Archives March 2014

Cities that have potential can resist bubbles

How do people compare China’s housing market with the bubble in Japan in the 1980s, or that in the US in the 2000s? It is an important question because it determines the answer to an even larger question: What is a safe bet for investors in China?

The business media has run features about China’s “ghost towns” built with huge investment and row after row of empty houses showing little trace of human activity.

In the last couple of weeks, more alarms were sounded – such as local real estate companies going under after failure to pay back their debt, and development funds defaulting when their bonds matured. The government has not stepped in to bail out the companies, and is unlikely to do so.

Even an economically-strong central government would balk at intervening, given the potential scale of the problem. It can address the issue only in a select number of cities and industries.

Economists say at least 60 percent of all companies listed on the A-share market have invested in real estate development during the last decade of unprecedented rise in asset prices. And, needless to say, all banks have housing mortgages as a main source of revenue.

Wouldn’t it be a nightmare if real estate prices tumble in city after city, and even in Beijing and Shanghai, and if the real estate industry proves poisonous to banks’ credit standing, and to the bond and stock markets?

No, no, no, say officials. We’ll manage to do just fine, they pledge. But investors need to know how.

On the national level, officials may be right because, unlike the US or Japan, China is still a developing country in a number of ways such as in per capita income. Large numbers of people are still moving to big cities from rural and frontier regions to seek off-farm jobs, and from small cities to seek jobs with better rewards.

In response, the central government has come up with a plan to, from 2014 through 2020, help 100 million workers from rural areas who already work in cities to enjoy all social benefits, help a second 100 million poor urban residents improve their housing, and help a third 100 million move into the cities in central and western China.

Overall, China’s urbanization ratio (people living in cities versus the entire population) is just above 50 percent. The figure is still lower if only those certified as urban residents are counted. A general tumbling of real estate prices is only possible when a nation’s urbanization ratio exceeds 60 percent, said an official from the Ministry of Housing and Urban-Rural Development, citing examples that the same index is about 70 percent in the US, 67 percent in Japan and 65 percent in Europe.

However, all this applies only at the macroeconomic level. There could still be a world of difference between one city and another. While the country may still be some distance from a housing market collapse, dangerous over-supply (evidenced by all the ghost towns) will cripple the economies of second-, third- and fourth-tier cities that fail to attract new workers.

This is already happening. It is bringing down smaller real estate developers and is a threat to banks with high exposure to housing and other development projects in smaller cities.

Challenges in the air to foreign recruitment

The continual smog affecting the country’s major cities has created problems in terms of recruiting workers at foreign-invested companies as expatriates fear to put their own and their families’ health at risk, industry insiders said.

The biggest issue is not so much investment or business decisions but recruitment, according to Roland Decorvet, chairman and chief executive officer of Nestle for the Greater China Region.

“We are really struggling to persuade people to move to Beijing – especially people with children,” he told China Daily.

“We certainly don’t want to increase our offices here. We’d rather increase them in places other than Beijing.”

Decorvet said the company has made an effort to clean the offices’ air and has given subsidies to employees for air cleaners at home.

But what employees worry about most is their children, said Decorvet, who as of May 1 is leaving Nestle to take a position at Mercy Ships, a charity organization.

The Swiss native will be succeeded by John Cheung, who is from Hong Kong.

For its part, Panasonic Corp of China said that it is paying a “hazard bonus for those foreign employees located in a challenging environment”.

In negotiations this spring, revisions of salaries and labor conditions were discussed based on the air quality in China, the company’s communication office said. But no decision was made.

The Financial Times reported on March 12 that the Japanese electronic company would offer air pollution compensation to their workers in China.

Panasonic is not the first to subsidize expats living in smog-affected cities, but it is the first to acknowledge that the allowance is specifically related to smog, according to Max Price, partner of Antal International China, a recruitment specialist based in the United Kingdom.

Price from Antal called it a dangerous precedent, which could be seen as putting a price on the health of individual workers.

Employers already are offering extra health insurance for foreign workers in China, with some companies “pollution-proofing” their buildings with air filters and window sealing, he said.

Such situations have become more prevalent. Some foreign professionals have decided that enough is enough and have asked for repatriation or an assignment away from China, according to Price.

“It is becoming more of a factor as time progresses. Polluted air is a major issue for foreign professionals, especially those looking to move to China with families,” he said.

