Category Investing in China

Beijing set to pave way for new yuan investment funds

Beijing is set to open the floodgates for fresh capital from Hong Kong to the mainland’s equity and bond markets in a bid to shore up liquidity.

The China Securities Regulatory Commission and the State Administration of Foreign Exchange have begun vetting applications for new renminbi qualified foreign institutional investor (RQFII) products following a three-month hiatus.

They are likely to grant fresh quotas as early as the end of this month, according to regulatory officials and fund managers.

Beijing launched the RQFII scheme in 2011, allowing Hong Kong subsidiaries of mainland fund houses and brokerages to raise offshore yuan to invest in the mainland stock and bond markets.

The RQFII quota was raised to 270 billion yuan (HK$339 billion) late last year from 70 billion yuan, which was used up in January.

A CSRC official said the regulators had accepted new applications and were reviewing them.

The move to reopen the RQFII market followed a major liberalisation last month, when non-mainland institutions registered in Hong Kong and Hong Kong-based units of mainland banks and insurers were also allowed to participate in the scheme.

“Hong Kong subsidiaries of mainland institutions will continue to be the primary target in the new round of RQFII quota issuance,” said Z-Ben Advisors’ chief researcher Howhow Zhang. “Some quotas will also be assigned to foreign companies.”

A clutch of mainland institutions, encouraged by the government to expand abroad, have been preparing to issue new RQFII funds in Hong Kong to diversify their revenue sources.

Last week, Industrial Securities said it would launch its RQFII product, taking an initial step towards its go-global strategy.

The medium-sized Fujian-based brokerage said it was also considering overseas acquisitions and a listing on the Hong Kong stock market.

RQFII funds are subject to a 20 per cent cap on equity investments while the remaining 80 per cent of their assets are restricted to fixed-income products. Mainland authorities might increase the equity investment ceiling in the near future, sources said.

The move to introduce more RQFII funds to the mainland follows a lacklustre stock market performance this year.

The Shanghai Composite Index is up 0.36 per cent so far this year, despite the CSRC’s efforts to restore investor confidence by suspending initial public offerings.

It is believed that newly appointed CSRC chairman Xiao Gang is under pressure to bolster confidence since he took office late last month.

The former Bank of China chairman, who took over from Guo Shuqing, remains tight-lipped on his policy directions. Yet, the timing of restarting issuing RQFII quota is seen as the latest effort by the regulator to boost the market.

The CSRC stopped approving initial share sales in October last year to stem fresh equity influx while underpinning the weak share market.

More than 700 applicants are still awaiting clearance to list on the Shanghai and Shenzhen stock exchanges.

Although there has been speculation that Xiao would lift the ban on initial public offerings soon, the CSRC has not announced a timetable for new share sales.

China services growth slows sharply, adds to recovery risk

Growth in China’s services sector slowed sharply in April to its lowest point since August 2011, a private sector survey showed on Monday – fresh evidence of rising risks to a revival in the world’s No.2 economy.

The HSBC services Purchasing Managers’ Index (PMI) fell to 51.1 in April from 54.3 in March, with new order expansion the slowest in 20 months and staffing levels in the service sector decreasing for the first time since January 2009.

Two separate PMIs last week had already shown that China’s manufacturing sector growth slowed, With the weakness spreading to services, which make up almost half of gross domestic product, the risk to the recovery may be increasing.

“The weak HSBC service PMI figure provides further evidence of a slowdown not only in the factory sector but also in the service sector,” said Zhang Zhiwei, chief China economist at Nomura Securities in Hong Kong.

“This confirms our worries about insufficient growth momentum in the economy, which we expect to slow to 7.5 percent in the second quarter.”

The HSBC services PMI follows a similar survey by China’s National Bureau of Statistics, which found non-manufacturing activity eased to 54.5 from 55.6. The official PMI is more weighted towards large state-owned firms.

Readings above 50 indicate activity in the sector is growing, while those below 50 indicate it is contracting.

The HSBC survey showed that the sub-index measuring new business orders dropped sharply to a 20-month low of 51.5 in April, with only 15 percent of survey respondents reporting an increased volume of new orders that month, HSBC said.

“This started to bite employment growth. All these are likely to add some risk to China’s growth in 2Q, as there’s still a bumpy road towards sustaining growth recovery,” said HSBC’s China chief economist Qu Hongbin.

