Friday, 31 January 2014

Paper: "Consumption Based Estimates of Urban Chinese Growth"

IMF paper: Urban inflation in China was pro-poor.  Given rising inequality this is a ray of sunshine.

It is interesting to note that consumption growth is put at 6.8% a year at a time when official growth statistics were generally over 10%.

MARCOS CHAMON, International Monetary Fund (IMF) - Research Department

International Monetary Fund (IMF)
This paper estimates the household income growth rates implied by food demand in a sample of urban Chinese households in 1993–2005. Our estimates, based on Engel curves for food consumption, indicate an average per capita income growth of 6.8 percent per year in 1993–2005. This figure is slightly larger than the 5.9 percent per year obtained by deflating nominal incomes by the CPI. We attribute this discrepancy to a small bias in the CPI, which is of a similar magnitude to the one often associated with the CPI in the United States. Our estimates indicate stronger gains among poorer households, suggesting that urban inflation up to 2005 in China was “pro-poor,” in the sense that the increase in the cost of living for poorer households was smaller than for the average one.

Friday, 24 January 2014


I can never resit a good play on words and a fine sets of images from Shanghaist. As someone who has spent sometime in Wuhan this comes as no particular surprise.

The flavor must be something to savour.

Air-pork-alypse: Wuhan butcher cures bacon outdoors in the smog [Shanghaiist]

Thursday, 23 January 2014

Journal: The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China

Interesting paper in the most recent Review of Development Economics.  Historically, guns and growth have been close companions.

The Growth and Decline of the Modern Sector and the Merchant Class in Imperial China


This paper offers an explanation of why, in Imperial China, the merchant class expanded and the economy modernized up to the 13th century, and why it entered into decline from the 14th century onward. The modernization of China required the accumulation of public capital and the building of good institutions, upon which a vibrant class of merchants and entrepreneurs could gradually emerge. This class contributed to the enrichment of the society and the emperor, but its activities also weakened the dominance of the emperor and the élite, who would then prefer to block the modernization of China and to restrict the size of the merchant class, putting the economy into long-run stagnation. However, when the emperor faced severe foreign military threats and when he realized that a modern sector improved the defense capabilities of China, he made the opposite choice.

Tuesday, 21 January 2014

Will China's $23 Trillion Credit bubble collapse - and collapse soon?

The guys over at Zero hedge warn it might. MEGA DEFAULT ahead?  A classic dismal scientist story.

As an economist it is always interesting and useful to read "the worst case" scenario articles.  By now we know very well that black swan events happen and more often that we care to imagine.  In this case  the concern is China's increase in credit from $9 trillion to over $23 trillion in 5 years.

But China has been growing rapidly so it is not a problem right? Not so simple.

I agree with Michael Snyder here (author of the Zerohedge article) - many Chinese companies are in deep - way too deep. 

Other posts have considered local government debt.

The date suggested - 31st January.  Of course this is scaremongering and not a reason to sell everything and buy gold (as many would suggest).

In reality the Chinese government have enough firepower to prevent catastrophic collapse but it might be worth watching the indices carefully on the 31st January.

 The $23 Trillion Credit Bubble In China Is Starting To Collapse – What Next? [Zerohedge]

China's elite and their "offshore" assets

An open secret is that large numbers of Chinese have assets outside of the country and money is leaving China at a significant rate.  Now CBCnew have written a nice article on the subject that is sure to raise some eyebrows.

Things could get ugly. Worth reading in full. My bold.

Offshore assets of China's elite revealed in leaked records [CBCnews]

"Close relatives of China's top leaders have used secretive offshore companies in tax havens that helped shroud the Communist elite's wealth, according to a massive cache of leaked financial records, posing a formidable challenge for President Xi Jinping, the country's avowed anti-corruption leader.

The confidential files include details of a real estate company co-owned by Xi's brother-in-law, as well as British Virgin Islands corporations set up by former premier Wen Jiabao's son and son-in-law, plus dozens of more cases of people tied to high-level officials."

 CBC News has exclusive access in Canada to the files, which show that nearly 22,000 people with addresses in mainland China and Hong Kong are involved in offshore dealings in locales such as the British Virgin Islands and the Cook Islands, places usually associated with hidden wealth. Among them are some of China's most powerful men and women — including at least 15 of China's richest, members of the National People's Congress and executives from state-owned companies entangled in corruption scandals.


Friday, 17 January 2014

Academic Paper: Sector-Level Productivity, Structural Change, and Rebalancing in China

The future of China depends to large extent to some degree of structural re balancing.  Export driven growth will be harder to achieve in a sluggish global economy.  This new IMF working paper is a province level study that considers productivity in the services sector.  Services have been growing rapidly - this will help GDP growth in the future.  Will the change happen quick enough?


