China can outgrow overcapacity, at least for now
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
China watchers are worried that excessive lending leads to massive overcapacity. However, the risk of Beijing pressing too hard on the brake is even greater. At least for now, China should be able to growing its way out of its bad debt problems.
Banking regulator Liu Mingkang recently told a conference that China’s banks should lend out 6-7 trillion yuan next year, equivalent to about one fifth of China’s annual output. Some think that is too much. However, these fears are overdone. Indeed, if new lending falls below 10 trillion yuan, bad debts will soar, private investment will be crowded out and the economic recovery may be derailed.
Since the stock of loans has been enlarged by this year’s explosive credit growth, the regulator’s target represents a 15 percent increase in China’s loan base. This is in line with past trends, but marks a sharp slowdown from this year’s 30 percent growth in total loans.
Just to keep funding current ongoing projects, the economy would need 8.3 trillion yuan in new loans in 2010, according to Nomura estimates. So the current goal implies that here would be no money left for new projects, and some current projects will not receive funding.
Setting the credit growth target too low will make it hard for new borrowers, because banks naturally want to keep funding current projects. That puts private sector borrowers, who are expected to invest more next year following strong government investment this year, at a disadvantage.
What’s more, if the banks sense the government might tighten lending targets next year, they are likely to lend as much as possible at the start of the year. This will increase the volatility of credit.
Mickey’s Magic needed for Disneyland Shanghai
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
China has finally given a green light for Disneyland to build a theme park in Shanghai. Negotiations that started when Bill Clinton was in the White House have concluded just before President Barack Obama is due to visit. The approval looks like a coup for Walt Disney Co, but it will take all of Mickey’s magic to prevent the park from becoming another government-financed loss maker.
Disney’s last theme park in the region was anything but a hit. Hong Kong Disneyland was created in 2005 in an effort to boost employment in the epidemic-stricken region, but attendance numbers have fallen short of target. This hits the Hong Kong government harder than Disney, because the former not only took an initial 57 percent equity stake in the venture, but also spent $1.75 billion building related infrastructure like a metro line and ferry piers.
Shanghai Disneyland is likely to be financed in the same way. Estimates for the park’s price tag are around $4 billion. The government and a group of Chinese companies will contribute about 60 percent of equity, with Disney paying for the rest. The Shanghai government is also likely to pay for the roads leading to the park.
The Hong Kong park has been a disappointment for a number of reasons, some of which might equally be relevant in Shanghai. It is the smallest Disneyland in the world, so it is crowded and not worth visiting for a second day. Culturally, locals identify more with the Ocean Park, which features pandas and sharks and is cheaper. Hong Kong Disneyland’s public image has also taken a hit from a bout of food poisoning and accusations that it has exaggerated visitor numbers.
The Shanghai park will be 3-4 times bigger than the one in Hong Kong, making space for more visitors. But this will also increase the cost of relocating current residents. Some locals are busy adding a second floor to their homes so they can demand more compensation when they move out.
Shanghai has twice Hong Kong’s population, but average income is only about a quarter that of its wealthier neighbour, so it’s far from clear how many visitors will be able to afford a ticket that will cost the equivalent of two days of earnings for a college graduate. Then there is the possibility that the Shanghai park will divert visitors from Hong Kong.
Winning the copyright battle in China
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
When it comes to protecting intellectual property in China, the United States often feels that its pleas are falling on deaf ears. Its best hope is that China recognizes that copyright protection is in its own interests. To achieve that, Washington needs to push for changes from within.
After a fruitless decade of lobbying China on intellectual property, Washington has reached for the microphone. This week, the U.S. Chamber of Commerce launched a high-profile international forum on intellectual property in Guangzhou, capital of Guangdong Province and best known as both China’s manufacturing hub and the global centre for intellectual property theft.
Guangdong understands it cannot hold on to both titles forever. Its reforming leader Wang Yang has vowed to build an innovative Guangdong, but he and his deputies understandably do not want to be criticized in public. The U.S. delegation included high-ranking officials such as Commerce Secretary Gary Locke, but the very man they hoped to engage with didn’t show up.
Foreign pressure can help, but changes rarely happen in public. First, both parties need to agree on what they are trying to achieve. As a manufacturer for the rest of the world, China has historically seen little upside in protecting copyright. The United States needs to convince Beijing that, if it wants to develop its own products, then protecting copyright is important.
