
discussion of labor markets, he quips, “The first
point to understand about China’s unemployment
data is that it is wrong.” By and large, however, the
story told is that of an increasingly sophisticated
and transparent National Bureau of Statistics attempting to pin down and measure the slippery
eel that is the Chinese economy. After all, political
pressure, hot money, shadow banking, tax evasion,
cottage industry, and a massive migrant labor force
are messy complicating factors for anyone calculating to the decimal point.
In some areas – for example, real estate prices
– the author concludes that the private sector is
doing a better job in policing the data than the
appointed ministry. In others, the combined efforts of roughly 80,000 NBS statisticians appear
to be tallying in good faith, at least to the extent
that they are able. In any case, the reader is left
in a much better position to judge the known unknowns of each indicator and draw his or her own
conclusions.
For better or worse, “Understanding China’s
Economic Indicators” focuses more on Orlik’s
area of expertise – drivers in the fixed-income
market. There is a detailed and excellent 40 pages
of analysis on the external sector where anyone
interested in FX reserves should get their fill.
On the other hand, retail sales are covered in a
mere five pages. That is an unfortunate oversight,
especially when one considers the book’s subtitle.
Retail sales are an often misused data point, critical to what could be the investment thesis of the
decade: the Chinese consumer.
With Chinese statistics bandied about in
media headlines more every day, there was a
forehead-slappingly obvious need for this book.
Orlik has risen to the occasion with a practical
and accessible reference guide that should be on
the desk of anyone interested in understanding
the Chinese economy.
Taylor Price

Heavy lifting - China Economic Review

Transcription

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