The pollution issue used to be offset by significantly higher salaries, but with the cost of living rising in expat areas, the salary benefit is not as attractive, Price noted.

Della Peng, human resources director for ManpowerGroup China, a workforce solution provider, said she is aware of the issues surrounding smog.

“Some enterprises could find it hard to recruit foreign employees if the air situation is not improved,” said Peng.

Several managers have been transferred out from China due to the problem, she said.

But she said that, overall, the allure of working in China – one of the most crucial markets for international companies – still outweighs environmental issues, which are likely to be improved in the future.

In addition, she said, employers are making efforts to balance the costs and opportunities. For example, despite the concerns over smog, the number of inbound visitors last year has increased, she said.

Measures taken by foreign-invested companies to lure more expatriates include subsidies to those assigned to smog-affected regions or implementation of flexible working hours, she said. Many companies have moved expatriate professionals to less-polluted cities.

HK, US sign tax information agreement

Hong Kong and the United States Tuesday signed an agreement on exchange of tax information.

Hong Kong’s Secretary for Financial Services and the Treasury, K C Chan, on behalf of the Hong Kong Special Administrative Region( HKSAR) government, signed the agreement with the US consul general to Hong Kong and Macao, Clifford A Hart on behalf of US government.

It is the first tax information exchange agreement (TIEA) signed by Hong Kong, after the legal framework for entering into TIEAs with other jurisdictions was put in place in July last year.

Chan said the signing of the TIEA with the US demonstrates Hong Kong’s continued commitment to fulfill its international obligations on promoting tax transparency.

Chan added, “The TIEA with the US has adopted highly prudent safeguard measures to protect taxpayers’ privacy and confidentiality of information exchanged.”

The TIEA will become effective after Hong Kong has completed the necessary legislative procedures for bringing the agreement into force.

FTZ ‘negative list’ may be cut by 40 pct to boost more interest

Administrators said more detailed policies will be introduced in the China (Shanghai) Pilot Free Trade Zone this year in order to boost interest and push forward reforms.

Zhou Zhenghua, head of the Development Research Center of Shanghai Municipal People’s Government, said at a news conference in Shanghai on Sunday that the so-called “negative list” for the FTZ may be cut by 40 percent in 2014, meaning more sectors will be opened up to investors in the zone.

The Shanghai government published the list of areas that are off-limits or come with restrictions to investors in the FTZ last September. The list currently includes 190 special regulatory measures, covering a broad range of activities.

Zhou said 40 percent is a target the municipal government aspires to, although if or when it can be reached depends on decisions made by various departments within the central government. “But even if only 20 percent or 30 percent of the current version is cut, it will be a huge step forward,” he said.

Last November, the Shanghai municipal government said its negative list would be modified to further support trade and financial reforms.

The list is reviewed annually, according to Shanghai municipal government.

Yang Xiong, Shanghai’s mayor, said two concerns stood out. “One concern is the list is too long. Another is how to secure its transparency,” said Yang.

Zhou said the 2014 version of the negative list should clarify some of the restrictions to investors. Shanghai’s pilot free trade zone will liberalize more services as well as ease a threshold for foreign capital in emerging sectors this year as it continues with its economic upgrading, said Jian Danian, deputy director of the China (Shanghai) Pilot Free Trade Zone Administration.

“Further liberalization of service sectors, including senior care, architectural design, accounting and auditing, e-commerce and film production, is among the priorities for the pilot zone this year,” Jian said.

The administration also plans to lower the threshold for foreign investment in emerging industries such as marine engineering equipment, aerospace manufacturing and new energy, he said.

As many as 23 measures for reforming the FTZ’s service sector were introduced in 2013 and, so far, 22 have been implemented. The only one not introduced yet is the restricted license bank.

Zheng Yang, head of the Shanghai Financial Services Office, said that a new batch of details for FTZ financial reforms will be introduced soon, including some that are designed to facilitate convenient exchanges for investment and financing.

According to a note from Haitong Securities, enterprises and investors should have fresh confidence in the FTZ as policy relaxations in the zone accelerate and favorable conditions boost trade.

Auto dealers in the doldrums amid price war

With inventories rising amid an intense price war, auto dealers in China are having a tough time making a profit, according to a report by British consulting firm Deloitte.