Huawei Technologies, the telecom equipment maker based in Guangdong, could be a good partner in this. In 2003, Cisco sued Huawei for copyright violations, but dropped the suit after Huawei agreed to stop selling some products. Now, Huawei has emerged as a strong protector of copyright. Last year the company filed the largest number of patents in the world.
Song Liuping, Huawei’s chief legal officer, advocates increasing the penalty for IP theft, a view shared by Americans. But he thinks the problem is not the lack of an adequate legal system or even lax enforcement, but the absence of a culture in China that values designs, patents, and copyrights.
I just bought windows7 for under 1 US Dollar in China. Even if I could not find it in China I could download it with a torrent. You think that is going to stop? That is like trying to stop drugs in the US. You arrest Gmoney and the next day his boy JT is out on the same block with some fresh product. You want copyright protection for big monopoly corporations? Tell them to quit overpricing their products. Windows7 should only cost a few dollars and be mass produced. The Chinese are showing them how to do it. Instead of crying maybe they should start learning. You put them out of business by eliminating the incentive.
Imagine when China runs a trade deficit
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
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.
This is an interesting article. If this were to happen we could envision a new Walmart-like chain littered with crappy reverse engineered American goods. Shelves stocked to the rafters with Made in U.S.A. All priced at $9.99.
China’s start-up market can win against the odds
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
It is hard to be very optimistic about China’s proposed stock market for start-up companies. After all, similar attempts in other countries have a decidedly mixed track record. Why would China, where small private companies face an uphill battle against state-owned firms, be any exception?
Nevertheless, there are reasons to believe that the start-up market, set to debut in October, offers better potential than previous efforts in Singapore, Germany and Hong Kong.
The country has a big reservoir of fast-growing small companies with real profits. In the past, they have opted for listing on foreign exchanges such as the Nasdaq. Though they were attracted by the prestige of a foreign listing, they also faced a home market that favors size over quality.
Indeed, China, home of internet stars such as Baidu and Sina, is the second-largest foreign supplier of companies to the Nasdaq.
But the exodus has almost ground to a halt. Beijing has tightened its grip on foreign listings because it wants to keep the best growth companies at home. Only companies which already have overseas structures can list their shares abroad, but even then they have to jump through a lot of regulatory hoops.
Obtaining a domestic listing will become much easier, as Beijing has ambitious plans to float hundreds of companies on the new market each year. Maintenance fees are lower and disclosure requirements are less stringent when listing at home.
India has no good experience of a stock exchange named ‘OTC’ for smaller companies. China has controlled economy, so may be successful in their efforts.
For Chinese exporters, grass is greener abroad
- Wei Gu is a Reuters columnist. The opinions expressed are her own. -
The U.S.-China tire dispute threatens to spill into other sectors and squeeze Chinese exporters’ already razor-thin margins further. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.
But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.
In addition, selling to large buyers such as Wal-Mart creates volumes large enough to compensate for weak margins. Moreover, Chinese exporters get all sorts of export rebates and local government incentives which help to lower their costs.
But as the tire spat has illustrated, Washington can slap punitive duties on Chinese imports simply by pointing to a significant increase in imports from China. By imposing penalties in this case, President Obama has opened the door for a slew of similar complaints against Chinese goods. It will only be a matter of time before other countries, worried about where those displaced Chinese exports might end up, start to follow suit.
That’s why Chinese policy makers need to get more serious about stimulating domestic spending. It is time for Beijing to revamp a system built over the past three decades that explicitly and implicitly favours exports and to encourage manufacturers to prioritise selling to the domestic market.
A good first step would be to reduce some of the export incentives China offers to certain industries. These effectively subsidise foreign consumers at the expense of domestic customers. For example, Chinese tyre-makers get a tax rebate of about 9 percent on the value of the products they sell abroad. That’s why tyre makers can afford to price exported tyres more cheaply than ones sold at home, according to Xu Qiyuan, a researcher at China’s Social Science Academy.
That would be good, if you can’t afford to go on holiday, stay at home and landscape you own garden.
Ex-Google China chief’s dream factory
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest businesspeople and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?
Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google searches that lead to pornographic sites. It has drawn strong support from investors.
Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics Inc., Legend Group, New Oriental Education and venture firm WI Harper Group.
Consider the fact that everyone remembers the ‘Cultural Revolution’ and what happened to people who used their creativity. Also consider Tien an min where the youngest, best, thinkers in China were shot or jailed for thinking freely. Now consider creative talent lining up for this. It’s not going to fly.
China finds tricky export niche amid global slump
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
As exports of manufactured goods slow, China has found a new niche — exporting its construction boom.
