Tag Archives: China

Chinese real estate market start to collapse (Part 1)

Last month, one real estate developer Zhejiang Xingrun Real Estate Co. experienced an insolvency. It couldn’t pay 2.4 billion Yuan to bank and nearly 1.1 billion Yuan to other creditors, which was almost $600 million. This was the biggest ever real estate firm default since 2008. The local government in Fenghua hold a meeting to determine what to do with a default of such a huge amount of money. As reported in WSJ:

While China has seen developers default before, government officials have arranged bailouts for troubled firms that allow their underlying financial problems to fester. On Thursday, analysts argued that authorities have to be willing to address the other option: Let the companies go broke, and send a warning to markets, even if it leads to some financial turmoil in the near term.

It’s not a news that Chinese real estate market is slowing down, more and more people start to wait for a lower price. More potential house purchasers anticipated that the rapid growth of house market in China has comes to an end, as the new centre government carried out executions rigorously, now more and more small real estate developers can’t get enough support fund from bank, either they will go bankruptcy or refer to usury.

There are many reasons why more and more real estate firms in china are suffer from default. Few years ago, as Chinese house market start its surging in scale and price, more and more small real estate developers without much fund thought they could win a tons of money from the market. Some houses were built without enough fund support, so the properties developers thought of a new strategy: they sell the houses first, and use those huge amount of money from house purchasers to build their projects. Because the cost of construction is far lower than the price, this is a win-for-free strategy. However, now they are suffering from the risks they buried years before. With less and less people willing to buy houses at such a historical high price, now the properties developers can’t get enough fund to support their construction, which turns out to be “unfinished residential flats”. That is, the building projects are far away from available, developers has no money to continue construction, and those who already paid for their houses can’t either get the house or their money back, and they still have to pay their mortgage loans to bank. Witnessed more and more “unfinished residential flats” in China, Chinese house purchasers have more incentives to stop their purchase plan.

Automaker’s next big bet: China (Part 2)

As I mentioned in my part 1 blog post, China’s large economy and growing middle class have made it a potential gold mine for the automotive industry.  For the past few years, China has been extremely important for the sales and profit of VW, GM and Toyota.  Ford has recognized this and have increased their presence in China, become one of the most popular brands with the focus and explorer.  China helped a lot of these automotive companies maintain their bottom line while demand slowed down globally.  Unfortunately, Chinese demand for cars has begun to cool as the young Chinese consumer view cars as being too expensive and unnecessary.  To make matters worse, China faces a growing pollution problem.  More cities in China are limiting auto sales to curb traffic congestion and pollution.  The increased pollution and expensive cars have actually led to car companies rethinking the cars they are producing in China.  New emphasis has been placed on efficiency and lowered price models with smaller engines.  Foreign automakers are advertising towards the young professional Chinese by offering lower-priced cars.

While these automakers are facing growing problems, it hasn’t effected growth.  Auto sales this past quarter grew 10% compared to last years.  While this is good news for the auto industry, it’s a far cry lower than the 16% growth of the past year.  The foreign car companies though are betting big on being able to appeal to the younger generations.  Volkswagen and its Chinese partner are investing $25.3 billion through 2018 in order to increase their production capabilities.  This would allow VW to produce 4 million vehicles by 2018.  GM will hit 5 million vehicles annually by 2015.  While demand is cooling, the regional heads at Ford and GM both believe that the growth is sustainable.

I believe that the fear of a decrease in Chinese demand being significant is not an issue.  Even if sales fall, China’s annual sales of 20 million units is still the largest in the world.  Foreign companies don’t have to worry about the potential of a demand slow down due to the continual decrease of domestic automakers market share.  Chinese automakers are viewed as inefficient and lacking the quality that the foreign car producers have.

On the other hand, the largest problem that car companies will face is from the government and restrictions.  In Beijing, the government limits the amount of cars by restricting the amount of vehicle licenses to 6 million by the end of 2017.  As of right now, 5.4 million vehicle license are issued.  The large reason for these vehicle limitations is to reduce pollution.  In 10-15 years, as the average middle class consumer in China earns higher wages, hybrid or electric cars will have a huge impact on the Chinese economy.

Is E-Finance Moving Stock Market’s Cheese?

Within less than 9 months, Yu’ebao, the poster boy of e-finance products, has attracted more accounts than those in the China’s stock market. This mostly attributes to Alibaba’s (parent company of Yu’ebao) huge user base. At the same time, Yu’ebao’s convenience, high profitability and low entry barrier are also driving reasons to this success. Without doubt, the fast rise of Yu’ebao and every other e-finance product are surely disrupting the game of traditional financial markets.

