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Low private investment, high debt weigh down growth

Beginning with the second quarter of the year, China will be in the do-or-die battle of its economic transition, according to Hong Kong-based researchers.

The country’s transition will undergo its most difficult stage, although it will probably maintain around 6 percent growth in GDP in the second half of the year, according to economists and financial analysts recently surveyed by China Daily.

According to the National Bureau of Statistics, the economy saw year-on-year growth of 6.7 percent in the second quarter, slightly above market expectations. The second quarter’s growth rate was the same as in the previous quarter.

The growth was powered by retail sales, industrial output and new loans directed to fixed-asset investment.

But several things are at the center of concern, said Sun Mingchun, senior partner and chief economist of China Broad Capital Co Ltd, including an excess of industrial capacity, a large total social financing and a high leverage ratio, meaning a high level of debt.

Private investment was 15.9 trillion yuan ($2.39 trillion) in the first half of 2016. Its annualized growth rate fell from 3.9 percent in the first five months to 2.8 percent in the first half of the year, which means there was quite a dip in June alone.

Private companies are not seeing encouraging returns from their investments in most industries. And they probably still will not see a good profit in the next two to three years, Sun said.

By contrast, the State sector investment rose an impressive 23.5 percent in the first half of the year, concentrating mostly on infrastructure development in the less-developed areas.

But so much investment is still not as powerful a driver of growth as consumer spending, especially that on services, said Fielding Chen, Asia economist for Bloomberg Intelligence. If investment sees a further decline in the second half of the year, which he expects, the economy’s growth engine will remain weak.

According to Cui Li, managing director and director of macroeconomic research at CCB International, the economy will be in its difficult period because it is facing an “unprecedented balancing risk”, including “weaker-than-ever global demand, need for a sharper-than-expected capacity cut for the industry, and a round of bond defaults that weigh on investor sentiment.”

Ding Shuang, head of China research at Standard Chartered Plc, said that although the hard landing scenario is less likely to happen, the mainland economic situation will remain complex, with questions about how to deal with its mounting debt and avoid the threat of capital outflow.

Ding expects that in the coming months of the year, China’s fiscal policy will keep expanding while its monetary policy will be neutral. Cutting the reserve requirement ratio for banks may be the best way to enlarge the credit supply. But before the RRR is cut, the government may use reverse repos and lower interest rates on the medium-term lending facility.

Debt is a particularly ugly spot, the researchers said. As measured by Fitch Ratings Inc’s Adjusted Measure of Total Social Financing, credit to companies, local governments and households rose as much as 15 percent in 2015 in the Chinese mainland, more than double its GDP growth.

Insurers, banks post sharp drops

Shanghai stocks ended nearly flat yesterday, with falls seen in financial and insurance firms.

The Shanghai Composite Index edged up 0.1 percent to close at 2,994.32 points.

Banks were vulnerable following investor concerns that curbs on their investment in wealth-management products might restrict capital flow.

China Everbright Bank lost 1.55 percent to 3.82 yuan (57 US cents), and China Merchants Bank shed 1.32 percent to 17.14 yuan.

China Life Insurance Co fell 1.35 percent and Ping An Insurance Group lost 1.04 percent after the China Insurance Regulatory Commission said local insurers’ combined profits plunged more than 54 percent in the first half due to lower investment return despite growing premium income.

Airlines gained as oil prices declined, with China Eastern Airlines adding 1.29 percent to 7.01 yuan and China Southern Airlines jumping 1.85 percent to close at 8.54 yuan.

Yuan to join world’s top three currencies for payments

Key challenges persist in internationalization process, experts warn

The yuan is expected to become the third-largest payment currency after the U.S. dollar and the euro by 2018, an expert said during the 2016 International Monetary Forum in Beijing on Sunday, while noting that the currency’s internationalization still faces key challenges.

“The yuan is expected to surpass the Japanese yen and the British pound to become the third-largest payment currency,” said Xiang Songzuo, a vice director of the International Monetary Institute (IMI) under Renmin University of China.

The yuan’s internationalization has progressed steadily in recent years, according to the 2016 Renminbi Internationalization Report, which was released by the institute during the forum.

As of the end of 2015, the Renminbi Internationalization Index (RII) stood at 3.6, a year-on-year increase of 42.9 percent and an increase of more than 10-fold over the previous five years, said the report.

The RII is used by the institute to measure the internationalization of the yuan. It takes into account the currency’s status in international trade and finance and in official foreign reserves.

A currency’s internationalization can range from zero to 100.

The yuan ranked sixth in terms of payments as of June 2015, Chen Yulu, a vice president of the People’s Bank of China (PBC), the country’s central bank, told the forum on Sunday.

Chen noted that 36 countries and regions had signed currency swap agreements with China as of June this year, with a total volume of 3.3 trillion yuan ($494.3 billion).

The factors driving the yuan’s internationalization are the steady performance of China’s economy, its orderly pursuit of financial reform and its enhanced financial infrastructure and support mechanisms that are in line with international standards, the report said.

China’s GDP grew by 6.7 percent in the first half of 2016, after expanding 6.9 percent in 2015, according to data released by the National Bureau of Statistics on July 16.

The yuan’s internationalization has moved forward in steps. For example, in October 2015, China launched the first phase of the yuan’s Cross-border Interbank Payment System, which provides clearing and settlement service to domestic and foreign financial institutions for cross-border and offshore yuan businesses, according to a statement on the PBC’s website at the time.