IMF Working Paper No. 13/240
MALHAR NABAR, International Monetary Fund (IMF)

KAI YAN, Yale University

This paper studies structural changes underlying China's remarkable and unprecedented growth in recent years. While patterns of structural transformation across China's provinces are broadly in line with international experience, one important difference is in labor productivity differentials between services and the rest of the economy. Specifically, the gap between labor productivity in the rest of the economy and services has widened across China's provinces as they have moved from low to middle income, which is contrary to the trend observed in cross-country experience. Evidence from a panel of China's provinces suggests that credit and labor market frictions have inhibited labor productivity growth in services relatively more than in the rest of the economy. Reducing these frictions is essential for achieving the next stage of China's development, one in which the service sector will need to play a more prominent role as an engine of growth. The evidence also suggests that improving labor productivity in services will lift the consumption share of GDP, thereby advancing the needed rebalancing of domestic demand in China.

Academic Paper: "Local Government Financing Platforms in China: A Fortune or Misfortune?"

New IMF working paper.  Local government "issues" are a key element of China's future success (or failure).  Bad debts and poor investment decisions need careful examination.  Land to sell is running out.

"Local Government Financing Platforms in China: A Fortune or Misfortune?Free Download

IMF Working Paper No. 13/243

YINQIU LU, International Monetary Fund

TAO SUN, International Monetary Fund (IMF)

China’s rapid credit expansion in 2009–10 brought local government financing platforms (LGFPs) into the spotlight. This paper discusses their function, reasons behind their recent expansion, and risks they are posing to the financial sector, local governments, and sovereign balance sheet. This paper argues that LGFPs were a fortune for China in the past, but would turn out to be a misfortune if the causes of the rapid expansion of LGFPs are not addressed promptly. In this context, the paper proposes ways to avoid misfortune by: acknowledging and addressing the revenue and expenditure mismatches at the local government level; establishing a comprehensive framework to regulate and supervise local government budgets; ensuring the sustainability of the financial resources obtained from the sale of land use rights; and developing local government bond markets and promoting financial reforms.

Wednesday, 15 January 2014

The Middle Dream

Lauren Johnston explains "the Middle Dream" on the China Policy Institute Blog. Link.

 A small flavour.

Soon after becoming Chinese President in November 2012 Xi Jinping spoke of his belief that “The Great Revival of the Chinese nation is the greatest Chinese dream”. Attempts to understand the concept of “Chinese dream”, inside and outside of China, have followed extensively since. This post reflects on the evolution of Chinese leaders’ political lexicon since Deng, and finds that Xi’s China dream is a lexical shift, but a policy continuum, allowing for greater aspirational convergence among China’s own poor and rich, and also in China’s foreign relations with developed as well as developing countries.

Reformist leader Deng Xiaoping famously employed the slogan “opening and reform”. Enduring to now have become the commonly used phrase capturing China’s remarkable program of economic reforms since 1979. Lesser-known of Deng’s lexicon however, and directly sharing more in common with the essence of the contemporary Chinese dream, is his 1978 call for the “invigoration of China” (zhenxing zhonghua). In sum, the “invigoration of China” was arguably Deng’s national vision, while “opening and reform” served as the umbrella policy direction that would be used to move the nation toward that vision.

Tuesday, 14 January 2014

Will the Renminbi Emerge as an International Reserve Currency?

Academic paper published in the most recent issue of World Economy.

Will the Renminbi Emerge as an International Reserve Currency? [World Economy]


The global reserve system can be strengthened by increasing the role of alternative currencies. A gradual evolution to a multicurrency system reduces pressure on a single reserve currency issuer from an ever-growing balance-of-payments deficit. It also allows countries to better diversify their foreign exchange holdings. Given the continuing strong economic growth in the China and its growing influence on the world economy, the renminbi will likely emerge as a new international currency. However, this is contingent on the China accepting a more convertible capital account and developing an efficient financial system. Internationalising the renminbi will likely be a gradual and drawn-out process. Simulations show that, with greater convertibility, the renminbi could gradually become an international currency within Asia and beyond – sharing from 3 to 12 per cent of international reserves by 2035.

Saturday, 11 January 2014

China's runnaway train - crash ahead?

Bloomberg give an impressively bleak outlook on China.  Link. The key is the "debt" - this is a real problem.  Patrick Chovanec does a great job.

My bold

I have real concerns about a liquidity crisis - the issue is local government debt.  The newspaper headlines are usually about how much money China has.  How can debt be a problem?

I have included the whole article given how good it is.  The interesting questions and first, what can China do to address these issues and second, what should the West and investors around the world do to protect themselves from a possible crisis (and in the case of hedge funds - profit from it).

