Archives October 2015

Manufacturing still backbone of the economy

Nothing demonstrates the striking power shift between China and the United Kingdom more than the planned investment by China into a high-speed railway and nuclear power station in the UK, deals clinched during President Xi Jinping’s recent state visit.

While the UK’s industrial advantages have declined, China’s have grown. Branded the “world’s factory”, China is the only country that boasts all the industrial categories as classified by the United Nations. Aside from advantages in traditional labor-intensive manufacturing and consumer goods, China has also gained an upper hand in equipment manufacturing, in which its output now accounts for one-third of the world’s total, 2.5 times that of Germany, which ranks second. All this has laid a solid foundation for China’s ascension to become the world’s second-largest economy.

However, there are also pressures threatening China’s role as “world’s workshop”. Such pressures are not just from pure economic factors such as soaring labor costs, but also from the fact that the market value of domestic electronics giants with numerous patents and annual profits of billions of yuan is lower than that of some loss-suffering enterprises whose market value is only based on speculative concepts.

Such concerns are aggravated by the fact that a number of domestic manufactures have shifted their business to real estate and capital operations and there is declining enthusiasm among university students to study science and technology majors.

However, manufacturing is the country’s economic backbone and more importance should be paid to consolidating it as the foundation of the domestic manufacturing sector.

It should be noted that a big country’s sustainable economic development can only be built on industrialization, because the modern service sector, which provides the majority of people with decent incomes and employment opportunities, is also built on the foundation of modern manufacturing. This is true not only for developing countries but also developed countries and economies.

If China’s aim in the past was how to economically catch up with and surpass developed countries, then its current aim should be how to prevent itself from being overtaken.

Is China’s manufacturing sector able and determined to pursue further development and prevent itself from being overtaken by its counterparts in the rest of the world? The answer is yes. A series of emerging trends, from intensified efforts to try new business models and open new markets by some domestic manufacturers to the exploration of the “Internet plus” model, show the foresight and adaptability of domestic producers.

In 2014 alone, a total of 53,140 scientific and technological fruits were registered in China and applications were filed for more than 1.3 million patents. Meanwhile, China’s R&D input was 2.09 percent of its gross domestic product that year. The proportion was even higher among such manufacturing giants as TCL.

What China now lacks is not excellent and hardworking technicians and scientists, nor entrepreneurs with a strong market vision and the courage to withstand pressure, nor enthusiastic investors and capital. What it lacks is equitable evaluation of its manufacturers and positive incentives.

It is hoped that the 13th Five-Year Plan (2016-20) can give the domestic manufacturing sector a deserved status and the capital market reasonably evaluates enterprises.

The author, Mei Xinyu, is a researcher at the Ministry of Commerce’s International Trade and Economic Cooperation Institute.

Tech, Internet, logistics firms bask in limelight

Benchmark ends higher after volatile swings on bourses

Stock prices posted marginal gains on Tuesday as a rally in the technology, Internet and logistics sectors kept the buying interest active.

The benchmark Shanghai Composite Index opened 0.6 percent lower in the morning at 3,409.14 points amid selling pressure after Monday’s gains, but made an about-turn in the afternoon and closed 0.14 percent higher at 3,434.34 points.

The Shenzhen Component Index opened 0.6 percent lower at 11,588.94 points, started to gain before noon and closed at 11,758.41 points, a 0.6 percent gain.

The diverse outlooks among investors for the long-term performance of various sectors clouded market sentiment, analysts said.

On the positive side, the benefits of the central bank’s rate cuts and removal of caps on interest rates have been gradually profiting the stock market and the real economy alike, according to a research note by Shanghai-based Haitong Securities Co.

However, sluggish growth has narrowed profit margins for many sectors and lower-than-expected data have become a matter of concern, especially after economic growth slipped to its lowest level since 2009 in the third quarter.