This disruption has struck a few nerves. Naysayers state that e-finance, instead of revolutionize the finance industry, it is killing the industry. Or, in a more specific way, it is destroying the stock market by drawing cash away.

To these opinions, I disagree. The defeat of China’s stock markets and commercial banks wasn’t because of the disruption of e-finance, but because of themselves.

Due to the government’s interference, these traditional financial industries have long been unable to meet people’s expectation on profitability. The stock market was prosperous because there was no other option to make money. Now with the debut of e-finance, people realized there’s a much more profitable while safer way to invest. It’s only natural to see the disruption.

So it all comes down to the rate of return. If the stock market can perform better and produce a rate of risk/return at least neck to neck to the e-finance products, this “disruption” should stop. In fact, the 6% annual return of Yu’ebao isn’t that high for a financial product. It was only popular because of the low risk. This so called “e-finance revolution” reveals problems of China’s stock market: the return and risk are unpredictable.

Like it was mentioned above, this unpredictability was because of the government’s interference. Unlike it is in most developed stock markets where the primary function is to allow companies to raise capital for profitable investment opportunities, China’s stock markets, was created to recapitalize and restructure large state-owned enterprises that otherwise would have gone under. These state-owned companies, by nature, rely on state subsidies and governmental deals. That is to say, the growth of these companies depends on policy makers’ decision rather than the market. This is unpredictable to normal people. Since the stock market is driven by these state-owned enterprises, it inherits the unpredictability as well.

So who’s actually responsible for the disruption on China’s stock market? The stock market itself, and, of course, the government. After seeing two decades of unstable performance, people have realized the truth of the stock market. There have always been problems on the stock market system. E-finance only magnifies them to the public. Now with PBOC finally set its mind to make changes, let’s hope e-finance will survive and serve as a catalyst, too.

Automakers next big bet: China (Part 1)

Saying China is a huge player in the world economy is like saying Michigan’s winters are cold.  It’s a common conception and it seems that now automakers are making it the newest battleground for profit.  General Motors, Fiat, Volkswagen and Ford have all announced in the past few days that they will increase production in China to rival Nissan Motors and Hyundai.  The auto industry believe that the next gold mine in China is the SUV.  After acquiring Jeep from Chrysler, Fiat is wagering on the growing popularity of SUV’s in China to jump start Jeep sales.  They will produce three new Jeep vehicles in China with one being specifically designed for China.  The importance of China to automakers is exemplified by GM picking China as the location of its global rollout of its new Cruze sedan.  GM believes that the Chinese automarket is going to grow by 8-10% next year.  Ford, the fastest growing foreign automaker in China, is following the SUV trend and producing a new seven seat SUV specifically for China.

The most interesting aspect of the growth of foreign car makers in China is that each one has a domestic based automotive partner.  Fiat has partnered with Guangzhou Auto and Ford is partnered with Chongqing Changan automobile co. and Jiangling Motors co.     The large number of partnerships between foreign automakers and domestic automakers is interesting.  For the past six decades, China has established policies to create a global automotive company that can be competitive against the other major foreign car companies.  Unfortunately, it hasn’t been successful and the easy money that is available right now due to low interest rates have increased foreign automakers ability to invest in production plants in China.  I believe that this is why you see so many foreign automakers partner with domestic automakers when it comes to producing cars in China.  Because of China’s inability to produce its own global automotive brand, it’s adding incentives to partner with domestic companies to bypass many of its automotive import tariffs.  China’s automotive tariffs are one of the biggest reason why these foreign automotive companies are building plants in China.  This allows them to reach the fastest growing automotive market.

The importance of China to the auto industry is immense.  China last year became the first country to see annual motor-vehicle sales of more than 20 million units.  This huge growth in China’s automotive sales has lead to the creation of 70 major automakers in China.  Unfortunately for China, none of these have reached the global range that they have been hoping for.  The market share of these automakers has reached a new low of 39.3 as more foreign automakers find ways to invest in China.

Part 2 will focus on the problems that China still faces with the automotive industries.

[REVISED] The “Zipper” Project

When we talk about unemployment in the U.S., we’re talking about economic conditions. When it comes to unemployment in China, it’s a social problem. When 1.35 billion people live in an economy second to the U.S.’s, how many jobs do you think that are available to the country? Yet China’s unemployment rate is as low as 4.1%. Despite the fact that labor-intensive manufacturing has provided abundant positions to hold the figure, during the process of urbanization, however, there are still a considerable number of farmers turning into jobless workers. In order to sponge out these extra workforces, local governments invented a special kind of projects – “Zipper” projects.

