Top-tier casino operator Wynn has always bet on VIP gamblers. Now it is adopting the same approach with its stock market flotation. Wynn is trying to trump half a dozen recent poor Hong Kong market debuts by shunning fickle retail investors and handpicking money managers who are likely to stay the distance. It remains to be seen whether this strategy can help justify its valuation premium.
Most Hong Kong retail investors sell their shares on the first day of trading for a quick profit. By putting 90 percent of the shares in the hands of institutional buyers, Wynn is aiming to avoid the hit when its shares start trading on Friday.
That's probably why the stock has not fallen in grey market trading, even though it was priced at HK$10.08, at the top end of the HK$8.52-$10.08 range.
Wynn has specifically obtained a waiver from the Hong Kong stock market to prevent retail investors from holding more than 30 percent of the total shares offered. But this effort turned out to be unnecessary, as private investors are simply not interested.
Retail demand for Wynn Macau is so weak that small investors are only taking 10 percent of the offering. It appears that Asian high rollers are more interested in gambling in Macau's casinos than investing in their stocks. Many have been burned in the past by the stocks' high volatility.
Investors are also deterred by the rich valuation. Wynn Macau has valued itself at around 16 times forecast 2010 cashflow, much higher than the 7.5 times enjoyed by Macau gambling tycoon Stanley Ho's SJM Holdings.
That is not to say Wynn does not deserve some premium. First, it has always been an investor favourite in the U.S., with a stable institutional investor base. Money managers hold as much as 60 percent of Nasdaq-listed Wynn Resorts. SJM, in comparison, has 1.4 percent institutional ownership.
Second, Wynn's casino and hotel in Macau looks more modern than SJM Holding's dimly-lit and smoke-filled Grand Lisboa complex. The luxurious look helps it attract a younger client base and broadens its appeal to non-gamblers as a conference venue.
Third, the majority of Wynn Macau's revenues is earned from VIP clients who typically place large wagers. This focus has given its casinos better returns per table and a better return on equity than industry peers. But high-end gaming can also be more volatile.
Some of the new investors in Wynn Macau are already shareholders of Wynn Resorts, though the proportion is unclear. Wynn's Macau casino already generates 50 percent more cashflow than the Las Vegas casino, and the offering gives investors -- who have limited opportunities to invest in the gaming industry at home -- a new outlet.
They are also attracted by the world's largest gaming market: Macau's total revenue is more than double the amount generated by the Las Vegas Strip in 2008. But local investors know very well that Macau's dependence on Chinese high-rollers can also be its Achilles heel. Changes in Chinese visa policies can lead to big swings in visitor numbers. Macau is also suffering from overcapacity in China, where there are about 30 casinos of varying sizes.
While it looks like Wynn's existing investor base has helped it to draw strong demand for the Macau spinoff, it may be a one-off. The future looks a lot less certain for highly-leveraged Macau Sands, a unit of Les Vegas Sands, which is hoping to go public in Hong Kong later this year. Without help from the VIPs, the Sands might have a harder time getting such a good valuation.
North Korea knows how to put on a show for honoured guests. Visiting Chinese Premier Wen Jiabao was this week treated to a special performance of the “Arirang” mass games, the world’s biggest choreographed extravaganza with as many as 100,000 participants.
Part circus act, part rhythmic gymnastics, the display features dancing girls, goose-stepping soldiers and a massive flip-card section animated by ranks of performers, which this time included one-off Chinese messages added for Wen.
But in the time honoured tradition of opaque Communist regimes, the slogans were likely meant as more than just a simple part of celebrations, and certainly suggested that the isolated regime keeps a very close eye on political developments in the northern neighbour that is one of its few allies.
In almost flawless Chinese they spelt out a giant welcome message that acknowledged their visitor’s populist reputation in China: “Grandpa Wen, so happy to see you!” — which may have been as heartfelt as it was enormous, given there is hardly a steady stream of top international leaders beating a path to the door of North Korean leader Kim Jong-il.
This was matched with a string of more formal tributes to President Hu Jintao, whose official place in the pantheon of China’s top communist leaders (along with national icons Mao Zedong and Deng Xiaoping) was cemented at massive national day celebrations in Beijing on Oct 1.
“Build a harmonious socialist society,” might not sound like a rousing paean, but in fact it is one of Hu’s key slogans, part of a campaign to make the country’s growth more equal after decades of frenzied development. There was also a stodgy but politically impeccable homage to Hu’s role as general secretary of the Communist Party of China, and a nod to one of his other key rallying calls, for a “people-centred concept of scientific development.”