“Recent events have tended to illustrate the scale of the task confronting the authorities in managing the policy trade-offs involved in structural rebalancing,” said Jenny Shi, managing director and country manager for China at global credit ratings agency Moody’s Investors Service.

China needs to engineer economic restructuring, policy reform, market liberalization, and slower credit uptake with the aim of shifting economic growth drivers away from State-led investment, without sacrificing short-term macroeconomic stability, which is a re-balancing challenge, according to Moody’s.

More than 500 companies listed in Shanghai and Shenzhen had released their third-quarter results or result forecasts by Tuesday, among which more than half reported gains, according to data from China Galaxy Securities.

Firms in the retail and textile sectors reported positive cash flows, showing signs of recovery in the third quarter after a tough period, said a report in the Securities Times.

Most of the other Asian bourses dropped slightly on Tuesday. Japan’s Nikkei 225 lost 0.9 percent, closing at 18,777.04 points while South Korea’s KOSPI dropped 0.17 percent, closing at 2,044.65 points.

Alibaba’s Q2 results likely to dim outlook for mainland consumers

Chinese e-commerce giant Alibaba Group Holding’s second-quarter revenue growth is likely to have slumped to half the year-earlier rate, undermining hopes consumer spending will temper a slowdown in the world’s second-biggest economy.

China is hoping that private consumption will pick up the slack as exports fall and it tries to rebalance the economy – now heading for its slowest full-year growth in 25 years – away from a reliance on trade and government spending.

But Alibaba’s second-quarter results due on Tuesday are expected to cloud the increasingly grim outlook for consumer spending, which accounted for 60 percent of China’s economic growth in the first half of 2015.

“Much focus will be paid to the deceleration in volume growth Alibaba guided to mid-quarter. Investors will be looking to see if Alibaba can improve take rates to make up for this slowdown,” Wedbush Securities analyst Gil Luria said.

Lackluster data from the firm behind China’s biggest and most successful e-commerce platforms could provide fresh fodder for bears predicting China is heading for a much harder economic landing than the official figures would suggest.

Having warned in September of slower-than-expected sales, Alibaba’s revenue in the three months through September is expected to be 21.3 billion yuan ($3.35 billion), according to Thomson Reuters data analyzing forecasts from 28 analysts.

That would represent an increase of 26.7 percent from the same quarter last year, when year-on-year growth was a sizzling 53.7 percent.

In the April – June quarter, revenue and gross merchandise volume – the total value of goods transacted across Alibaba’s platforms – both eased to their slowest rates in more than three years.

To be sure, government data shows retail sales have continued to grow above 10 percent so far this year, even as GDP growth has slowed to 6.9 percent in the third quarter.

But a China consumer confidence index produced by ANZ Bank and polling company Roy Morgan fell to a record low in August, and research firm Gartner said smartphone sales recorded their first fall in the Chinese mainland in the second quarter.

China’s rate cut to promote growth

Workers are busy at a manufacture base of Dongbei Special Steel Group Co., Ltd. in Dalian, northeast China’s Liaoning Province, Oct. 13, 2015.

China’s central bank on Friday cut interest rates and lowered the reserve requirement ratio (RRR) to promote growth and interest rate liberalization.

The People’s Bank of China (PBOC) cut its benchmark one-year lending and deposit rates by 25 basis points each to 4.35 percent and 1.5 percent, from October 24. The bank also cut the RRR for all financial institutions by 50 basis points.

This is the fifth RRR reduction and the sixth round of interest cuts in the last year.

LIQUIDITY INJECTION

Any rate cut’s direct impact on growth tends to be limited, but it reduces the interest rate burden for corporates and local governments and reduces financial risk, said a J.P. Morgan report sent to Xinhua.

“The monetary easing is supplemented by additional fiscal policy adjustment to mitigate the funding constraint faced by local governments. Local government debt swap program was expanded to 3.2 trillion yuan in 2015, and policy banks issued 300 billion yuan special financial bond to support infrastructure investment,” according to J.P. Morgan

“As the real economy faces tough challenges, the cuts in interest rates and RRR are building a sound monetary environment for stable growth,” said Zeng Gang, researcher at the Chinese Academy of Social Sciences.