Dealer margins are hurt by their heavy reliance on new vehicle sales, a challenge compounded by rising operational, labor and financing costs, said the report based on surveys and in-depth interviews with dealers.

The report said one cause for dealer doldrums is the low percentage of revenues from parts and after-sales services.

Deloitte said the average profit margin at Chinese auto dealers was less than 2 percent of revenues in the first half of 2013, well below the industry benchmark of 3 percent.

Statistics also show that the ratio of dealer overheads – which include expenses in sales, management and financing – was more than 7 by the end of 2013, up 1 percent from the previous year.

Since 2011, Deloitte has researched and surveyed auto dealer performance to provide insights about the risks and challenges in the industry. It then formulates strategies to address problems.

Its latest report was based on a questionnaire and nearly 100 interviews with executives at auto dealers and carmakers in China.

“While auto sales will be buoyed by sustained economic growth, the structure of the auto market is not mature, compared with the Western world,” said Winhon Chow, a managing partner at Deloitte China.

“Heavy reliance on new car sales can leave overall profitability exposed to uncertainties in the external environment. There is a long way to go for the profit structure to tilt toward the back-end segments (of parts and services). Chinese auto dealers also need to bear the brunt of increased overheads.”

After years of rapid development, the Chinese auto market began to slow in 2011. In the wake of the global economic recovery, there has been a moderate but steady rebound over the last three years.

Modest growth

Sales growth has continued at a single-digit pace and prospects remain weak as the industry matures. After years of high-gear expansion, the auto dealership sector now faces an era of modest growth, according to Deloitte.

New challenges include high risk of cash liquidity problems and piling-up inventory.

In the first half of 2013, a drastic increase in production amid modest growth in sales led to excessive inventory. Some 74 percent of survey respondents attributed the oversupply to fierce market competition.

The Deloitte report said high inventories will give rise to funding and liquidity problems exacerbated by the lack of external financing and scarcity of internal capital at dealerships.

“After all, it is a capital intensive industry – auto dealers have always been operating with great balance sheet stress. Usually, they are highly leveraged to meet capital needs. Loans from local commercial banks are cited by 64 percent of respondents to be one of their major sources of financing,” said Chow.

One of the emerging trends in the industry is expansion of sales networks into second and third-tier cities, partly due to government purchase restrictions in mature first-tier cities and partly because of pent-up consumer demand in smaller cities.

But the trend will make it harder for auto dealers to manage their sales networks, especially when qualified management and technical professionals are in short supply in lower-tier cities, said the Deloitte report.

With the steady recovery of China’s auto market offset by challenges that emerged in 2013, the report advocated stronger cooperation among automakers, dealer groups and independent dealers, as well as tighter controls on capital, expenses and staff.

The report also highlighted the need for staff retention and transformation of the overall business model.

China Mobile hits profit slump amid competition, new projects

China Mobile Ltd’s booth at the 3-15 International Consumer Goods Exhibition in Dalian on March 13. Provided to China Daily

China Mobile Ltd, the world’s largest telecom carrier by subscribers, experienced its first annual net profit decline in more than a decade after the company invested heavily in mobile network projects and was put under pressure by Internet companies.

At a news conference in Hong Kong on Thursday, China Mobile said its revenue reached 630 billion yuan ($101 billion) in 2013, up 8.3 percent year on year.

But the company’s net income was dragged down by a disappointing second half; it fell by 5.9 percent from the previous year to 121.7 billion yuan.

China Mobile’s shares on the Hong Kong stock exchange dropped by 3.6 percent to HK$67 ($8.63) per share at the market’s close on Thursday. During the day, the company’s stock was traded at HK$66.55 per share, its lowest point in five years.

China Mobile’s profit growth rate has fluctuated greatly in the past decade. The Chinese telecom operator enjoyed double-digit growth in terms of net income between 2004 and 2008, thanks to major expansions to the country’s vast rural areas.

In 2007, China Mobile recorded its highest annual net profit growth rate of 32 percent.

But the figure dropped to single digits in 2009 and in the ensuing years, it hovered at or below 5 percent.

China Mobile attributed the weak performance to the effects of over-the-top (OTT) products, such as WeChat, on traditional voice and text messaging businesses, along with a more saturated telecom market with fiercer competition.