China’s Runaway Train Is Running Out of Track [Bloomberg]

"A financial drama is unfolding in China as the new year begins. Last week, for the second time in six months, interest rates in the critical interbank lending market spiked above 10 percent, prompting fears of a liquidity crisis that would trigger mass defaults and cripple the world’s second-largest economy

Western investors largely ignored the cash crunch and failed to grasp its potential significance. Although the situation has largely eased after the People’s Bank of China hastily injected at least $55 billion into the market, that isn’t the end of the story. These repeated crises are a sign that the foundations of China’s investment-driven growth model are crumbling -- with unsettling implications for the rest of the global economy. 

To those who wrote off China’s first banking seizure in June as a fluke, this latest episode appeared to come out of nowhere. They cast about for explanations: Perhaps some seasonal surge in cash withdrawals was to blame, or the U.S. Federal Reserve’s decision to taper its bond-buying policy. Optimists assumed the PBOC was tightening credit on purpose, as a warning to banks to rein in unsafe lending practices. With inflation at manageable levels, they reasoned, the People’s Bank of China had plenty of room to loosen monetary policy again and ease the cash crunch. 

In fact, loose monetary policy is the problem, not the solution. Two simple words -- bad debt -- are the key to understanding why China has too much money, yet not enough. In the years since the global financial crisis, China has racked up impressive growth in gross domestic product by engineering an investment boom, fueled by a surge in easy credit. Total debt has risen sharply, from 125 percent of GDP in 2008 to 215 percent in 2012. Credit has spiraled to $24 trillion from $9 trillion at the end of 2008. That’s an additional $15 trillion - - the size of the entire U.S. commercial banking sector -- lent out in just five years. 

A lot of that money has gone into projects whose purpose was to inflate the country’s economic statistics, not to generate a return. Officially, China’s banks report a nonperforming loan ratio of less than 1 percent. In reality, they are rolling over huge amounts of bad debt, both on their own books and by repackaging it into retail investment products -- many of them extremely short-term -- that promise ever higher rates of return. 

China’s banks can hide bad debt by playing this shell game, yet that doesn’t change the fact that they’re not getting their money back. With their capital locked up in existing projects, the only way they can finance the next round of big investments -- and keep China’s GDP growth rates from collapsing -- is by expanding credit. More and more of that new credit is now eaten up paying imaginary returns on the growing pile of bad debt. 

This year, total credit in China grew about 20 percent, from an extremely high base -- hardly tight money. Yet the cash needs of China’s banks aren’t what they seem. In addition to its declared balance sheet, each bank is juggling a host of dubious assets and hidden cash obligations (in the form of quasi-deposits) on what amounts to a “shadow” balance sheet. Rein in credit growth, even modestly, and there isn’t enough to go around. 

That’s what Chinese authorities discovered in June, and again last week. In both instances, the People’s Bank of China didn’t take away the punch bowl by tightening credit, it merely tried to resist handing over an even bigger punch bowl. The result, both times, was a near-meltdown in the interbank lending market that threatened to unleash a cascade of defaults throughout the economy. Nor have the signs of financial stress been limited to the interbank market: Over the past few months, yields on Chinese government and corporate bonds have steadily risen, even as the economy slows.

The PBOC could, and did, halt the immediate liquidity crisis by injecting more cash. But in doing so, it effectively cedes control over monetary policy to the shadow banks. Runaway lending continues, bad debts mount even higher, and the need for more cash to paper over losses becomes that much more acute. Far from solving the problem, pumping in more cash just kicks the can farther down a dead-end street. 

The implications of this brewing storm are bigger than many global investors realize. China’s credit-fueled investment boom has been a driver of metals prices and machinery exports. China has become the world’s largest automobile market, its largest oil importer, and its largest buyer of gold. Although foreign banks have relatively little direct exposure to Chinese financial markets, capital flows into and out of the mainland are potentially large enough to have a significant impact on asset classes not normally associated with China. A financial train wreck would send tremors through global markets.

The detailed blueprint for market reform published by the Communist Party in November encouraged many. China’s leaders clearly recognize that its economy needs to move in a new direction. But the first crucial step, weaning China away from its addiction to debt-fueled stimulus, is proving a lot harder than many imagined. China’s leaders are riding a runaway train that they don’t quite know how to stop. And they’re running out of track. 

(Patrick Chovanec is managing director and chief strategist at Silvercrest Asset Management, and a former associate professor at Tsinghua University’s School of Economics and Management. Follow him on Twitter at @prchovanec.) 

To contact the writer of this article: Patrick Chovanec at"

Friday, 10 January 2014

China's Coal BOOM

China approved the construction of more than 100 million tonnes of new coal production capacity in 2013 – six times more than a year earlier. Reuters Link.  Airmageddon!

The problem is of course that coal is cheap and despite great progress on renewables and nuclear these can never increase fast enough to outpace economic growth - for now.

Cheery Friday post bit next....

Of course when the Chinese bubble bursts as wages rise, productivity falls, energy costs rise and the construction boom collapses after the housing bubble bursts, things may change and pollution may improve.  Until then - airmageddon will continue.