The move is meaningful for enterprises as they will reduce financing costs and improve operating conditions, Zeng said.

Wang Tao, a UBS economist, expects the PBOC to cut rates one more time this year, and again in early 2016 to bring the one-year deposit rate to 1 percent and the lending rate to 3.85 percent.

“This would push the real deposit rate into negative territory, as often happened in the past, which could encourage consumption, support asset prices and anchor inflation expectations,” said Wang.

INTEREST RATE LIBERALIZATION

As a step towards full interest rate liberalization, the central bank also announced on Friday removal of the 50 percent upper-bound for deposit rates, in principle leaving banks free to set their own deposit rates.

The removal of the deposit rate ceiling completes interest rate liberalization, though it will take longer for rates to be fully determined by market, said Wang.

To that end, Wang suggests breaking implicit credit guarantees, reforms of SOEs and financial sectors, and a more price-based monetary policy.

HELPING INTERNATIONALIZATION OF RMB?

The rate move came after deputy PBOC governor Yi Gang’s remarks at the IMF annual talks in Lima last week that China hopes the RMB will be included in the special drawing rights (SDR) basket later this year.

The PBOC issued its first offshore RMB note in London on Wednesday,worth 5 billion yuan at a rate of 3.1 percent, due in 2016. It has also extended an agreement on a reciprocal currency swap scheme with the Bank of England.

The PBOC opened the onshore inter-bank FX market to foreign central banks, sovereign wealth funds and multilateral financial institutions on Sept. 30. Paul Mackel, head of EM FX strategy at HSBC, described the PBOC activity as addressing “some” of the IMF’s initial considerations for the next SDR review.

“There have also been several other announcements that are not directly targeted at the upcoming SDR review, but are nevertheless supportive of the RMB playing a more important global role over the medium term, be it in asset management, the invoicing of goods and services trade, FX trading, or as a funding currency,” Mackel said in a report.

Earlier this month, the first phase of the China international payment system was launched in Shanghai. Also on Oct. 8, the central bank announced that China’s official statistics will conform to special data dissemination standards (SDDS), an IMF statistical system to improve transparency.

On October 6, SWIFT said that the RMB overtook the Japanese yen in August to become the world’s fourth most important payment currency.

The SDR is currently made up of the dollar, euro, Japanese yen and the British pound. The yuan failed to be included in 2010 when the IMF said the currency did not meet the “freely usable” criteria.

Rush for jobs fuels Disney dreams

A prospective candidate facing the interview board in Shanghai on Wednesday. The Shanghai Disney Resort, expected to open early next year, is set to create more new job opportunities in the city.

Though it took 25-year-old Ling Zhiqiang a full day to travel from Yunnan province to catch the first round of job fairs held by the Shanghai Disney Resort on Tuesday, he does not regret it as he believes it is a life-changing opportunity.

Ling quit his job as a transportation worker in a hotel in a small town in Yunnan and opened an online shop to sell clothes a year ago. But, when he spotted the Shanghai Disney recruitment advertisement, he considered it an opportunity to fulfil his dream of working for a global company.

“Shanghai Disney is a promising work place that will help me gain knowledge and experience from a long-term perspective,” said Ling.

Ling was excited to learn during the interview that the company allows everyone to try working in different positions at the resort and choose what they are good at later.

The job fair attracted hundreds of applicants such as Ling from all over the country for 30 positions.

The four-day event is the first recruitment fair organized by the Shanghai Disney Resort to kick off the preparations for its opening early next year.

“We look forward to hiring and training great local talent who will deliver warm hospitality and renowned guest service to help our guests make memories that last a lifetime,” said Philippe Gas, general manager of Shanghai Disney.