When he touched down in Pyongyang earlier this week, Wen became the first Chinese premier to visit North Korea since 1991, according to Beijing, and he arrived at a time when the secretive regime, shunned internationally for its nuclear weapons programme, is struggling economically in the face of a recent round of tighter sanctions.
China is vital as a key supplier of aid, a conduit for dialogue with less friendly nations, and in the past a defence against Western calls for tighter punishment of Pyongyang for its nuclear ambitions — though Beijing did sign up to tougher UN controls, after North Korea’s second nuclear test in May.
The North Korean government signalled during Wen’s visit that it could return to nuclear disarmament talks it had declared dead six months ago, but a report that it was near restoring its atomic plant underlined the secretive state would keep stakes high.
With so much in play, and China’s role key to the eventual outcome, the North Koreans must be hoping Wen’s team took plenty of snaps of their giant tribute to show off back in Beijing.
[Photographs of Wen Jiabao and Kim Jong-il and the Arirang mass games]
China might have good environmental reasons to restrict the production of rare earth metals, but export quotas and duties are not the way to do it.
Instead, it should raise environmental standards which will force consolidation in the production of these metals, which are key to green technologies. That will improve China's environment, give it greater control over output, but reduce the risk of a trade battle.
China dominates the global production of rare earth metals -- a collection of 17 chemical elements in the periodic table that are key materials for making hybrid cars, wind turbines and smart phones. This is unusual, as China depends on imports from abroad for most of its raw materials. However, the country's control of supply has not helped it control prices.
Although demand has been rising more than 10 percent each year, prices were a third lower in 2005 than in 1990, mainly because of a surge of exports. Meanwhile, China's reserves are being used up rapidly. They now account for only half of the world's total, down from almost 90 percent in 1990.
In response, China has started to impose quotas and duties on rare earth exports in the hope that less supply might help improve prices. This has had some success: since 2004, exports from China have shrunk by about 10 percent each year. But it has angered China's trading partners. Concerned that China wants to use its resources mainly for its domestic consumption, the U.S. and EU both filed complaints with the World Trade Organization earlier this year.
China's move to restrict exports looks poorly coordinated with its recent resources acquisition frenzy. If this is how it behaves when it is the dominant supplier of a valuable resource, how can it complain that the rest of the world does not want to sell it more?
A better solution would be for China to raise environmental standards in rare earth production. This would squeeze out smaller producers and give China greater control over exports.
Production in China has soared mainly because swarms of small, unregulated Chinese miners have ignored the environmental harm of rare earth extraction. To get these elements, miners pump potent acid into holes in the ground, where it dissolves the minerals and ends up in artificial ponds which can be leaky. It is a bitter irony that the very elements needed to produce green technologies exact such a large environmental toll.
This disdain for the environmental costs of rare earth production gives China an advantage over its trading rivals. Explorers in Canada, Brazil, Australia and South Africa are not producing much at current price levels, mainly because they have to bear much higher environmental and labour costs, and cannot compete with China on price.
China does charge resource taxes for mining, but the tax is lower than in other countries and covers fewer resources. Unlike most other countries, it does not tax the use of land, forests, water and the ocean. The duties for using mining areas is only 6 percent of the value of the output, much lower than 20 percent in European countries and 12.5 percent in America.
In addition, Beijing subsidizes electricity to a level that is cheaper than in other developing countries such as Mexico and Brazil. That's why industries like steel and non-ferrous metals that use a lot of energy thrive in China.
China's central authority has been trying to consolidate the rare earth industry since the 1990s, but has made little progress because low exploration costs has drawn in more firms. The fragmented sector also undercuts Beijing's efforts to negotiate better prices in the global commodities market.
This is the reverse of China's situation in iron ore, where it is the largest importer but has little bargaining power over the biggest mining firms. But the outcome for the nation is similar.
It is time China realised it is better to price in the real costs of the environment, energy and health to force industry consolidation. As China gets richer, it can afford to sacrifice a little growth for the sake of the environment and to get the bargaining power it craves.
Other countries may still complain about China's attempts to control the price of rare earth. But their protests will be harder to justify. After all, haven't Western countries been arguing for years that China's low environmental standards give it an unfair advantage? The WTO has also increasingly sided with countries that present a strong environmental argument.