What is interesting (from academic paper perspective) is to map the "closed mines" relative to the newly "opened mines".  I suspect this will match population densities and lobbying power of cities and provinces.  This means a large shift in jobs (and detrimental health impacts).  The winners in terms of jobs may well be the losers in terms of health.

China approves massive new coal capacity despite pollution fears [Reuters]

"BEIJING, Jan 8 (Reuters) - China approved the construction of more than 100 million tonnes of new coal production capacity in 2013 - six times more than a year earlier and equal to 10 percent of U.S. annual usage - flying in the face of plans to tackle choking air pollution.

The scale of the increase, which only includes major mines, reflects Beijing's aim to put 860 million tonnes of new coal production capacity into operation over the five years to 2015, more than the entire annual output of India.

While efforts to curb pollution mean coal's share of the country's energy mix is set to dip, the total amount of the cheap and plentiful fuel burned will still rise.

According to data compiled by Reuters, the National Development and Reform Commission (NDRC), China's top planning authority, approved the construction of 15 new large-scale coal mines with 101.3 million tonnes of annual capacity in 2013.
"Given that China's total energy consumption is still growing along with the economy, then coal production will continue to grow," said Helen Lau, senior commodities analyst with UOB Kay Hian in Hong Kong.

"While China is trying to foster consumption from other sources like hydro and nuclear, we expect actual coal production to grow 2-3 percent a year in the next five years."
Chinese coal production of 3.66 billion tonnes at the end of 2012 already accounts for nearly half the global total, according to official data. The figure dwarves production rates of just over 1 billion tonnes each in Europe and the United States.

Much of China's new capacity is in regions like Inner Mongolia and Shaanxi, reflecting a strategy to close small mines in marginal locations like Beijing and consolidate output in a series of huge "coal industry bases" that will deliver thermal power to markets via the grid.

While expanding output at such bases, China has shut more than 300 million tonnes of old capacity in the last decade, but critics say new mines are rapidly outpacing closures and the policy merely shifts China's environmental problems elsewhere.

"Despite the climate change pressure, water resource scarcity and other environmental problems, the coal industry is still expanding fast in northwest China," said Deng Ping, a campaigner with environmental group Greenpeace in Beijing.
"The scale of these coal bases has been rarely seen in other places in the world, with open-cast coal mines, coal power plants, and coal chemical plants all combined together."

The new projects involved a total investment of 54.1 billion yuan ($8.9 billion). In 2012, the administration approved just four coal projects with 16.6 million tonnes of annual capacity and a total investment of 7.8 billion yuan.

The list of approvals does not cover all mines launched in 2013, with many smaller projects under the purview of local authorities and not the central government. According to rules issued in December, coal mines producing more than 1.2 million tonnes per year need Beijing's go-ahead, while local governments can approve the rest.
It takes the NDRC months to announce new mine approvals, so other projects may have been passed in the fourth quarter. One 46 million-tonne mine was approved in December but the NDRC has yet to publish details. An NDRC spokesman was not available to comment.


 With major cities hit by smog last year, the government has promised to ease its dependence on coal, a major source of air, soil and water pollution as well as climate-warming emissions.

It has issued guidelines to restrict mining in residential areas, improve quality and reduce overcapacity.

But coal is cheaper than all the alternatives and China is the world's biggest producer as well consumer. It is also far more reliable than intermittant energy sources like hydropower or wind.

The 2011-2015 plan said around 860 million tonnes of new coal production capacity will be brought into operation, as well as 300 more gigawatts of coal-fired power, twice the total generation capacity of Germany.

While Beijing said in September that it would cut the share of coal in its primary energy mix to "less than 65 percent" by 2017, down from 66.8 percent in 2012, consumption will still rise in absolute terms, with total energy demand set to grow 4.3 percent a year over the 2011-2015 period.

"The replacement of coal hasn't been as fast as expected, and other sources of energy are not only expensive but also face a lot of technical and environmental problems," said UOB's Lau.

The government's 2011-2015 energy plan put coal production capacity at 4.1 billion tonnes by 2015, but Lau said it may be much higher.

"We estimate China's total coal production capacity will be 4.7 billion tonnes by 2015 - I think the government figure is a big underestimation."

($1 = 6.0506 Chinese yuan) (Reporting by David Stanway; Editing by Richard Pullin)"


Wednesday, 8 January 2014

What could happen to China in 2014?

McKinsey and Company present their annual China predictions.  A good read.

I recently wrote something called "is China too big to fail" - it touches on a number of these issues.

I agree with a number of the issues raised here.  From an environmental perspective water and energy costs will impact productivity.  To compete with a resurgent Mexico, rising wages and rising energy costs China needs in increase productivity.  That will be difficult.

The job creation issue is also important.  China has to create jobs as part of the social contract.  As wages rise and firms replace workers with capital jbo creation will be harder and the slack cannot be taken up by services just yet.