So what really is zipper project? Like a zipper, which is frequently zipped and unzipped, zipper project is a kind of frequently repeated construction or maintenance project. Most of the zipper projects are labor intensive, cheap and time-consuming. If you’ve been to China, you should’ve seen workers planting rode-side trees or fixing roads, those are most frequently used zipper projects. The reason I’m so sure that you have seen them is because they are there all the time – not long after the projects are finished, the same or another group of workers will be sent back to tear everything down and start over. It’s kind of like “the Myth of Sisyphus” in real life, only that it’s not a punishment but a way to provide temporary job opportunities.

“Zipper” project, is yet another unique social phenomenon in China. It exists to solve a social problem, but it’s not a real solution, because zipper projects can’t eliminate the migrant worker problem from the root. If anything, it’s a compromise.

It’s a compromise between keeping the rapid growth of China’s economy and maintaining the stableness of China’s society. You have to admit the difficulty of running a country is not linear to its population. Feeding the biggest population in the world while keeping up with the world’s economy growth is not an easy task. Many think the idea of zipper projects sounds ridiculous, as it makes no sense for a city to waste resources on prying and patching the same part of the road repeatedly. The reality is, however, if it weren’t for the zipper projects, there would be hardly enough temporary jobs to buffer the huge number of incoming migrant workers. When these people coming into the city without jobs, trouble comes, too. Between putting the the society at risk and wasting resource, it’s wiser to choose the latter.

This reminds me of the famous “Trolley Problem”: you see a trolley running towards five people out of control and there’s lever that can divert the trolley to a sidetrack where there lies one person, what would you do? I guess for the Chinese decision makers who shoulder the responsibility of 1.35 billion people, utility beats morality.

Alibaba, E-Commerce legend in China

Can anyone imaging that a company who generates 2% of total China’s GDP and whose transaction volume is one-third larger than that of Ebay and Amazon’s last year combined, is created in a small apartment by this small, thin man?

Jack Ma started Alibaba.com in his apartment in 1990, and vowed to build Alibaba into the greatest Chinese-made company in the world.  The 49-year-old Mr. Ma is a tenacious, charismatic leader, and he keep his words. His Alibaba now handles roughly 80% of all online shopping in China, which some analysts say is already the world’s largest market for e-commerce. Tmall, a website under the name of Alibaba, has about 800 million product listings from seven million sellers who pay Alibaba for advertising and other services.  Although its profit is not comparable to Amazon, its deserve the name of the most busy online market in the world.  It is also of growing potentials, given that hundreds of millions of Chinese still haven’t shopped online. Yahoo reported late Tuesday that Alibaba’s revenue jumped 66% from a year earlier to $3.06 billion, and profits more than doubled to $1.35 billion.

What’s the story behind this success?

Alibaba has never been a market changer as Apple or Google. Rather than inventing revolutionary products, Alibaba often adapts existing technology to serve China’s fast-growing e-commerce market. Taobao (now known as Tmall ), which means “searching for treasure,” was created to sell directly to consumers as the Internet emerged in China.

Alibaba doesn’t own the merchandise it sells. The company is a middleman, making most of its money from charging merchants for marketing and ad services so they can stand out in the crowded marketplace. Sellers on Tmall and Alibaba.com pay annual fees. Alibaba is tiny in revenue compared with Amazon because the Seattle company sells products to consumers.

Taobao allowed sellers to list their products free rather than pay a fee. He said Taobao wouldn’t try to turn a profit for three years. “I know the Chinese user market and users better than Meg Whitman, ” Mr. Ma said about eBay’s chief executive at the time.The company was in business for three years before it posted its first annual profit: $1 in 2002.”Alibaba has played the scale game really, really well,” says Paul McKenzie, an analyst at Hong Kong brokerage firm CLSA in Hong Kong. “They created a virtuous circle of more merchants attracting more shoppers, which in turn brings in more merchants.”

Taobao, the online version of a raucous Chinese street market, quickly leapfrogged eBay in China. But Alibaba executives worried that the site would be a turnoff for big, brand-name companies because they wouldn’t want to be associated with tiny, unknown sellers. Mr. Ma sent a team of about 30 engineers back to his old apartment to develop a site that would win over the big names. “Jack’s apartment was reserved only for the most important projects,” says Wang Yulei, an Alibaba vice president who was one of the engineers on the team. “It’s a spiritually important place.” Officials at companies that Alibaba hoped to attract often visited to tell the engineers what they wanted. “When they walked into the apartment and saw our messy rooms, they looked very curious,” Mr. Wang recalls.