If China now uses higher environmental standards to give it greater clout in rare earth exports, it will be hard for the West and the WTO to object.
A dozen or so companies have raised money in Hong Kong over the past month to cash in on rebounding equity markets, but that window is threatening to close after a string of poor debuts.
Glorious Property was the latest, falling by 15 percent on its debut on Friday. Its poor performance came on the heels of China South City, a real-estate developer in Guangdong province, which had the worst trading debut in Hong Kong this year by falling 23 percent.
Even companies in more stable businesses, such as men's clothing retailer Lilang and sports shoes maker Peak Sport, also fell below their offer prices last month.
One reason for the wobble is that issuers and investment banks seem to have been greedy. IPOs are generally priced at a discount to comparable listed stocks to reflect risk and to encourage trading in the after market. But with strong investor demand, they have steadily been whittling away at the discount and relying on the froth in the market to get issues away.
Of late, IPOs have often been more than 100 times oversubscribed with institutions as well as retail investors vying for stock. Thanks to cheap and freely available money, it has been possible for investors to borrow to fund their IPO purchases. Banks have been offering interest rates on IPO loans as low as 1.8 percent.
But market sentiment has changed dramatically, with the Heng Sang Chinese Enterprises Index <.HSCE> down almost 10 percent in the past two weeks. This has suddenly made IPOs which had set aggressive ranges seem expensive. Glorious Property actually priced its IPO towards the bottom of the range but it still received a poor response.
From a position of excessive enthusiasm, sentiment has now snapped the other way. Retail investors have become more cautious. Some banks have stopped offering IPO loans to retail investors, which will further temper demand for new issues.
But the message hasn't yet got through to some issuers. Las Vegas casino company Wynn Resorts priced its Hong Kong IPO at the top of its indicated range, which values it at a much higher multiple than Macau gambling tycoon Stanley Ho's flagship casino firm SJM Holdings. This looks pretty daring.
Issuers are starting to widen their pricing range on the downside to take account of softening demand, but this only solves part of the problem. A wider band makes it even more difficult for investors to calculate the risk involved. Retail investors are particularly vulnerable, because they cannot place price limits on their orders and so risk paying the most expensive price in the range.
It looks as if investment bankers are going to have an uncomfortable time of it in the near future. They still have 30 to 40 companies in the pipeline which were trying to make the cut before a second-dip in the market and economy. Persuading investors to buy them may take all of their ingenuity.
4:30 pm : China celebrated its wealth and rising might with a show of goose-stepping troops, floats and nuclear-capable missiles, 60 years after Mao Zedong proclaimed its embrace of communism.
The two hour-parade of picture-perfect soldiers, tanks and missiles, floats and 100,000 well-drilled civilians was a proud moment for many Chinese citizens, as reporters Ben Blanchard and Lucy Hornby write.
The weather was perfect too, with the Chinese air force deploying a “magic-like” range of chemicals and technology to clear Beijing’s smoggy air.
Here's another image from the grand parade:
2:40 pm : Here’s a video of the parade shot by photographer David Grey.
2:00 pm : On a street corner at the end of China’s 60th anniversary parade route a crowd of ordinary but excited Beijingers gathered to wave flags and snap pictures of the floats as they trundled off to a temporary parking lot, reporter Emma Graham-Harrison writes
They were lucky — stringent security meant probably only a
few thousand people, in a city of well over 10 million, got a
live glimpse of the government’s celebration of its own success.
The leadership’s apparent conviction that ordinary Chinese
people could not be trusted to join in the celebration led to a
strange atmosphere downtown, with empty, echoing streets
occasionally filled with the rumble of an airforce flyover.
By the time the parade reached areas that - although partly
sealed off — still held some ordinary citizens, the thousands of
dancing, marching escorts that accompanied each display through Tiananmen Square had already peeled off.
Those on the floats looked off duty; many had sat down or were chatting among themselves.
But the small crowd still waved, shouted and snapped at the lavish representations of everything from the Olympics to agricultural advancements as if they were at the heart of the celebrations.
The fervour of those who could get close stood in sharp relief to the cordons of armed and aggressive cops — and to the mistrust of a leadership that claims to serve the people but appears somewhat afraid of them.
But it also suggested that the biggest security danger in throwing open the parade might have been not the terrorism Beijing claimed to fear, but a simple excess of enthusiasm among an increasingly patriotic population.