What is very interesting is the decaying infrastructure argument based on the premise of poor quality materials - this is something to follow up but difficult to prove.

I agree entirely with the bankrupt mall scenario.  The solar industry rebound is less clear but there have to be some survivors in this sector and given the state support for those in China this could be a good bet.

Finally, the football prediction is unlikely. Corruption is a problem in business - I suspect European clubs would be playing with fire if they go anywhere near the Chinese football league.

A good article.

What could happen in China in 2014? [McKinsey and Co]

1. Two phrases will be important for 2014: ‘productivity growth’ and ‘technological disruption’

China’s labor costs continue to rise by more than 10 percent a year, land costs are pricing offices out of city centers, the cost of energy and water is growing so much that they may be rationed in some geographies, and the cost of capital is higher, especially for state-owned enterprises. Basically, all major input costs are growing, while intense competition and, often, overcapacity make it incredibly hard to pass price increases onto customers. China’s solution? Higher productivity. Companies will adopt global best practices from wherever they can be found, which explains why recent international field trips of Chinese executives have taken on a much more serious, substantive tone.

2. CIOs become a hot commodity

There is a paradox when it comes to technology in China. On the one hand, the country excels in consumer-oriented tech services and products, and it boasts the world’s largest e-commerce market and a very vibrant Internet and social-media ecosystem. On the other hand, it has been a laggard in applying business technology in an effective way. As one of our surveys recently showed, Chinese companies widely regard the IT function as strong at helping to run the business, not at helping it to grow. Indeed, simply trying to find the CIO in many Chinese state-owned enterprises is akin to hunting for a needle in a haystack. Yet the CIOs’ day is coming. The productivity imperative is making technology a top-team priority for the first time in many enterprises. Everything is on the table: digitizing existing processes and eliminating labor, reaching consumers directly through the Internet, transforming the supply chain, reinventing the business model. The problem is that China sorely lacks the business-savvy, technology-capable talent to lead this effort. Strong CIOs should expect large compensation increases—they are the key executives in everything from aligning IT and business strategies to building stronger internal IT teams and adopting new technologies, such as cloud computing or big data.

3. The government focuses on jobs, not growth

Expect the Chinese government’s rhetoric and focus to shift from economic growth to job creation. The paradox of rising input costs (including wages), the productivity push, and technological disruption is that they collectively undermine job growth, at the very time China needs more jobs. Millions and millions of them. While few companies are shifting manufacturing operations out of the country, they are putting incremental production capacity elsewhere and investing heavily in automation.
For example, Foxconn usually hires the bulk of its workers for a given 12-month span just after the Chinese New Year. Yet at the beginning of last year, the company announced that it wouldn’t hire any entry-level workers, as automation and better employee retention had reduced its needs. Although upswings in the company’s hiring still occur (as with last year’s iPhone 5S and 5C release), the gradual rollout of robots will probably reduce demand for factory workers going forward. In short, many manufacturers—both multinational and Chinese—are producing more with less.
So as technology enables massive disruptions in service industries and sales forces, what happens to millions of retail jobs when sales move online? To millions of insurance sales agents? Millions of bank clerks? Even business-to-business sales folks may find themselves partially disintermediated by technology, and rising numbers of graduates will have fewer and fewer jobs that meet their expectations. They will not be happy about this and may not be passive. Finally, while state-owned enterprises will feel pressure to improve their performance, to use capital more efficiently, and to deal with market forces, they are likely, at the same time, to face pressure to hire and retain staff they may not really need. The government and the leaders of these enterprises have long argued that such jobs are among the most secure. They will find it very hard to declare them expendable.

4. There will be more M&A in logistics

As everyone pushes for greater productivity, logistics is a rich source of potential gains. State-owned enterprises dominate in capital expenditure–intensive logistics, such as shipping, ports, toll roads, rail, and airports; small mom-and-pop entrepreneurs are the norm in segments such as road transportation. This sector costs businesses in China way more than it should. With upward of $500 billion in annual revenues, logistics is an industry ripe for massive infusions of capital, operational best practices, and consolidation. Driven by the pressure to increase productivity, that’s already happening at a rapid pace in areas such as express delivery, warehousing, and cold chain. Private and foreign participation is increasingly encouraged in many parts of the sector, and its competitive intensity is likely to rise.

5. Crumbling buildings get much-needed attention

While China’s flagship buildings are architectural wonders built to the highest global standards of quality and energy efficiency, they are unfortunately the exception, not the rule. Much of the residential and office construction in China over the past 30 years used low-quality methods, as well as materials that are aging badly. Some cities are reaching a tipping point: clusters of buildings barely 20 years old are visibly decaying. Many will need to be renovated thoroughly, others to be knocked down and rebuilt. Who will pay for this? What will happen if residential buildings filled with private owners who sank their life savings into an apartment now find it declining in value and, perhaps, unsellable? Alongside a wave of reconstruction, prepare for a wave of local protests against developers and, in some cases, local governments too.