The employment sub-index decreased to 49.6 in April, the first net reduction in staff numbers since January 2009, although HSBC said job losses were marginal, partially caused by firms down-sizing and employee resignations.

Employment is a decisive factor shaping government thinking because it is crucial for social stability. The services sector accounted for 46 percent of China’s gross domestic product in 2012, as big as the country’s better-known manufacturing industry.

China’s economic growth unexpectedly stumbled in the first quarter, slipping to 7.7 percent versus 7.9 percent in the previous three month period, as factory output and investment slowed.

The government has set a 2013 growth target of 7.5 percent, a level Beijing deems sufficient for job creation while providing some room to reform to the economy.

Any more weak data could spark a policy response.

“The risk of slower growth is rising, the Chinese government will probably take actions after April data come out,” said Jianguang Shen, chief China economist of Mizuho Securities Asia in Hong Kong.

“I see an increasing possibility for China to cut interest rates, but not likely any time in the near future, as housing inflation is a constraint.”

However a Reuters poll last month found that China’s central bank is expected to keep the benchmark one-year bank lending rate at 6 percent and the one-year bank deposit rate at 3 percent through 2013, as well as holding banks’ reserve requirement ratios (RRR) steady.

Nestle to invest more in health food sector

Nestle SA, the world’s largest food company by revenue, said on Monday that it will boost its investments in China’s health food sector.

“Nestle will bring more products which target Chinese kids, the senior, pregnant women and (products) for critical care,” said Luis Cantarell, president and CEO of Nestle Health Science SA.

The Chinese health food market was worth 105 billion yuan ($16.87 billion) in 2011, with an annual increase of 11.4 percent since 2006, said the State Food and Drug Administration.

According to the Beijing-based S&P Consulting, China’s per capita spending on health food is $31 per year, which accounted for 0.07 percent of consumers’ total annual consumption. By contrast, the figure in the United States and in the European Union is about 2 percent.

Private foundations flourishing in China

The number of foundations set up in China reached 2,961 in the third quarter of 2012, about three times that of 2005, the Ministry of Civil Affairs announced Tuesday.

The number of foundations in China has continued to increase steadily in recent years, with the number of private foundations overtaking public ones for the first time in 2011, according to a report released by the ministry’s non-governmental organization administration.

The total assets of foundations across the country reached 78.5 billion yuan ($12.58 billion) in 2011, up 29.91 percent year on year, figures from the report show.

Foundations received donations worth 40.1 billion yuan and spent 28.9 billion yuan on public welfare projects in 2011, according to the report.

The administration also found an “obvious imbalance” in the layout of foundations in different regions throughout the country.

In 2011, the number of foundations in provincial-level regions, including Jiangsu, Guangdong, Zhejiang, Beijing and Hunan, accounted for about half of the nationwide total, according to the report.

Surging numbers of private foundations

In recent years, private foundations have expanded more quickly than their public counterparts, surpassing public ones in number for the first time in 2011, according to the report.

By 2011, the country had 1,296 private foundations, accounting for 53.75 percent of the total, figures from the report show.

Of the 351 foundations registered in 2011, 264, or 75.21 percent, are private.

In China, foundations are divided into two types: public foundations, which can raise funds from the public; and private foundations, which may not take public donations but rely entirely on funding from individuals or organizations.

The administration said in the report that as the number and scale of private charity foundations increase, they are gradually evolving into an important force for solving social problems, resolving social conflicts and promoting social development.

Private foundations are not only growing in terms of numbers, but they are also maturing in terms of project management, according to the report.

Investing in innovation

China should divert foreign capital to core technologies and manufacturing activities with high added value
Globalization has made it impossible for any individual country to produce completely independent innovations or dominate innovations by monopolizing all resources and technologies for such activities.

Therefore, China should try to take advantage of the dividends brought about by globalization to facilitate its struggling transformation into an innovation-driven economy.

The ever-rising prices of China’s factors of production in recent years, its tightened land supply and looming labor shortages, together with the weakened cost advantages enjoyed by traditional production activities, have put ever-growing pressure on China-based foreign-funded enterprises, especially export-oriented and labor-intensive ones. However, this has not crippled China’s general advantages in attracting overseas capital.