1:30 p.m.: Security for China’s 60th anniversary parade was tight, with access to many areas blocked by multiple cordons, which meant that Reuters journalists had to sleep in the office to ensure that they would be able to cover the parade.
Reuters’ Graham-Harrison writes about her night in the office ahead of the parade :
For a moment on waking up I savoured the one unquestionable benefit of sleeping in the office — my commute was cut to about 30 seconds. I could be up at 7.59 and still at my desk by 8.00.
It became obvious a couple of weeks before Communist China’s 60th anniversary parade that covering it was going to be complicated.
The government is putting on the spectacle for 1.3 billion people, and apparently considers the several million people who actually live in the capital more of an annoying security problem
than guests at the party.
Our office is on the parade route and so the surrounding streets would be shut down and all buildings emptied from nearly 24 hours before the parade to 24 hours after it, we were told.
The only way we could access stable, uncensored connections to the outside world was by staying at our desks the whole time. We persuaded building management to let the bureau chief, chief correspondent, a Chinese colleague and me to stay overnight — but we wouldn’t be allowed out, they warned.
So preparing for work on the 30th felt more like getting ready for a camping trip. I lumbered into the office with a backpack stuffed with sleeping bag, toiletries, pajamas, books (we expected a quiet evening) and mountains of food.
I find it hard to work properly when I’m hungry so — much to the amusement of my colleagues — I had brought stew, Chinese pancakes, a loaf of rye bread, cheese, tomatoes, apples, oranges,
cereal, soya milk, tuna (with can opener), baked beans, and a jar of tomato sauce.
My more modest colleague just opted for instant noodles.
As for spending the night in the office, it was dull but less of an ordeal than I expected. I curled up on sofa cushions from the pictures department and slept quite well.
(Reuters pictures by Nir Elias, David Gray, Tyrone Siu, Jason Lee)
12:00 : The military parade is followed by floats with huge portraits celebrating four generations of top communist leaders - Mao Zedong, Deng Xiaoping, Jiang Zemin, and one which looked like Hu Jintao.
There are also floats depicting environmental protection featuring trees, shrubs and giant model leaves - lots of people waving flags that are a very unnatural looking green. Another float celebrated China’s success in swimming and diving at the Beijing Olympics, with what looked like medal winners.
As reporters Ben Blanchard and Lucy Hornby point out in this report Hu wants the day of extraordinary spectacle and security to make the case that the formula of one-party rule and rapid growth remains the right one for hauling the world’s third-biggest economy into prosperity, ruling 1.3 billion people and elevating China into a superpower.
11:10 a.m: Security arrangements for China’s 60th anniversary parade to make sure the televised show went without a hitch left many ordinary Beijing residents and citizens feeling left out.
As Lucy Hornby reports, five miles is a long way away, and so the small crowd that gathered by the China World Hotel to try and catch a glimpse of the National Day military parade on Tiananmen Square might be described as unduly optimistic.
But then again, the security for this parade could also be described as unduly restrictive. Even five miles away was too close, it seemed, as police with bullhorns ordered the grumbling crowd even further back, beyond the third ring road, and then even further and further east. “Well I figured I could at least see the airplanes in person. We’ve got the TV set to record at home,” said a middle-aged man who had come with his family from the nearby province of Hebei. The police and security guards were reasonably sympathetic with the crowd, most of whom looked like migrant workers from outside the city.
“”I understand you, I understand that you want to see the parade. Believe me, I’d like to see the parade too!” one yelled, as he shooed a few stragglers further from the police cordon.
But it was hard to understand what would be the problem with patriotic citizens actually seeing the parade, which viewed from a TV did indeed turn out to be very impressive.
“Now, if its such a great thing for China, why are they trying to stop everyone from having a look?” said Chris Hill, an Australian businessman whose efforts to see the parade were proving to be utterly unsuccessful.
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10:50 am :Tyra Dempster, a TV producer standing just in front of Mao’s portrait in Tinananmen Square, says the whole place reverberated with the cannons as the parade began. It felt as if all the masonry might come tumbling down. It is still very noisy, with all the marching and shouting. The troops are female soldiers marching past in what look like quite short skirts, which doesn’t seem like practical military kit.
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10:15 a.m:10:15 a.m: TV shows Hu driving along the Avenue of Eternal Peace, in what looks like a Chinese-made red flag limo, inspecting immaculate ranks of soldiers, male and female, from the army, navy and air force.