6. The country doubles down on high-speed rail

When China inaugurated its high-speed rail lines, seven years ago, many observers declared them another infrastructure boondoggle that would never be used at capacity. How wrong they were: daily ridership soared from 250,000 in 2007 to 1.3 million last year, fuelled partly by aggressive ticket prices. Demand was simply underestimated. Now that trains run as often as every 15 minutes on the Shanghai–Nanjing line, business and retail clusters are merging and people are making weekly day-trips rather than monthly two-day visits. The turnaround of ideas is faster; market visibility is better; and many people come to Shanghai for the day to browse and shop. There are already more than 9,000 kilometers (5,592 miles) of operational lines—and that’s set to double by 2015. If the “market decides” framing of China’s Third Plenum applies here, much of the investment should switch from building brand-new lines to increasing capacity on routes that are already proven successes.

7. Solar industry survivors flourish

Many solar stocks, while nowhere near their all-time highs, more than tripled in value in 2013. For the entire industry, and specifically for Chinese players, it was a year of much-needed relief. By November, ten of the Chinese solar-panel manufacturers that lost money in 2012 reported third-quarter profits, driven by demand from Japan in the wake of the Fukushima disaster. (Japan’s installed capacity quadrupled, from 1.7 gigawatts in 2012 to more than 6 gigawatts by the end of 2013.) Domestic demand also picked up as the State Grid Corporation of China allowed some small-scale distributed solar-power plants to be connected to the grid, while a State Council subsidy program even prompted panel manufacturers to invest in building and operating solar farms—an initiative that will ramp up further.
This year is likely to see even stronger demand. Aided by international organizations, including the World Bank, an increasing number of developing countries (such as India) regard scaling up distributed power as a way of improving access to electricity. In addition, solar-energy prices continue to fall rapidly, driven down by technological innovations and a focus on operational efficiency. While I’m on green topics, I’ll point out that the coming months are also likely to see another effort to create a real Chinese electric-vehicle market. The push will be centered on the launch of the first vehicle from Shenzhen BYD Daimler New Technology.

8. Mall developers go bankrupt—especially state-owned ones

Shopping malls are losing ground to the online marketplace. While overall retail sales are growing, e-retail sales jumped by 50 percent in 2013. Although the rate of growth may slow in 2014, it will be significant. Yet developers have already announced plans to increase China’s shopping-mall capacity by 50 percent during the next three years. For an industry that generates a significant portion of its returns from a percentage of the sales of retailers in its malls, this looks rash indeed. If clothing and electronics stores are pulling back on the number of outlets, what will fill these malls? Certainly, more restaurants, cinemas, health clinics, and dental and optical providers. But banks and financial-service advisers are moving online, as are tutorial and other education services.
I expect malls in weaker locations to suffer disproportionately. These are often owned by smaller developers that can’t afford better locations or by city-sponsored state-owned developers that are expanding into new cities. The weak will get weaker, and while they may be able to consolidate, it’s more likely they will go out of business.

9. The Shanghai Free Trade Zone will be fairly quiet

In early October, there was much speculation about the size of the opportunity after the State Council issued the Overall Plan for the China (Shanghai) Pilot Free Trade Zone (FTZ), and the Shanghai municipality issued its “negative list” of restricted and prohibited projects just a few days later at the end of September. For the FTZ, the only change so far appears to be that companies allowed to invest in it will not have to go through an approval process. As for the negative list, while there’s a possibility that Shanghai will ease the limitations, for the moment the list very much matches the categories for restricted and prohibited projects in the government’s fifth Catalog of Industries for Guiding Foreign Investment. This ambiguous situation gives the authorities, as usual, full freedom to maintain the status quo or to pursue bolder liberalization in the FTZ in 2014 if they see a need for a stimulus of some kind. On balance, I’d say this is relatively unlikely to happen.