Other factors, including hefty investments in building a speedier fourth-generation (4G) mobile network and handset subsidies for flagship smartphone models such as Apple Inc’s iPhone devices, all played a role in squeezing China Mobile’s net profit.

Xi Guohua, chairman of China Mobile, said, “China Mobile will vigorously push forward the development of 4G service and will lower the 4G user threshold.”

Since China Mobile was granted a 4G (TD-LTE) license last December, the company has taken the lead in launching 4G commercial services. It said the 4G business has been “positively received by its customers” and revealed that about 1.34 million people had subscribed to its 4G service by February.

The company said it plans to build the world’s largest 4G network, with 500,000 base stations, that will cover every city, key village and urban area in counties by the end of 2014.

But the foreseeable future for China Mobile is not rosy, many analysts said, since the company has no choice but to spend a lot on both network construction projects and handset subsidies.

Meanwhile, outside pressure coming from Internet companies will only get worse, said Sandy Shen, telecom analyst with Gartner Inc.

“Trends show more people are likely to stick to instant-messaging mobile applications such as WeChat and that few of them will go back to rely on traditional voice and text messaging services,” Shen said.

But Xiang Ligang, a Beijing-based telecom expert, said it may be a good thing for China Mobile to see a reduced net profit.

“If China Mobile gives up the mind-set of always pursuing an extraordinary performance, it will stop pushing its employees too much, and stop imposing so much pressure on the industry, which causes abnormal competition in the market.”

Foreigners allowed bigger stakes in Chinese companies

Relaxed regulation unlikely to create big short-term waves amid low stock market confidence: Analysts

Foreign investors can own more of a listed Chinese company after rules were relaxed to draw long-term overseas capital.

Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) can hold up to 30 percent of a company, under a guideline issued by the Shanghai Stock Exchange on Wednesday.

That had earlier been capped at 20 percent of total outstanding shares in a company. Foreign investors will soon also be able to invest in more financial products, including asset-backed securities and preferred shares, according to the authority.

Analysts said the move is meant to attract more long-term capital and boost China’s equity market. It is in line with the Chinese leadership’s plan to further open up the capital market.

QFII and RQFII are programs for licensed foreign investors to buy and sell yuan-denominated “A” shares on the Shanghai and Shenzhen stock exchanges.

State Administration of Foreign Exchange data show that in February, China issued total quotas of $52.3 billion under the QFII program and 180.4 billion yuan ($29.32 billion) under the RQFII program, which allows investments using offshore yuan.

QFIIs increased holdings in more than 20 Shanghai-listed companies, according to their annual reports. The Bank of Ningbo Co Ltd and Ping An Insurance (Group) Co of China Ltd were among companies that got the most QFII investment, Securities Times said on Thursday.

Analysts said foreign investors, favoring long-term value investment, are cautious about China’s stock market, which has suffered bearish sentiment since 2008 and has been hurt by insider trading and price manipulation scandals.

“The overall amount of QFII and RQFII investment is still limited on the A-share market, so the impact of the new rules may be limited in lifting the market,” said Zito Ji, an analyst with a mutual fund in Shanghai.

Investors cite corporate governance as a problem. Analysts say a lack of clarity about how Beijing will tax profits from QFII investments has also restrained some investors, Reuters said.

A weakening yuan and a pressured property industry is dragging investor confidence in China’s stock market.

The benchmark Shanghai Composite Index slumped by 1.4 percent to 1,993.48 on Thursday. And Shenzhen Component Index dived to a five-year low to 6,698.2.

Smog and slowing growth make it hard for US firms to recruit in China

China’s smog was making it harder for foreign firms to convince top executives to work in the country, the American Chamber of Commerce in Beijing said on Tuesday, offering some of the strongest evidence yet on how pollution is hurting recruitment.

About 48 percent of the 365 foreign companies that replied to the chamber’s annual survey, which covers businesses in China’s northern cities, said concerns over air quality were turning senior executives away.

Pollution was “a difficulty in recruiting and retaining senior executive talent”, the report said. This year’s figure is a jump from the 19 percent of foreign companies that said smog was a problem for recruitment in 2010.

China’s slowing economy, however, remained the top risk for companies, the report said.

Foreign executives increasingly complain about pollution in China and the perceived impact it is having on their health and that of their families. Several high-profile executives have left China in recent years, citing pollution as the main reason for their decision to go.