The country’s comparatively steady economic development, a series of policies it has adopted to spur domestic demand, as well as a steady increase in the quality of its labor and a relatively complete industrial auxiliary infrastructure, are sharpening China’s edge in absorbing high-quality foreign investment. The adoption of an innovation-driven development strategy and measures aimed at encouraging the development of new industries of strategic significance have also offered policy props for China to improve the quality of inward foreign capital.

At the same time, different economic development stages among its regions and a multi-layer labor force supply model have made China attractive to different types of foreign investment. Its ever-improving investment environment, increased investment convenience, as well as a sound legal system and strengthened efforts for intellectual property rights protection also make China a tempting long-term investment destination for foreign investors.

China’s low ratio of technological conversions is now undergoing some positive changes and this has benefited from expanded technological cooperation with the outside world and its absorption of foreign technological transfers. Data indicate that some foreign countries, especially developed ones, are spending more and more funds on scientific research in China and the number of technological transfers has been growing. These have offered China more chances for cooperation on joint research and development. In particular, developed countries’ renewed efforts to promote re-industrialization, boost high-end manufacturing and expand their exports of services, moves aimed at realizing their economic rebalancing, have increased the opportunities for their technological cooperation with China.

The history of industrial technological innovations shows that high-tech products need enormous inputs of funds, but they usually only enjoy a short life cycle. This decides that developed countries, in the context of global market integration, have to share technological development costs with other countries and embark on an export-oriented road. Increasing exports and expanding their share of overseas markets are effective ways to help them gain a profit proportionate to their research inputs.

China now faces multi-directional and multi-layer international competition in terms of absorbing foreign investment. But the upward global transnational direct investment momentum, rising internationalization of transnational companies and their increased cash-holding volumes mean there are possibilities for a new round of cross-border investment in the future. This, if true, will bring more opportunities for the flow of increased foreign investment to China.

At the same time, China has also become a major market of global high-tech exports. Statistics from the Ministry of Commerce indicate that the value of China’s high-tech imports rose to $463 billion in 2011 from $56 billion in 2001, with an average annual growth rate of 23.5 percent. It is estimated that the country’s high-tech imports will grow 20 to 40 percent year-on-year in the coming decade, a pace that is expected to help China develop into a base for global industrial transfers and technological research and development. This, undoubtedly, will offer China an opportunity to make great leaps in innovation.

China also enjoys a wide space for more economic openness. According to the United Nations Conference on Trade and Development, the per capita foreign direct investment absorbed by China has long been below the world’s average. In 2011, China’s per capita foreign direct investment reached a record high, but it was still only 18 percent of the world’s average. The low per capita FDI, however, also means the country still has space for it to expand in the years ahead. While trying to increase its FDI volumes, the country should also work hard to improve the quality of inward foreign investment. For example, it should try to divert foreign investment to manufacturing activities with high added value and expand the openness of domestic services to foreign investors.

Foreign capital should also be used to help facilitate the ongoing industrial transformation in China’s booming eastern regions, its bid to promote industrial transfers to less developed central and western regions, help optimize its foreign capital structure and advance its innovation capability.

China should further lower domestic market barriers to foreign investors in a bid to narrow the gap with developed countries in financial openness. Its rising international economic status, deepened economic and trade links with surrounding countries mean China can push for regionalization and internationalization of the yuan. Besides, the country should also further lower the import tariffs on finished industrial products to attract high-tech imports and facilitate participation in the utilization of global resources and the research and development of some core technologies.

The author is an economics researcher with the State Information Center.

Chinese listed companies see little profit growth

The net profits of domestic companies listed on China’s bourses remained slightly above that of 2011 last year, as the country’s economic growth slowed to a 13-year low, according to new data released Friday.

As of Thursday, 1,435 companies had filed their 2012 annual reports to the Shanghai and Shenzhen stock exchanges.

Their total profits stood at 1.69 trillion yuan (about 270 million U.S. dollars), up just 0.46 percent year on year, China Finance Information, a website providing stock market information, reported.

The profits of 648 companies, or 45.17 percent of the total, dropped year on year, the report said.

This came as the country’s economic slowdown last year thwarted demand both at home and abroad and cut into the profitability of Chinese companies.