10. European soccer teams invest in the Chinese Super League

I know, I know—I’m making exactly the same prediction I did a year ago. True, Chinese football has battled both corruption and a lack of long-term vision. It’s also true that the Chinese Super League still trails Spain’s La Liga and the English Premier League in television ratings. That’s in spite of roping in stars such as Nicolas Anelka and Didier Drogba (who both returned to Europe this year) and even David Beckham (as an “ambassador”).
At least this year some things started to improve. After all, Guangzhou Evergrande just won Asia’s premier club competition—the AFC Champions League—a year after hiring Italy’s seasoned coach Marcelo Lippi. This international success could be temporary, but there is a shared sense in China that something has to change because there is so much underleveraged potential. Maybe Rupert Murdoch’s decision to invest in the Indian football league will precipitate more openness among Chinese football administrators? Perhaps the catalyst will be the news that the Qatari investors in Manchester City also invested in a New York City soccer franchise? An era of cross-border synergies from the development and branding of sister soccer teams is coming closer.
Finally, something that’s less a prediction than a request. Can we declare the end of the “BRICs”? When the acronym came into common use, a decade ago, the BRIC countries—Brazil, Russia, India, and China—contributed roughly 20 percent of global economic growth. Although China was already the heavyweight, it did not yet dominate: in 2004, the country contributed 13 percent of global growth in gross domestic product, while Brazil, Russia, and India combined contributed 9 percent, with similar growth rates. Compare that with the experience of the past two years. China accounted for 26 percent of global economic growth in 2012 and for 29 percent in 2013. The collective share of Brazil, Russia, and India has shrunk to just 7 percent. It’s time to let BRIC sink.
About the author
Gordon Orr is a director in McKinsey’s Shanghai office. For more from him on issues of relevance to business leaders in Asia, visit his blog, Gordon’s View, at McKinsey’s Greater China office website.

Saturday, 4 January 2014

China's High Tech Emperors - taking on the world?

Daily Telegraph writes on the rise of the Chinese high tech companies.

This article touches on some of my previous research looking at the success of Chinese state-owned exporters and also on some current research looking at the increasing internationalisation of Chinese firms.

The article provides food for thought.  The internet expansion is where it will start but all Western companies need to be prepared now that China is upgrading and upskilling its workers and investing vast sums in research and development.

China’s hi-tech emperors

A new generation is taking power in China. Not the grey graduates of Communist Party committees. But aggressive, entrepreneurial and often colourful internet billionaires. 

As well as influencing domestic politics, several plan to break out on to the world stage in 2014.

They will be following a trail blazed by Huawei, the telecoms equipment maker. But with products and services that have much less to do with the critical infrastructure and ownership structures more familiar in the West, China’s internet giants are unlikely to hit similar trade and national security barriers. 
Leading the charge is Jack Ma, the founder of Alibaba, an online bazaar that allows a business to sell almost any item to any other business.

On Alibaba you can buy a machine for converting used car tyres into fuel oil, a kilo of “good quality” toad venom extract, or a full-size Sponge Bob bouncy castle. Jeff Bezos wanted Amazon to be “the everything store”, but Ma built it first. 
 Most of the suppliers are, of course, Chinese, but Alibaba is increasingly used by exporters around the world and the company is in an enviable position to profit as trade becomes ever more global and online. The company predicts that Chinese e-commerce will be worth more than that of the United States and European Union combined by 2016. 
“Increasingly we’re finding markets that were only buyers are increasingly suppliers too,” says James Hardy, head of Europe for 

“Some decide on a strategy and then look for data to support it. Others, like Alibaba, look at data – both internal and external - and only then make strategic decisions about growth and market opportunity. 

“The decision for us to enter the Russia and Brazil markets was the product of analysing external data and combining it with extensive internal data.” 

Ma’s accomplishment makes him unique among China’s internet plutocracy. While other Chinese billionaires have built online empires that closely resemble Google or Twitter, Alibaba has no equivalent in the West. Amazon and eBay target consumers. 

As such, Ma has been garlanded with awards by the Western business media in the last few years. Following the flotations of Facebook and Twitter, Wall Street is hungry for new technology stocks and would love to get its hands on Alibaba. 

It is easy to see the attraction. Alibaba’s third-quarter revenues were up 60pc, to $1.73bn (£1bn). In the same period its profits more than doubled, to $717m, more than twice what Facebook makes on roughly the same sales. PrivCo, an investment research firm specialising in private companies, reckons Alibaba is “conservatively” worth $110bn, which would catapult Ma to the top of China’s rich list. 

The NYSE, Nasdaq and the London Stock Exchange have been among the bourses courting Ma in the hope of securing a listing since his flotation talks with the Hong Kong stock exchange broke down in September. 

Authorities on the island were concerned about Alibaba’s two-tier share structure, which gives Ma and other executives more voting power than ordinary shareholders. It is a common setup for Silicon Valley giants run by their founders, however, including Facebook and Google, as the New York exchanges were happy to point out. 

The kowtowing to Ma can be seen as part of a bigger power shift for the technology industry to China, a country that has been mostly known as its assembly line. 

The most striking example of the trend is Xiaomi, a three-year-old smartphone maker that counts the Russian billionaire Yuri Milner among its investors. It makes high-end devices that compete with the iPhone for the attention of wealthy young Chinese, and at the last count, was beating its Californian rival.

Though its smartphones are cheaper than Apple’s, they are not cheap to make. Xiaomi sees itself as an internet company striving to capture customers for its services, in the mould of Amazon’s Kindle Fire tablet business. Xiaomi is ferociously ambitious and has unusually sophisticated marketing for a Chinese consumer electronics maker. 