Even after stepping down as chief executive, Mr. Ma exerts his influence at Alibaba’s headquarters campus in Hangzhou, designed with a Silicon Valley feel that includes brightly colored cafeterias, gyms and recreational areas with pool tables.

No one lives in his old apartment, but Alibaba uses it occasionally to work on new projects. Mr. Ma has said he wants to turn it into a museum someday.

China “Slowing Down”

China’s figures for the first quarter of the year were released. The country grew at a rate of 7.4%. The Wall Street Journal and Washington Post articles’ headlines describe this is as slowing down. Considering the fact that this is a slower growth rate than that of the previous quarter, which was 7.7%. The journal reports that analysts expected it to be 7.5%, so it is a little lower than expectations. In a New York Times article, a spokesman of the National Bureau of Statistics said that the economy was still growing at a relatively faster rate.

Two of the largest contributors to this “slowdown” are the low exports and the weak housing market. Combined, they decreased by 27.2%. The weakness of China’s housing market has also made foreign investors anxious.

I am not surprised that low exports and a weak housing market were two of the larger contributing factors to this slowdown. They decreased by 27.2%! That is more than a quarter in a decrease. I would not be surprised if the housing market alone was a big contributor. There are more and more empty homes, and they have been becoming more and more expensive, and out of reach for the middle class. The housing situation is absolutely ridiculous.

The reason why I have put “slowdown” in quotation marks is that the economy is still growing at a very fast rate. Yes, 7.4% is less than 7.7%. Regardless, these are still very high growth rates. At the same time, this could be the beginning of China’s permanent cool-down. The country has been skyrocketing. What comes up, must come down. The housing market’s situation is enough to decrease foreign investments. Furthermore, the government is trying to keep at an artificially low level. When exports decrease, output decreases. If this trend continues for all of these aspects, I believe that it is possible for China to see growth that is less than 5%. Investments are very important to an economy. Investments contribute to output, which is related to growth. When investments come in, then output grows. Exports contribute to output as well, and they two have the same relationship. Investors being scared away and decreases in exports can combine to a much larger decrease than if it were just one of them that were slacking. IF this rate continues.

Obviously the continuation of this current slowdown is not guaranteed, but it could happen. China has been having problems with two components of its output. It is very likely that China’s economy could turn around. All we can do is play the waiting game.

China’s dilemma: reform or stimulate

Getting rid of one’s old and harmful behavior pattern is not an easy task, let alone changing the economic stimulus pattern of a whole nation.

Earlier this year, China’s top officials declared new resolution to  bring about economic overhaul and to stop such myopic and harmful stimulus measures as state initiate spending.

At the Boao Davos Forum,  Premier Li Keqiang emphasized that the government won’t panic in the face of slowing growth. “We won’t resort to strong short-term stimulus policies just because of temporary economic fluctuations.” Yet this does not mean they give up growth rate on the list of economic performance measures. They told business leaders that they would use monetary policy or “slightly bigger adjustment” measures if growth slips below acceptable levels. I guess that’s why there are so many room for public debates on what official statements mean.

But apparently, China’s slowdown in growth will likely put pressure on Beijing to pick up old stimulus measures and postpone structural reforms. What are the signs for this trend?

For example. Beijing has announced plans to build more railways and cut some taxes. Stimulus measures in coming weeks will likely involve stepped-up investments in transportation, urban renewal and alternate energy projects. The government is also planning to spur growth with a more accommodative monetary policy. Many analysts expect there will be a reserve-requirement reduction to give banks more money to lend. But it will more likely continue its long-standing reliance on investment even as spending becomes less effective.

Apart from Fiscal and Monetary policies, slower growth may also make PBOC continue depreciating yuan that has been downward trending for the past two months.  Although it is stated by PBOC officials that their currency moves were aim to reduce Yuan speculation, not to improve competitiveness of domestic product on foreign market. Actually, even if yuan were depreciating, China’s export barely increase. According to export companies, what they needed the most to improve competitiveness is more innovated product and better service quality.  But according to RBS economist Louis Kuijs, “the longer China needs to wait for convincing export growth, the more likely it is that keeping the currency down is a tempting policy measure to try to instill some life in exports and manufacturing.”

