Wei's Feed
Dec 9, 2009
via Breakingviews

China’s automakers may run out of gas

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China’s passenger cars sales almost doubled in November, thanks to major government incentives. But these will be hard to replicate next year. Investors in automakers such as Geely Auto, whose shares have increased more than seven-fold in a year, and battery maker BYD, whose stock has risen five-fold, may have got ahead of themselves.

Last year, investors dumped Chinese auto stocks because they were worried about overcapacity. Geely’s shares fell to their lowest levels in a decade. This year, it’s a different story. Car sales are on track to surge 50 percent and to surpass 10 million units for the first time, thanks to the government’s tax cuts for small cars and rebates for
purchases by villagers.

Dec 2, 2009
via The Great Debate

China can outgrow overcapacity, at least for now

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– 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.

Nov 4, 2009
via The Great Debate

Mickey’s Magic needed for Disneyland Shanghai

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– 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.There is also a risk of a culture backlash. Chinese children are less familiar with Disney characters than their counterparts in, say, Japan, home to Disney’s most successful overseas theme park. That said, the Chinese have so far appeared to be receptive to the American cultural icon: Mickey Mouse Clubhouse appears on national TVs and Disney has opened a chain of language schools in Shanghai.China’s decision to relent after ten years says a lot about its changed priorities. Before, the government was concerned about the economy overheating, but now growth has become the top priority. While it is probably better to build a theme park than more empty highways, a second Disneyland might prove to be one too many.– At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. —

Oct 29, 2009
via Breakingviews

China needs a more contrarian investment strategy

The Chinese may be big admirers of Warren Buffett, but two recent examples show that even the most sophisticated Chinese investors don’t follow the Sage of Omaha’s method. They tend to pay too much attention to Mr. Market and spurn the value-based strategy advocated by Buffett.China’s sovereign fund, CIC, acts like a momentum trader. This year it has been doing deal after deal, trying to chase a rising stock market. Last year it mostly sat on its hands though its strong cash position would have allowed it to scoop up assets on the cheap.In another example, Chinese regulators stopped approving mutual funds which invest in global equities 17 months ago. After a dramatic run-up this year, they decided that now is the time to go abroad again and resumed approval of those funds, though bargains are much less likely to be found now.There are reasons why Beijing acts in this way. The government is worried about how¬† foreign investment plays with the public in an economy where a large proportion of the people remain extremely poor and the welfare system is patchy. Lending to wealthy westerners, or investing in Wall Street firms run by billionaires is controversial. Contrarian investments tend to attract more attention than those that follow the herd. Only steely-nerved politicians and officials welcome that sort of exposure.Chinese investors are also perhaps still too inexperienced to be hard-nosed valueinvestors. This may change over time as it did with the Japanese. Shaking off their old image of being indecisive and pro-cyclical, the Japanese surprised observers by snapping up shares in famous names such as Morgan Stanley <MS.N> during the crisis at prices that now look like a bargain.Of course, momentum investing hasn’t been a unsuccessful strategy so far this year, as global markets have rallied sharply. But CIC should not be complacent. The jury is still very much out. In most cases CIC has committed to lock-up periods and bought shares with less voting rights, so it is not that easy to exit some of the big plays it has made. If markets weaken, CIC may find itself locked into these investments for the long haul. The still sceptical Chinese public might be even more unforgiving if that happens.

Oct 28, 2009
via The Great Debate

Winning the copyright battle in China

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– 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.China is likely to act when it feels others are trampling on its rights. A Chinese group recently complained that Google’s planned online library of digitised books might violate Chinese authors’ copyrights. The more China feels that its own interests are at stake, the more serious it will get. When every new movie or software program can be copied for nothing, it is impossible to develop a film business or software industry.It is better to back Chinese movie stars and technology entrepreneurs rather than American politicians to drive this message home in China. — At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —

Oct 12, 2009
via Breakingviews

Beijing gate-keeping disadvantages Chinese buyers

Chinese regulators might think that a tough stance on takeovers prevents domestic bidders from overpaying for overseas targets. This approach has helped prevent unwise deals. But, as the takeover of General Motors Co’s Hummer business shows, Chinese bidders may have to pay more to compensate for the regulatory risk at home.