Data from the National Bureau of Statistics show that China’s gross domestic product grew 7.8 percent last year, the slowest pace since 1999.

By the end of last year, 2,494 Chinese companies were listed in Shanghai and Shenzhen. They are required to release annual reports before the end of this month.

Angel investor gives wings to new firms

Mobile payment technology displayed at an international telecommunications exhibition in Shenzhen, Guangdong province. Innovation Works is focusing on the IT, software and mobile segments. Its founder Kai-Fu Lee said most mistakes are made in first 12 to 18 months in business.

If asked for three words to describe himself, Kai-Fu Lee, a high-profile information technology professional and former head of Google China, says they would be: “Make a difference”.

He certainly lives up to the motto. The 51-year-old has made a difference in terms of not only his career development but also his devotion to, and influence on, young people in China.

Born in Taiwan in 1961, Lee was the youngest child in his family and was sent to the United States to be educated at the age of 12. After getting a PhD degree in computer science at Carnegie Mellon University in 1988, his career progressed smoothly through a series of globally leading IT companies.

New career

Lee worked at Apple Inc from 1990 to 1996, where he started as a research and development executive.

The talented individual then moved to Silicon Graphics Inc, a global high-performance computing solutions provider, and spent a year as a senior executive.

At Microsoft Corp, he founded the company’s research facility in China, and helped Bill Gates deal with problems the company experienced in China. He also set up the Chinese business side for Google Inc, introducing the search engine to the nation.

However, after decades of success in leading multinational companies, Lee decided to start up his own business – Innovation Works – in 2009. It’s a company that acts as an incubator for entrepreneurial young Chinese people with innovative business ideas to initiate startups.

According to Lee, when he was heading Google China, he saw a lot of people who worked for him leave and start their own companies with passion and determination. Some succeeded, some failed. Lee then decided he would like to use his experience and social network to give people – not just former Google employees – the backing to start new companies.

“I think I can. I believe the elements that made Google, Facebook and Apple become great companies can be – and will be – duplicated in China,” said Lee.

What Innovation Works does is to find promising entrepreneurs early and provide them with all-round support, including recruiting people, product manufacturing, management, and financial and legal consultancy.

Lee’s company usually helps young entrepreneurs in their first 12 to 18 months in business. “That’s when most mistakes are made. That’s when people have the chance to succeed. If you make one mistake, everything can fall apart,” he said.

With initial funding of $500 million, Innovation Works focuses on the IT, software and mobile segments. It has made 50 investments over the past three years. The majority have so far survived and 18 of them have received a second round of funding averaging around $30 million. “But these companies still have a long way to go before they can go public,” said Lee.

He added that of the hundreds of companies Innovation Works has invested in, so long as one becomes an Internet giant in 10 years, the investment return will be considerable.

Two years ago, Jiang Fan, a 25-year-old engineer, decided to leave Google and set up his own company – Umeng Co Ltd – to provide services for mobile Internet application developers. Jiang described his business plan to Lee and immediately received support.

“He had never done anything other than engineering. He is a great engineer but has no business experience, so we first had to mentor him to be a good manager,” said Lee, adding that he felt Jiang has good business sense.

Just 28 months later, Jiang’s company has grown from only one person – himself – to almost 100 people and become the leader in the niche market. The company received another round of funds of $10 million from venture capital firm Matrix Partners in 2011. Lee estimated that Umeng will be profitable by the end of this year.

“Without help from Lee, companies like us at the early stage may not survive and develop the business so well,” Jiang said. “More importantly, Lee has made ‘angel’ investments more widely recognized in China. As a result more rich people and successful businessmen are joining in the trend.”

Angel investors are wealthy people who help entrepreneurs they believe in to start businesses by funding them.

Xu Xiaoping, founder of the venture capital fund Zhen Fund and Lee’s friend, said: “Lee feels a strong social responsibility to help both young Chinese people and companies to list in the US market.”

Promising sectors

According to Lee, over the next five years, mobile Internet companies will come to prominence. “Today, you think of Baidu, Alibaba and Tencent as three giants. I predict that in five years there will be two or three other mobile Internet companies at the same level of power and value as these companies,” said Lee.

He specifically cited entertainment such as music, video, gaming, social networking and e-reading as aspects of the market young people are mostly interested in and that are most promising.