At intervals he shouts “Hello comrades! hardworking comrades!”. The troops are so well trained their heads turn in exact unison to follow his car. They reply “Serve the people!” or “Hello commande
Reuters pictures by Nir Elias,David Gray,Tyrone Siu, Jason Lee)
10 a.m:Hu Jintao has appeared on top of Tiananmen gate, wearing a dark modern take on a Mao suit. The rest of the top leadership appear to be in business suits and ties.
9:45 a.m: Hundreds of people are stranded at Beijing train station because several bus and metro services have been suspended and there aren’t enough cabs. Many were complaning bitterly, some saying they will never come to Beijing again, Kitty Bu from the television department said.
And in Hong Kong pro-democracy demonstrators gathered at the venue of the national day celebrations, carrying a mock coffin, symbolising those who died in the 1989 crackdown in Tiananmen Square.
9:30 a.m: Ben Blanchard reports the weather is perfect for the national day parade after days of overcast gloom. Looks like clouding seeding worked ? Far from Tiananmen Square in the fashionable Drum Dowar area there is little security evident, he says. The narrow streets are lined with large red Chinese flags. It’sd all very quiet - perhaps people are still in bed.
Downtown Beijing has been awash with black-clad security troops sporting reflector sun-glasses, automatic guns and hulking black hum-vees and anti-riot vehicles, guarding the city for the 60th anniversary celebrations of the founding of the People’s Republic of China. Correspondent Chris Buckley says many of them look quite pleased with their expensive bling, even if their leather loafers can look a tad prissy and the
What’s the inspiration for this all-black chic? Some will blame the Bat Man film franchise. There are also plenty of menacing new buildings around Beijing that look like they were pinched straight from Gotham. The Reuters bureau is housed in one.
But the real inspiration may be “Black Cat Police Sergeant” (Hei mao jingzhang), a clunky but enduring Chinese cartoon series about a cat-cop who, when he is not vanquishing evil-doing animals, stands around looking very cool — if you’re a six-year old.
No Chinese childhood is complete without a dose of this cartoon, and locals can see Black Cat’s influence in the latest police fashions.
There is also the more recent Japanese import, Ultraman. a team of sleak, leaping superheroes who have entertained Chinese kids for many years, and apparently also inspired the couturiers at the Ministry of Public Security.
8:30 a.m. Police and journalists were up in the wee hours of Thursday, getting ready for China’s National Day parade. “That led to some friendly, pre-dawn comraderie with the hearty policemen manning the barricades at 5:30 am, while we all waited for some floats to roll by — the only glimpse either they or we will catch of this perfectly orchestrated parade,” correspondent Lucy Hornby reports.
There may be about 200,000 marchers, but the spectators are all being kept several city blocks away from the main parade route.
Even one cop, a stocky, cheerful 48-year-old with a strong Beijing accent, thought that was a bit excessive.
“Nowadays they have everything under tight control. They can’t let a lot of people near it, there would be too much potential for trouble. But when I was little we used to run right up and stand on the sidewalks as the parades went by. That was fun. Now everything’s much more strict.”
The People’s Republic of China will mark the 60th anniversary of its founding on Thursday with a military parade showcasing its growing political and economic clout.
Reuters correspondents, photographers and television crew will be blogging live the anniversary, tracking key events in Beijing’s Tiananmen Square and elewhere in the country, through the day.
Ahead of the celebrations, correspondent Emma Graham-Harrison takes a look at China at 60 and Benjamin Kang Lim and Lucy Hornby report on the country’s plans to cut back its army and boost the air force and navy, a strategic move that could stoke regional tensions.
Faced with a backlash against foreign investors, Beijing may
be tempted to offer shares in the last of its big four banks to
a domestic audience.
That decision may reflect China's new found confidence in
the wake of the credit crisis. But it also means Chinese investors
will retain full responsibility for the country's weakest bank.
The Agricultural Bank of China might end up just listing in
Shanghai without any endorsement from foreign institutions,
bankers close to the deal say. The bank claims it is still
keeping its options open.
But if AgBank pursues this path, it would be in sharp contrast
to the privatisation of China's three other large banks, all of
which attracted foreign strategic investors before listing in
both Hong Kong and Shanghai.
There are three explanations for this change of direction.
First, China has become a lot more confident in its banks, which
have weathered the financial storm better than their foreign
counterparts.
This means it has less need for foreign banks to
provide a seal of approval before launching a public offering.