To get ready for an expected high number of tourists after the opening, the resort will recruit a large number of staff for each sector of the resort, such as ride operations, guest services, custodial and cleaning, retail operations, food and beverage operations, engineering and maintenance, security, and hotel operations.

After the one-hour interview, Ling was lucky to receive a confirmed offer as he applied for a position that does not require him to speak English.

“My goal is to become the head of transportation at the resort within three years,” said Ling.

For certain job positions such as entertainment host, guest service and park greeter, English is an essential skill for applicants.

Zhang Liangguang, an applicant who applied to be an entertainment host, said: “I thought I applied for the position that required the least related working experience, but I still failed to pass the interview as my spoken English was not up to the mark.”

Although Shanghai Disney Resort claimed that the first two days of the job fair were open only for pre-registered candidates and the other two for the general public, the online registration platform has been jammed and the four-day job fair has been fully reserved by online applicants. Those not registered online are have been asked not to come by since the interview vacancies for the first round are filled.

A series of job fairs will take place in the city in the following months, aiming to attract talent with experience in the tourism and service industry.

Shanghai Disney currently employs more than 1,500 local staff members working on the development and operation of the resort. It will have six themed areas, including Mickey Avenue and Tomorrowland.

China’s economic downturn ‘vastly overstated’: report

China’s recent economic downturn is less a sign of catastrophe than of the long-awaited shift to a market economy model that is service-based and consumption-driven, a new report from international think tank European Council on Foreign Relations (ECFR) said.

“Doom-mongering predictions about the decline of the Chinese economy are vastly overstated,” Francois Godement, head of ECFR’s Asia and China program, said in his report “China’s economic downturn: The facts behind the myth”.

“After years in which China’s economic hyper-growth was taken for granted, there has been a dramatic reversal of international sentiment. The Chinese economy is now widely believed to be faltering. This is an exaggeration,” Godement said.

Godement asserted that recent economic issues in China should be seen as part of China’s transition to a service-driven economy, rather than a deep-rooted economic downturn.

The report highlights variances between different economic sectors within China, where the service sector continues to expand strongly — particularly in e-commerce, with web retail sales growing 36 percent in the first three quarters of 2015.

Meanwhile, declines in sectors such as steel and housing are desirable due to overproduction, and their environmental impact, the report said.

Godement said these patterns reflected China’s economic structural changes.

Godement also asserted that ideas of China’s impact on the global economy were exaggerated, claiming that these ideas were essentially “psychological.”

He cited limited non-Chinese exposure to the Chinese stock market and its positive current account and trade balances as factors limiting any real contagion to the global economy.

Nevertheless, he highlighted some possible effects of China’s economic changes on parts of the world economy, which do impact Europe.

Worst hit by the transition will be big exporters to China, including commodity providers like Brazil and Venezuela.

For consumer markets such as Europe, which are neither producers of primary material nor large exporters to China, the benefits from a Chinese slowdown are twofold: the downward trend in primary material prices benefits all importers; and the reduced price of Chinese exports is a boon to living standards, the report said.

However, for various European countries, the impacts of China’s economic transition would be mixed.

For Eastern Europe, it would be mostly positive, due to lower primary prices and cheaper consumer products from China.

The effects for Germany may turn out to be negative as the country relies on China as an export market.

As for southern European economies, including France, the price deflation may well increase their relative debt burden.

“There will be losses but they will, in the main, be limited in scope, although exporters to China or those with high public or private debt levels may feel the effects very sharply indeed,” Godement said.

Instead of a crisis, the expert said China’s economic transition would be an “opportunity” for European counties.

The expert said some more liberal economies — chiefly, Britain and Sweden — and Eastern European economies were right to seek China as a main funder of infrastructure projects, albeit with Chinese suppliers.

“The terms for long-term financing have never been so good; China’s supply prices, thanks to deflation and excess capacities, are becoming almost unbeatable; and the quality gap with Western supply has decreased in all but the very top technologies,” the report said.