The value of the Chinese mobile Internet market totaled 14.8 billion yuan ($2.38 billion) in the third quarter of 2012, up 102.1 percent year-on-year, data from iResearch Consulting Group shows.

Lee also said he is personally keeping a close eye on digital television, enterprises selling software to corporate clients and big data businesses.

Against short sellers

Chinese software company Qihoo 360 Technology Co Ltd in August initiated legal action against Citron Research and its main contributor Andrew Left for the short seller’s “untruthful publications or statements regarding Qihoo 360”, the New York-listed company said in a statement.

Citron is blamed for affecting the share prices of 21 New York-listed Chinese companies since 2006, with 16 companies seeing their prices drop more than 80 percent, and seven being forced to delist. Qihoo was among those that suffered a fall in the value of their shares. Lee said he has also filed a lawsuit against Citron for alleged defamation, which will be held in Beijing.

The spat came after Lee rounded up more than 60 top Chinese technology executives to defend US-listed Chinese companies from being hit by short sellers in a joint letter in September.

In one of the alleged mistakes in the piece of analysis that Lee pointed out, a Chinese search engine is described as using a new search method that is simply illogical and that does not exist.

Lee said the “intentional” behavior of Citron has had several dangerous outcomes, including misleading US investors, damaging their confidence in Chinese companies and causing Chinese companies’ stock prices to fall when they are “completely innocent”.

Furthermore, the Chinese companies that were listed in the US market may choose to turn private and relist in Hong Kong or elsewhere while those waiting to list may defer that move.

“So all these could end up with the result that US stock exchanges, which could be perfect stock exchanges, may no longer have Chinese stocks,” Lee said, adding that he wanted to help US investors understand Citron and Muddy Waters, another short seller of stocks in Chinese companies, “are not to be trusted”, that warning signals need to be sent to short sellers so they can “no longer fool people”.

Lee said his action also gives the signal to Chinese companies that if a company is unfairly treated it should react immediately, especially by using the legal system to protect itself. Spending money for this purpose is worthwhile.

The most crucial thing is to have truthful and authentic financial data, said Lee. Chinese companies should have strong public relations with the media and attach importance to investor relations.

Citron has admitted some mistakes. “It’s just a step and they might be more careful in the future because they know they are being watched by Chinese companies,” said Lee. “Hopefully it could help Chinese companies regain the confidence to defend themselves.”

China Facing Increasing Competition from Asian Neighbors On Tax Rates and Costs

China is facing pressures concerning its foreign direct investment inflows as other Asian countries reposition themselves to take advantage of its increasing labor costs. China’s minimum wages are rising at an average 22 percent per year, while employers have to part with as much as 40 percent of that salary again through social welfare payments that are directly linked to wages. China’s corporate income tax rate is currently 25 percent, yet foreign investors are also subject to a further 10 percent tax on profits (dividends tax) should these be repatriated out of the country. Concerns are growing among many multinationals over the ongoing and increasing costs of doing business in the country.

Many, however, assert that the creation of wealth in China is a positive issue, pointing out that the current middle class in China estimated at roughly 250 million is expected to rise to 600 million by 2020. The view is that foreign investors will be able to share in a mass consumer boom for products on a gigantic scale as increasing numbers of Chinese enjoy higher levels of disposable income. The key to this potential bonanza, though, relates to where these products will actually be made – and part of this conundrum relates to the continuing rise of Chinese labor.

Other Asian neighbors are eying China’s middle class consumer boom versus increasing labor costs predicament with their own strategic views. The Vietnamese Ministry of Planning and Investment has indicated that in 2013 it will employ a far more aggressive approach to attracting foreign investment. German, Japanese, Taiwanese and South Korean investors have all been lobbying for reductions in taxes, and the government appears to have been taking their cases seriously.

Vietnam’s corporate income tax rate is currently 25 percent, the same as China’s, yet moves expected to be ratified by Vietnam’s National assembly next year could see these reduced to 23 percent – a significant discount. In addition to this, the Vietnamese government has reduced corporate income tax rates to 10 percent for foreign investors increasing their existing investments in Vietnam. On a trial basis, Samsung has been given a 10 percent CIT level for profits arising from a new factory investment of US$830 million following an increase of this amount in their Vietnamese registered capital. Again, this policy is expected to be adopted as an FDI incentive by Vietnam at the National Assembly in the spring next year. Unlike China, Vietnam does not levy any dividends tax.