Only last week it began its international expansion push in Singapore and its founder, Lei Jun, confidently announced that he aims to more double sales this year to 40m handsets. No Western rival would dare create such a hostage to fortune. 

The prediction was delivered on Lei’s Sina Weibo account, the Chinese equivalent of Twitter. Sina, the company behind the service, is run by another of China’s technology elite, Charles Chao. Already listed on Nasdaq, Sina’s shares doubled last year on the growth of the service, which claims 600m users, not far short of Twitter. 

Such is the influence of Sina Weibo in China that Eric Schmidt, the executive chairman of Google, has predicted it will play a major role in a gradual democratisation of the country.

“You simply cannot imprison enough Chinese people when they all agree to something. You won’t be able to stop it even if you don’t like it,” he said. 

Sina Weibo has become the most open forum in Chinese media, yet it filled a vacuum left when censors cut off access to Twitter by agreeing to restrict certain subjects. 

It is not the only one of China’s native internet powers to have benefited from a more cooperative approach to government. Baidu, China’s search engine, was helped when Google was forced out of China by a government row in 2010, and has an iron grip on the web search market.
 The same cannot be said for WeChat, another internet service that Schmidt identified as a liberalising force in China. It is among a small group of smartphone apps that provide what amounts to free text messaging and is already in a fight with WhatsApp, the Western leader, and Line, a Korean-Japanese effort. 
 Each boasts hundreds of millions of users and is seeking more away from their home territory in the knowledge that scale usually wins online. 

That battle is the sign of things to come as the globalising effect of the internet goes mobile and truly global. China’s internet powers are rising.

Thursday, 2 January 2014

Pollution Threatens China's Food Security

Zero-hedge do pollution in China.  Interesting perspective.

Food security is a major issue for China for political and historical reasons.  One to watch.

Guest Post: Pollution Threatens China's Food Security [Zero-hedge]

 A Reuters report this week noted that nearly 3.33 million hectares (eight million acres) of Chinese farmland are too polluted to grow crops. The article, which was re-posted by the state-run China Daily news site, quoted Wang Shiyuan, China’s vice minister of land and resources. Wang says that the government is determined to address the issue of polluted farmland, and will commit “tens of billions of yuan” each year to help return the land to a usable state.

Food security is a major concern for Chinese leaders, and worries over this issue already had the potential to severely slow down other planned reforms such as urbanization. The announcement on China’s pollution levels further complicates the balance of preserving farmland and speeding up urbanization. Wang Shiyuan noted that the amount of polluted land represents nearly 2 percent of the country’s arable land, which is not something the Chinese government can ignore.  China’s per capita arable land area is already less than half of the world average — the country simply can’t afford to lose any more land to pollution.

China’s government wants to ensure enough arable land is left reserved for farming, and the large swath of polluted fields cuts into that amount. Xinhua reports that China’s arable land survey counted about 135.4 million hectares (334.6 million acres) of farmland — but after removing from that count land reserved for “forest and pasture restoration” as well as land too polluted for crop-growing, the “actual available arable land was just slightly above the government’s red-line” of preserving 120 million hectares (296 million acres) of usable farm land. In other words, pollution is presenting a dangerous threat to one of the government’s highest priorities.

This presents a tough choice for Chinese leaders: let the land lie farrow and risk disrupting food supplies, or allow crops to be grown on tainted soil. Wang’s remarks show the government is leaning towards the former. Tainted crops have already caused scares among China’s citizens. A report by Guangzhou in May found that nearly half the rice in the cities’ restaurants had excessive levels of the heavy metal cadmium. The city’s residents were outraged when the report was published.  The rice in Guangzhou was linked to polluted plots in Hunan province, which produces 11 percent of China’s total rice each year. Caixin published an article arguing that cover-ups by both local and provincial governments allowed the problem to spread before it exploded into the public consciousness in late spring 2013.

In a way, Wang’s public report could actually be good news for environmental advocates.  For one, it shows that the central government is taking the problem seriously, and might be taking steps to increase transparency in the tracking and reporting of soil and water pollution. Even more importantly, food security is a non-negotiable for China’s government and pollution becoming a serious impediment to ensuring a steady supply of crops. Now China’s leaders will be more willing to make the hard choices necessary to clean up the land and water pollution in China’s rural areas. This might mean setting strict new pollution limits for businesses, or even closing down factories that operate close to farmland.

Unfortunately, however, the food security crisis could also negatively impact the environment. Chinadialogue reported back in November that the government was letting reforestation subsidies (money paid to farmers who plant trees on their land) expire over food security concerns. Wang’s remarks seem to promise that some land is being kept in reserve for reforestation and the creation of pasture land. If China’s arable land continues to creep down towards the “red line,” it will be very tempting for the government to reclaim this land for agriculture — which Chinadialogue argues will speed up desertification, putting China at risk in other ways.