With many countries in the world adopting stimulus plans to drive demand, China has been scrambling for these public spending dollars. And it is well placed to do so.
Infrastructure investment has powered Chinese growth in the past three decades. The nation has deep experience in building roads and bridges quickly and cheaply.
Moreover, it isn’t just construction expertise China is offering to clinch the deal. Its state-controlled banks such as the Industrial & Commercial Bank of China (ICBC) and Bank of China are eager to throw in some cheap loans too.
China’s big advantages are the scale of its companies — 51 of the world’s largest 225 contractors hail from China — and its substantial capital reserves, which allow its banks to provide long-term, low-cost credit for projects abroad.
The surge in construction revenue from overseas looks remarkable against a 22 percent drop in total exports during the first half.
So basicly nationalism + state subsidized economic warfar = totaly destroying world competition?
God I wish the EU and the USE could get away with that..
Wait a sec, I wish we could beat our banks in line and get some old school post ww2 nationalism wupped up again.
Its not China holdign us down, its all the lazy bastards and greedy financialist
China stock jitters look overdone
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
Just as Chinese stocks often rise without fundamental support, they are now tanking even though companies just had a better-than-expected earnings season.
Fears about a policy shift towards tighter liquidity are blamed for the 22 percent decline in the Shanghai market from its August peak. But those fears are largely overblown. Beijing might be talking about boosting domestic consumption, but structural reforms take time and there is little the authorities can do other than continuing to reinflate the economy in the short run.
There are encouraging signs that corporate profits — the fundamental basis for share prices — are on the turn.
Chinese companies’ earnings for the past quarter rose 36 percent compared with the previous three months, helped by strong results from banks and property firms. Companies also offered a more optimistic outlook, propelling a string of earnings upgrades.
The purchasing managers’ index, released on Tuesday, confirms that China’s manufacturing sector is keeping up its steady recovery.
Stocks are now trading at about 20 times forecast profits for next year. This is higher than the rest of the region, but Chinese companies enjoy higher growth rates: earnings are projected to grow by 20 per cent this year.
The Chinese economy is already flawed on 10 levels, atleast. With P/E’s like that and the present growth rate, it points to one outcome: cash flow problems. Speaking of which, the US bond book is astounding, the interest payments and close-out maturities must put a lot of pressure on the US cash flow, let alone the the subtle, calculated and callous reverse takeover of US public sector cash flow. Hopefully the US private sector won’t fall for that one in future with dividend payments and share buybacks.
Yuan trade settlement mission impossible, for now
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
The People’s Bank of China’s ambitious plan to settle foreign trades in yuan has been given the cold shoulder by companies both at home and abroad. The failure of this experiment shows the difficulties China faces in internationalising its currency.
Launched by the PBOC with a fanfare almost two months ago, the pilot scheme has so far seen only thin volumes of yuan trade settlement. Guangdong province, the country’s export hub, was supposed to be the cornerstone of the plan, but local officials said they found few willing counterparties.
This should not have come as a surprise. Foreign importers either have little access to the yuan, are reluctant to part with it, or do not want to commit future payment in a currency that is expected to appreciate. More surprisingly, domestic exporters, who would benefit from lower currency risks, are put off by the logistical headache of receiving domestic currency for their exports.
These concerns aside, there is a more fundamental reason why the yuan is not catching on. The Triffin Dilemma, named after the Belgian-American economist who rose to prominence in the 1960s, stipulates that it is hard for a country running a large trade surplus to demand that others buy goods using its own currency.
The world now suffers from an oversupply of the manufactured goods that are China’s specialty. Thus it is hard for China’s millions of small exporters to demand that Wal-Mart pays them in yuan, or for thousands of small Chinese steel mills to persuade Rio Tinto and BHP Billiton to accept the Chinese currency.
Only exporters in countries such as Indonesia, which has a limited amount of foreign reserves, have an incentive to sell goods such as timber to China in exchange for yuan, which can be used to buy imports from China later. But given the lack of convertibility of the yuan, it is probably not worth going through the hassle.
Wei Gu focuses her attention on new capacity, while the concern of most analysts is on the old capacity that is now obsolete, and growing more inefficient every day. China needs to develop new plant and equipment, naturally, just to remain competitive in the global market. However, many believe an equally pressing need is to close and consolidate obsolete buildings and companies. In my view, companies could strongly benefit from providing workers with a year’s income as a severance package, to prevent protests when the companies close down. That kind of investment would show a high return, since clearing the obsolete, inefficient capacity off the map of China is a very intense priority.