Deep-pocketed Chinese buyers are increasingly appearing as potential buyers of assets overseas. But as well as grappling with protectionism in target countries, they also face unpredictable regulatory decisions at home. Foreign sellers are increasingly demanding that Chinese bidders pay more to compensate for these risks.There have been many reports over the last few months that Beijing would not allow Sichuan Tengzhong Heavy Industrial Machinery to buy the manufacturer of gas-guzzling cars. The concern was that a deal would fly in the face of Beijing’s goal to reduce carbon emissions. There were also doubts about Tengzhong’s ability to manage a foreign brand.The debate did not kill off Tengzhong’s bid. However, it may have lengthened the negotiations, which have taken a year. GM had little choice because it had no other credible bidders lined up. However, other sellers that have a choice of buyers are unlikely to wait that long.Moreover, there is a possibility that Tengzhong might have been forced to pay a bit more to convince the seller that they can pull it off. The final purchase was reported to be $150 million for the ownership of the brand, though this does not include key technologies which remain largely off-limits to the Chinese.Beijing has used its veto power several times in the past few years. For example, in July 2008 the cabinet rejected a request by China Development Bank to raise its stake in Britain’s Barclays Plc. That decision looked smart when market turmoil hammered Barclays shares a few months later. However, it has added to the nervousness among foreign companies about whether Chinese investors are reliable.While it is important to have the regulatory checks and balances in place, Beijing can do its own companies a favour by acting more professionally. China used to be in shrouded in darkness. Now it is in a transition phase, where many people who have little to do with the decision making process are eager to express their views.Foreign media, meanwhile, can also do a better job interpreting messages from Beijing. They need to understand that there is a big difference between the regulator, people close to the regulator, and the state media. All the conflicting messages only make Western sellers more nervous.When there is a choice of buyers, Chinese companies are at a disadvantage compared to Western rivals. Beijing Auto almost missed the deadline to bid for GM’s Opel, probably because it had to talk to various constituencies first and agree on a proposed price. This is not to say that U.S. protectionism and regulatory hurdles have not thwarted Chinese bidders. But China’s lack of responsiveness and inflexibility make it even more difficult for Chinese companies to win highly competitive bids.Some might argue that this is a good thing. After all, most mergers and acquisitions fail to justify their purchase price, and competitive auctions tend to have an even lower success rate. However, it might come as a surprise to the Chinese government, which is encouraging Chinese companies to make more strategic acquisitions abroad, that its gate-keeping could be hurting the very companies that it wants to protect.

Oct 7, 2009
via Commentaries

China can be smarter on reserving more resources

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.

Sep 30, 2009
via Commentaries

China might keep the weakest bank all to itself

Faced with a backlash against foreign investors, Beijing maybe tempted to offer shares in the last of its big four banks toa domestic audience.That decision may reflect China’s new found confidence inthe wake of the credit crisis. But it also means Chinese investorswill retain full responsibility for the country’s weakest bank.The Agricultural Bank of China might end up just listing inShanghai without any endorsement from foreign institutions,bankers close to the deal say. The bank claims it is stillkeeping its options open.But if AgBank pursues this path, it would be in sharp contrastto the privatisation of China’s three other large banks, all ofwhich attracted foreign strategic investors before listing inboth Hong Kong and Shanghai.There are three explanations for this change of direction.First, China has become a lot more confident in its banks, whichhave weathered the financial storm better than their foreigncounterparts.This means it has less need for foreign banks toprovide a seal of approval before launching a public offering.China’s Social Security fund is expected to be AgBank’s onlystrategic investor, though China Life also stands a goodchance of participating, bankers say.AgBank is probably not happy with the arrangement, as itschairman has said it wanted to have foreign strategic investorsand failure to attract them will be regarded as a loss of face.But the post-credit crunch list of qualified foreign investorswith deep pockets and rural banking expertise is very short.When China formulated its plan for bank reforms at the startof the century, diversification of the investor base was one ofits key goals. Bringing in strategic — particularly foreign –investors was seen as beneficial to improving the ownershipstructure 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. ButBeijing has rightly become more wary of foreign investors aftersupposedly long-term strategic partners such as Royal Bank ofScotland and Bank of America cashed in theirinvestments in Chinese banks in order to raise much-needed cash.After the recent meltdown, the idea that Westerninstitutions have anything to teach China’s second-largest bankabout risk management also seems fanciful.But the authorities should not get carried away by thehistory of successful IPOs of Chinese banks. AgBank is muchweaker than peers such as ICBC and CCB, whose stock priceshave roughly doubled since they went public three years ago.The bank only published its first audited annual report thisApril. As recently as 2007 it was technically insolvent, with anon-performing loan ratio of 24 percent, before a $30 billioncapital injection and massive bad debt carve-out.Agbank’s NPL ratio dropped to a more respectable 4.32percent by the end of 2008, but is still more than double thelevel of other state-owned lenders. Its loan loss reserves as aproportion of total NPLs was just 63.5 percent, compared with156 percent for the 12 other listed Chinese banks at the end of2008, according to Fitch.Earnings have been under pressure from weak assetquality and high expenses associated with AgBank’smassive 24,000-branch network.Listing in Shanghai does not mean AgBank will have tocompromise on valuation. For dual-listed companies, domesticshares trade at a 12 percent premium to their Hong Kongcounterparts because there is a lot of money chasinga limited pool of investments.By excluding foreign investors, Beijing can boast that it iskeeping all the upside from rural reforms and urbanisation toitself. But if things do not work out as planned, Chinese investorswill have to bear all the losses.