Almost all Chinese cities monitored for pollution last year failed to meet state standards, but northern China suffers the most. It is home to much of China’s coal, steel and cement production. It is also much colder, relying on industrial coal boilers to provide heating during the long winter.

The capital Beijing, for example, is surrounded by the big and heavily polluted industrial province of Hebei. It is also choked by traffic.

By contrast, China’s commercial capital Shanghai, in the south, suffers less air pollution. Indeed, a similar survey conducted by the American Chamber of Commerce’s Shanghai branch did not even ask if pollution was affecting recruitment.

Premier Li Keqiang “declared war” on pollution at the opening of parliament this month.

Shanghai Disneyland to feature first Pirates-themed land

Shanghai Disneyland, the first Disney park on the Chinese mainland, will feature scenes and characters from the blockbuster “Pirates of the Caribbean” movies, Shanghai Disney Resort announced on Wednesday.

The first-ever Pirates-themed land in any Disney park will be named “Treasure Cove,” according to a press release.

A major attraction at the Treasure Cove will be “Pirates of the Caribbean: Battle of the Sunken Treasure.” This is a boat ride that incorporates new effects and technologies, and guests will be enlisted to travel with Captain Jack Sparrow on an epic journey to find Captain Davy Jones’ treasure.

Wednesday also marks the completion of the key structural work on the Pirates attraction.

“We are excited to celebrate this new milestone in Shanghai Disney Resort’s development,” said Bill Ernest, president and managing director for Asia with Walt Disney Parks and Resorts.

He said the resort’s theme park will be home to “a first new themed land and attraction, inspired by the phenomenal Pirates of the Caribbean movies that were originally inspired by a Disney attraction.”

“It is truly unique to Shanghai Disney Resort,” added Ernest.

“We are excited to see the Disney Imagineering team continue to bring the most advanced technologies and construction techniques to China, working collaboratively with local talents, in building this modern and innovative park,” said Fan Xiping, chairman of Shanghai Shendi Group, Disney’s Chinese joint venture partner in Shanghai Disney Resort.

Construction of Shanghai Disney Resort began in 2011 in the Pudong New District and is scheduled to open at the end of next year.

The complex will include Shanghai Disneyland, a Magic Kingdom-style park, two themed hotels, a large retail, dining and entertainment venue, recreational facilities, a lake and parking and transportation hubs.

China Unicom launches 4G services

China Unicom, the country’s second-largest wireless operators in terms of subscribers, launched its 4G service Tuesday, making it the last of the country’s three major wireless carriers to do so.

China Unicom’s 4G monthly package starts at 76 yuan ($12.26), with 200 minutes call time and 400 megabytes wireless traffic, while a similar package could cost 88 yuan at its major rival China Mobile.

At a partner conference Tuesday, China Unicom launched a total of 61 terminals together with companies including Samsung and Lenovo, and 25 of the new terminals launched are China-developed TD-LTE (time division-long term evolution) terminals.

At the event, China Unicom also signed this year’s sales contracts with 16 companies. Terminal sales would top 188 million units in 2014, media reports said.

The company will first provide 4G services in 25 cities including Beijing, Shanghai, and Guangzhou in South China’s Guangdong Province, and by the end of this year, its 4G services will expand to 300 cities, Web portal tech.qq.com reported Tuesday.

China Unicom will initially use the China-developed TD-LTE network, but it is also planning to adopt the FDD-LTE (frequency-division duplexing) network after the government issues licenses for the standard. The FDD-LTE standard has already been used in countries such as the US and the UK, earlier media reports said.

The Ministry of Industry and Information Technology issued 4G TD-LTE licenses to China’s three major telecommunication companies in December. China Mobile launched 4G services in the same month.

China Unicom’s smaller rival China Telecom launched 4G services in February, but it only released the price policy for mobile data, with the price policy for calls and voice yet to be published.

Analysts noted that with China Unicom finally joining the competition, the price of 4G services may get lower in the future.

There have been complaints about the expensive 4G service charges by China Mobile’s since the launch of its 4G services.

China Unicom had gained a head start in the 3G arena, as it was the first company to introduce the contract Apple handsets to China. By January, China Unicom had total 3G users of 126 million.

China Mobile had 206 million 3G subscribers by January, and China Telecom had 103 million 3G subscribers, according to their filings on the Hong Kong bourse.