China's Social Security fund is expected to be AgBank's only
strategic investor, though China Life also stands a good
chance of participating, bankers say.
AgBank is probably not happy with the arrangement, as its
chairman has said it wanted to have foreign strategic investors
and failure to attract them will be regarded as a loss of face.
But the post-credit crunch list of qualified foreign investors
with deep pockets and rural banking expertise is very short.
When China formulated its plan for bank reforms at the start
of the century, diversification of the investor base was one of
its key goals. Bringing in strategic -- particularly foreign --
investors was seen as beneficial to improving the ownership
structure of the state-owned banks and breaking the "blood ties"
that existed between banks and various government departments.
Foreign investments also helped put a value on the banks'
equity which provided a guide to the flotation price. But
Beijing has rightly become more wary of foreign investors after
supposedly long-term strategic partners such as Royal Bank of
Scotland and Bank of America cashed in their
investments in Chinese banks in order to raise much-needed cash.
After the recent meltdown, the idea that Western
institutions have anything to teach China's second-largest bank
about risk management also seems fanciful.
But the authorities should not get carried away by the
history of successful IPOs of Chinese banks. AgBank is much
weaker than peers such as ICBC and CCB, whose stock prices
have roughly doubled since they went public three years ago.
The bank only published its first audited annual report this
April. As recently as 2007 it was technically insolvent, with a
non-performing loan ratio of 24 percent, before a $30 billion
capital injection and massive bad debt carve-out.
Agbank's NPL ratio dropped to a more respectable 4.32
percent by the end of 2008, but is still more than double the
level of other state-owned lenders. Its loan loss reserves as a
proportion of total NPLs was just 63.5 percent, compared with
156 percent for the 12 other listed Chinese banks at the end of
2008, according to Fitch.
Earnings have been under pressure from weak asset
quality and high expenses associated with AgBank's
massive 24,000-branch network.
Listing in Shanghai does not mean AgBank will have to
compromise on valuation. For dual-listed companies, domestic
shares trade at a 12 percent premium to their Hong Kong
counterparts because there is a lot of money chasing
a limited pool of investments.
By excluding foreign investors, Beijing can boast that it is
keeping all the upside from rural reforms and urbanisation to
itself. But if things do not work out as planned, Chinese investors
will have to bear all the losses.
If current trends continue, China might swing to a trade deficit
in the not-too-distant future. Given that China has enjoyed more
than a decade of strong exports, this may sound a bit far-fetched.
But even if it happens, this would not necessarily be something for
the world to worry about.
Some economists have recently sounded alarm bells about the
possibility of a Chinese trade deficit. They argue that if the
Chinese current account surplus shrinks, it would leave Beijing
with less spare cash to buy U.S. Treasury bonds. Then who would
fund the U.S. budget deficit -- and, by implication, U.S.
consumers?
Those worries are largely misplaced. First, it is unlikely
to happen any time soon. In order for China to have a trade
deficit next year, imports would have to outgrow -- or shrink
less than -- exports by at least 23 percentage points.
In August, exports fell 23.4 percent while imports fell 17
percent. So while the trade surplus is diminishing, a deficit is
not around the corner.
If China's trade surplus shrinks, it will most likely be
caused by a contracting U.S. deficit, in which case Americans
will be saving more and the U.S. will be less dependent on
overseas investors to finance its government debt. That would be
a sign that the long-overdue rebalancing of the global economy
was beginning to take place.
It would not be so bad for the Chinese economy either,
because China is a lot less dependent on exports than many
people assume. Although exports have accounted for a whopping 50
percent of the economy in the past few years, the contribution
of net exports to economic growth is actually much smaller,
because a lot of what China sells abroad is low value-added
assembly work.
In the same way, one cannot just look at China's large
imports number and jump to the conclusion that China is a big
end-user of the world's goods. China's imports accounted for a
third of its gross domestic product last year, versus about 17
percent in the U.S. during the same period. But this is because
a lot of what China imports, such as computer parts, eventually
finds its way abroad.
On average, net exports contributed 1.4 percentage points to
annual GDP growth between 1979 and 2007, according to the
Statistics Bureau, much less than the contribution from the
other two drivers -- consumption and investment.
The transition to a more balanced trade account will take
time. In particular, it will need a push from foreign exchange
reforms, as the currently undervalued yuan encourages exports
and discourages imports. China allowed the yuan to rise
gradually for a few years after 2005, but has re-pegged it to
the dollar since the start of the credit crisis.