UBS analyst Tao Wang says that the slowing growth means that difficult reforms will be put off indefinitely. First up, said Ms. Wang: cutting red tape, opening the service sector to private investment and development of new financial products. For instance, the People’s Bank of China is in its final stages of winning approval for a bank deposit insurance system. Ms. Wang said more difficult efforts, including restructuring state-owned enterprises, land reform and establishing a nationwide property tax “will progress more slowly.”

 

The “Zipper” Project

When we talk about unemployment in the U.S., we’re talking about economic conditions. When it comes to unemployment in China, it’s a social problem. 1.35 billion people live in an economy second to the U.S.’s, how many jobs do you think that are available to the country? Yet China’s unemployment rate is as low as 4.1%. Despite the fact that labor-intensive manufacturing has provided abundant positions to hold the figure, during the process of urbanization, however, there are still a considerable number of farmers turning into jobless workers. In order to sponge out these extra workforces, local governments invented a special kind of projects – “Zipper” projects.

So what really is zipper project? Like a zipper, which is frequently zipped and unzipped, zipper project is a kind of frequently repeated construction or maintenance project. Most of the zipper projects are labor intensive, cheap and time-consuming. If you’ve been to China, you should’ve seen workers planting rode-side trees or fixing roads, those are most frequently used zipper projects. The reason I’m so sure that you have seen them is because they are there all the time – not long after the projects are finished, the same or another group of workers will be sent back to tear everything down and start over. It’s kind of like “the Myth of Sisyphus” in real life, only that it’s not a punishment but a way to provide temporary job opportunities.

“Zipper” project, is yet another unique social phenomenon in China. It exists to solve a social problem, but it’s not a real solution, if anything, it’s a compromise.

It’s a compromise between keeping the rapid growth of China’s economy and maintaining the stableness of China’s society. You have to admit the difficulty of running a country is not linear to its population. Feeding the biggest population in the world while keeping up with the world’s economy growth is not an easy task. Although the idea of zipper projects is ridiculous in theory, between putting the stableness at risk and wasting resource, in reality, it’s wiser to choose the latter.

This reminds me of the famous “Trolley Problem”: you see a trolley running towards five people out of control and there’s lever that can divert the trolley to a sidetrack where there lies one person, what would you do? I guess for the Chinese decision makers who shoulder the responsibility of 1.35 billion people, utility beats morality.

Walmart is Fighting Back in China

Walmart is fighting back against Chinese regulatory authorities after facing continuous investigations. The world’s largest retailer has been forced to pay roughly $10 million over the last three years for violating Chinese food and safety standards. These fines have not only impacted the company’s profitability, they have also hurt its long-term growth prospects by driving traffic away from Walmart stores.

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Although Walmart has taken the initiative to rectify these problems, they will not bear fruit until the real problem is solved. The issue does not lie at the retailers’ end only, but at the end of suppliers and manufacturers as well. It is the latter’s responsibility to ensure quality and deliver what they have promised to the retailer. Consequently, Walmart thinks these manufacturers need to be investigated by regulatory authorities as well.

Food safety has been one of the biggest issues in China, as thousands of Chinese have fallen ill after consuming unsafe products. However, Chinese regulators do not investigate or fine local manufacturers or supermarket chains with the same frequency they regulate and fine international retailers. In 2012 Chinese media said a Carrefour store in central Henan province had sold expired chicken and had mislabeled ordinary chicken as a more expensive organic variety. Carrefour responded by closing the store and apologized to consumers.

Personally, I think some of the fines are not reasonable, at least it’s not worthy such large amount of money. But it’s true for most international companies, getting ahead in China means playing by Chinese rules. However, Walmart has taken the unusual step of asking Beijing to rewrite them. It shocked me. Walmart express that it wants manufacturers to bear more responsibility. Executives at the Arkansas retailer have urged China’s Food and Drug Administration to carry out inspections of all companies which handle food, not just retailers, and to make manufacturers responsible for their own breaches.

That might seem a reasonable position to take, but tackling the problem in this fashion amounted to a major breach of Chinese protocol that may come to be viewed as a watershed moment. International companies are still tightly controlled in China, and have historically made much more commercial headway when they have gone along with Beijing’s rules.

Will Walmart win? Will China be unhappy with the actions Walmart is taking?

I would say no in most cases but considering Walmart is in a different position, however. Not only is it a major employer in China, its international operations mean it is also the largest American buyer of Chinese-manufactured goods, and its eighth-largest trading partner worldwide – ahead of most countries.

Let’s wait and see.