The report also said the turn in China’s economy towards services and the changing trends in consumption would facilitate investment or free-trade negotiations between China and the European Union.

“A deal whereby Europe would participate more in China’s new economy while opening itself to the older Chinese sectors seems like a win-win proposition,” the expert advised.

Baidu halts recruitment drive following IT industry downsize

(Ecns) — Baidu, one of China’s three leading Internet giants, is tuning its recruiting strategy to focus on top talents.

The company confirmed the adjustment to China News Service, including a halt on team expansion.

Baidu’s recruiting head Liu Hui revealed in an email that they’ve closed the window for job applications, excluding already announced positions.

Meanwhile, campus recruitment will continue as scheduled. Its CEO Li Yanhong will appear at a career talk at Fudan University in Shanghai next week.

Except for Baidu, Alibaba Group, led by Jack Ma, has also announced it would cut down on new employees in 2016 from a planned 3000 to 400, triggering speculation of an industrial slump, according to tech.qq.com.

In response, Baidu explains that the move is “in line with its consistent pursuit for efficiency,” and that it will take the lead with a “smaller but excellent” team.

Founded in 2000, Baidu has been gaining momentum over the past 15 years with more than 50,000 current employees.

Sep property investment growth slows to six-year low, figures from NBS indicate

Growth in China’s real estate investment over the first nine months of the year cooled to its slowest rate since the global financial crisis, although sales improved, underlining a mixed recovery in one of the most critical sectors of the economy.

Property investment, a main driver of the economy, grew 2.6 percent in the first nine months of 2015 from a year earlier, marking the slowest rate since the January-February period of 2009, data from the National Bureau of Statistics (NBS) showed on Monday.

“The fact that real estate investment is weak will hinder fourth-quarter economic recovery,” said Oliver Barron, a researcher at NSBO in Beijing.

While home sales and prices have improved in bigger Chinese cities over recent months after a barrage of government support measures, conditions remain weak in smaller cities and a huge overhang of unsold homes is discouraging new investment and construction.

New construction fell 12.6 percent during the January-September period from a year earlier though it slowed from a 16.8 percent annual drop in the first eight months, the NBS data showed.

Reflecting the sharp drop in housing starts, sales of earth excavating machines in China fell 35 percent in September from a year earlier, the China Construction Machinery Association said.

The property malaise has weighed on the Chinese economy, which is expected to post its slowest growth in 25 years this year.

Still, the recent rebound in home sales could suggest the housing market is at least bottoming out.

The floor area of property sold grew 7.5 percent during the January-September period, up from a 7.2 percent increase in January to August, according to the NBS data.

Regulators cut down payment requirements again late September for first-time home buyers as they look to reduce the property market’s drag on the broader economy.

China’s average new home prices rose 0.3 percent in August from July, the fourth straight month of gains, though they were still down 2.3 percent from a year earlier, according to official data out in September.

Chinese public companies expect rising 3Q profits

More than half of China’s listed companies have published preliminary financial results for the first nine months of the year, with the majority of them expecting better profits.

So far, 1,702 of China’s 2,800 companies listed in Shanghai and Shenzhen have announced preliminary financial estimates for the Jan-Sept. period. More than 58 percent said their profits increased in the last nine months.

Among the top ten gainers, seven were in the manufacturing sector, according to market information provider Eastmoney.

Companies in the steel, electric equipment, agriculture, entertainment and chemical sectors recorded the best performance, with profits rising 332 percent, 256 percent, 96 percent, 79 percent and 50 percent, respectively.

Weapons, construction material, real estate, and mechanical equipment companies suffered the heaviest blows in the third quarter, with profits falling 183 percent, 25 percent, 24 percent and 22 percent, respectively.

According to Wang Delun, an analyst with China’s third largest brokerage, Guotai Jun’an Securities, many heavyweight companies have yet to release their financial results.