It will take time before Beijing is confident enough to
remove some of the export incentives, or at least not pile them
up as it has done in response to the crisis. A more equalised
trade account will probably not hurt China's overall growth that
much, but will help in making the world economy more balanced.
Is latte at Starbucks in China overpriced or is the local currency, the yuan, unexpectedly overvalued? The former is certainly more plausible, but it might be equally true that the yuan, if not overvalued, is at least not as undervalued as other measures suggest.
This conclusion would come from my proposed Grande Latte index, the caffeinated equivalent of The Economist’s Big Mac index. The Grande Latte index, like its burger brother, is a light-hearted attempt to find a basket of goods that can be compared across countries to assess purchasing power parity (PPP) and, by extension, fair currency value. There are serious flaws, but I will save these for, ahem, the bottom of this blog.
The cross-country cost comparison of grande (i.e. medium in Starbucks-speak) lattes shows that the Seattle-based coffee chain’s brew is rather dear in China. A grande latte costs $3.75 in the United States but $4.10 in China in dollar terms. It is even more expensive in Japan. The conclusion, that the yen is currently overvalued by 23 percent, accords well with the views of many analysts. But the idea that the yuan might be overvalued by 9 percent flies in the face of pretty much all conventional wisdom. It is also a drastically different perspective than that of the Big Mac index, which in its latest edition showed the yuan to be 49 percent undervalued.
The Grande Latte index is certainly not the gospel truth, though nor is burgernomics. The truth, as ever, probably lies somewhere in between the two extremes — i.e. the yuan is undervalued, but not to the tune of 49 percent. One thing is clear. Arguing that the yuan is undervalued is easy enough, but the actual degree of undervaluation is a matter for seriousdebate. With Beijing not about to let the exchange rate float freely, the market may have to wait a few years more before getting a chance to deliver its own verdict.
As for questions about the price of Starbucks, there is no shortage of coffee shops in China, from international chains to local cafes, and their prices are all about the same. Here, in any event, is what a Starbucks spokeswoman in Shanghai said:
“Setting the price for coffee is quite complicated. We have to consider the costs. We import the coffee from the U.S. and there are customs taxes. There is the labour cost, the store rental cost and the drink cost, so there are many factors to consider. Different markets have different conditions, so you cannot do a direct comparison with the United States. As far as we understand, our customers do have some price sensitivity. But this is not their only deciding factor. They think the service we provide and the values that Starbucks represents are more important.”
Grande Latte index
Local currency / Dollars / Implied PPP / Actual dollar / Valuation / Big Mac %
of dollar exch. rate vs dlr %
USA 3.75 3.75
Britain 2.35 3.76 1.60 1.60 ~ +3
Canada 3.75 3.45 1.00 1.08 -7.5 -6
Japan 420 4.63 112 91 +23.1 -3
China 28 4.10 7.47 6.83 +9.4 -49
The most glaring flaws in the Grande Latte index are that: (1) a key input, coffee, is not locally produced in most countries, and (2) in places like China, coffee is a niche product that is consumed by a subsection of well-heeled urbanites.
But, in defence of the index, coffee beans are a relatively small input in every latte, with water, milk, labour, rent, advertising and packaging making up the bulk — all are reflections of local costs, hence fair measures of purchasing power parity. As for catering to well-heeled urbanites, this is true, but these are the very people with international experience, who should know the fair price of a latte, and hence should insist on proper application of the law of one price in China.
How would you like to sport a Tiananmen square or the Great Wall on your head ? Then just step into Jiangshanxiu salon.
National flags are placed at the entrance of the salon in Zhengzhou, capital of Henan province in central China and staff wear naval uniforms and the song ‘Ode to the Motherland’ plays in the background.
Ahead of the 60th anniversary of the People’s Republic of China, which will be celebrated countrywide on October 1, salon manager Cao Bin has given more than 30 customers patriotic cuts and styles - and says that’s only the start.
You can also choose a design from the real life models — the staff.
Becoming a walking work of art is absolutely free, it will just cost you time as some designs can take anything up to two hours.
Top-tier casino operator Wynn has always bet on VIP gamblers. Now it is adopting the same approach with its stock market flotation. Wynn is trying to trump half a dozen recent poor Hong Kong market debuts by shunning fickle retail investors and handpicking money managers who are likely to stay the distance. It remains to be seen whether this strategy can help justify its valuation premium. 
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