Taiwanese companies too are eying the potential. Foxconn, for example, has thousands of employees in China, and has invested heavily in strategic hubs of component manufacturers all based in one themed industrial park. Yet with those labor costs increasing, and a de facto (repatriated) profits tax rate of 35 percent, Vietnam’s lower labor costs, CIT rates and lack of dividends tax are starting to appear very alluring.

It is not just Vietnam that is aggressively looking at exploiting China’s labor, tax and consumer boom squeeze. Thailand and Indonesia are beginning to provide lower tax bases to attract FDI. India too, with its rather high corporate income tax rate of 40 percent is examining this situation. India’s politicians realize their CIT rate is too high, and significant tax reforms are expected to come in due course with a top rate of 30 percent CIT anticipated.

On top of facing competition from other Asian countries offering significantly lower income tax rates and incentives, the ASEAN free trade zone will unify in 2015. Existing and anticipated free trade agreements between ASEAN and China, such as the Regional Comprehensive Economic Partnership, will wipe out tariffs across the region on thousands on products come January 1, 2015. By that time, the costs of manufacturing in China may well have begun to look highly uncompetitive. Foreign manufacturers wishing to reach out to the Chinese consumer will have options regarding where to position that manufacturing capacity. It is to countries such as Vietnam and other ASEAN locations that the bean counters at corporate head offices will start to reach out to, as competition for foreign direct investment in the global manufacturing arena places China’s dominance thus far in some question.

CHINA-Shanghai Comp : 2013 could be a promising investment year

The Shanghai Stock Exchange rose nearly 10% in the last sessions while signs of improvement started to be seen as the economy is accelerating under the monetary control of Beijing. And this could be the beginning of a strong catch-up which could take place in 2013. The Chinese stock market is still at a three year low, and it is one of the few remaining stock markets to be negative this year. In fact, more good news reassured investors and suggested that the second largest economy hit a bottom and could see a new economic upturn next year.

The Chinese economy has shown more and more reassuring signs of upturn since the end of September. The Chinese manufacturing activity in December grew at its fastest pace in 14 months, thanks to an increase in new orders and the resilience of employment according to the first result of a survey of purchasing managers. The HSBC PMI “flash” was released at 50.9, its highest since October 2011. This indicator had increased for the fifth consecutive month, a development that strengthens the hypothesis of a stronger recovery than expected in China.

The improvement reflects the government investment projects announced in the second quarter and which begin to produce their effects on the economy. This important upturn in the activity can be explained by good numbers in construction and distribution industries. The strength of China’s services sector shows that the Chinese economy quickly came out of its slump…Investors could take interest in the Chinese stock market again.

Technically, the dynamics of the index is now bullish in weekly data above 2100 points which also refers to the 20-week moving average. One month ago we had reported that it was the time to take long positions. We reiterate our advice to target 2450 points in the first half of 2013. Any pullback on 2100/2130 points will be the opportunity to obtain long exposure to the Chinese market. We can play this bullish trend thanks to a tracker on CSI 300 (IE00B5VG7J94).

Dell May Spend More Than $100 Billion to Widen China Operations

Sept. 16 (Bloomberg) — Dell Inc. plans to spend more than $100 billion over 10 years to broaden operations in China and capture more sales in the world’s second-largest economy.

The company will open a second China operations center next year in Chengdu, adding production, sales and support in the western part of the country. It will also add an office and as many as 500 workers at its existing Xiamen site, the Round Rock, Texas-based company said in a statement.

Last year’s sales increased in the Asia-Pacific region for Dell at a faster pace than other parts of the world. Still, the company got only 12 percent in its business revenue last year from Asia-Pacific, according to data compiled by Bloomberg.

The manufacturing and customer support center in Chengdu will begin operations in 2011 and may eventually employ 3,000 people, the company said. It didn’t elaborate on how it intends to spend the $100 billion.

Dell fell 3 cents to $12.27 at 12:08 p.m. in Nasdaq Stock Market trading. The shares had fallen 14 percent this year before today.

Dell said it’s the No. 2 supplier of PCs in China and that it posted a 52 percent revenue increase in its most recent fiscal quarter.