Then in November 2015, the IMF announced it would include the yuan in the basket of currencies for its Special Drawing Rights reserve unit.

That move is scheduled to take effect in October 2016.

However, the yuan’s internationalization still faces big challenges amid a complex, volatile and cloudy international monetary environment, Xiang warned.

One challenge is investors’ confidence in the country’s economy, Tu Yonghong, a professor who specializes in international currencies at Renmin University of China, told the Global Times on the sidelines of the forum.

Since the global financial crisis in 2008, many structural obstacles have emerged in China’s economy.

These include weak innovation abilities, an unbalanced economic structure, difficulties in channeling finance to small and medium-sized companies, said the report.

Xia Le, chief economist for the Asia research department of Banco Bibao Vizcaya Argentaria, told the Global Times in an interview during the Beijing event that China may have to further liberalize the yuan’s exchange rate.

But he said this process should be slow, as it may lead to capital outflows if the yuan sharply depreciates.

The core task of China’s monetary authorities when it comes to macro financial management is to establish comprehensive, targeted strategies to achieve financial stability, concluded the report.

China should also communicate with private companies in Western countries including the US, the UK and Europe to understand how their policies are formulated, rather than communicating only on a government-to-government level, Alistair M. Michie, secretary-general of the British East Asia Council, told the Global Times in an interview on the sidelines of the financial forum.

“With the rapid pace of China’s economic upgrading and reform, the yuan’s inclusion in the SDR basket and the country’s ‘Belt and Road’ initiative, the yuan will be needed more by the market,” Chen said.

110 of nation’s firms on Fortune Global 500 list

A record 110 Chinese companies have squeezed onto the latest Fortune Global 500 list, 13 of which made their debut, including manufacturing powerhouse China Railway Rolling Stock Corp, e-commerce juggernaut JD.com, home appliance maker Midea and property developer Wanda.

Experts said that it is not surprising for more Chinese companies to be listed, because of the country’s relentless efforts to upgrade manufacturing, boost innovation and drive consumption.

“We will see the continued rise of Chinese companies to capture that tremendous growth of the local economy,” said Adam Xu, partner of Strategy&, which is PricewaterhouseCoopers’ strategy consulting business.

As more technology and commerce companies leverage and benefit from China’s tremendous market potential in e-commerce, entertainment and real estate segments, they will make the Fortune Global 500 list, Xu added.

Three of the top five companies on the list are from China. State Grid rose to second place from seventh last year, surpassing the State-owned energy giants China National Petroleum Corp and Sinopec Group.

State Grid, generating $329.6 billion in sales last year, attributed its performance to successful investment strategies and research and development input.

Among the 13 debut Fortune Global 500 companies from China, JD.com ranks at 366, with revenue reaching $28.85 billion last year.

“It is not a surprise, given how quickly China e-commerce has been growing and how advanced China is for digital and mobile commerce,” Xu said.

JD.com positions itself as a self-managing e-commerce giant. Alibaba acts more like a service provider to numerous online shops, which is why Alibaba’s revenue is not as huge as JD.com’s.

China Railway Rolling Stock Corp, which ranks 266, has grown into a leading global supplier of bullet trains and subway cars.

It is widely expected that China will become the largest e-commerce and consumption market and will nurture a new consumer-centric ecosystem, Xu said.

State-owned companies topped the Chinese companies on the list, because the ranking is based on the companies’ revenue instead of their profitability, said Han Xiaoping, an independent energy analyst.

“All State-owned energy enterprises are large enough to compete from a global perspective. But they are facing huge pressure when it comes to financial performance amid falling oil prices,” he said.

China Vanke debuted on the list at 356, with annual revenue of $29.33 billion, followed by real estate giants Dalian Wanda Group at 385 and Evergrande Real Estate Group at 496.

Wanda, headed by China’s richest man, Wang Jianlin, said after the list was released that this was the first time the conglomerate had registered for the Fortune Global 500, even though it could have secured a place before.

Factbox

Thirteen Chinese companies have appeared on the Fortune Global 500 list for the first time

102 China South Industries Group

266 CRRC

349 China State Shipbuilding

356 China Vanke

366 JD.com

381 China Aerospace Science and Industry

385 Dalian Wanda Group

408 China Electronics Technology Group

427 New China Life Insurance

473 CK Hutchison Holdings 481 Midea Group

495 WH Group

496 Evergrande Real Estate Group

Chinese brands lead smartphone sales

Chinese smartphone brands, including Huawei, Oppo and Vivo, posted double-digit growth in the second quarter, compared with a 3.2 percent year-on-year rise in sales globally, a report said yesterday.

The combined sales of Chinese brands hit 139 million units, up 13.8 percent year on year. The high growth rate of Chinese brands is set to remain in the third quarter, according to market watchers.

Comparatively, sales of overseas brands grew slowly and even fell.

Huawei’s sales grew 7.4 percent to 29 million units, cementing its No. 3 ranking globally. Sales of Oppo and Vivo jumped about 15 percent in the second quarter.

The global smartphone sales hit 320 million units in the second quarter, led by the top-five market leaders Samsung with a 24.5 percent share, Apple with 15.1 percent, Huawei with 9.2 percent, Oppo with 5.6 percent and LG with 5.4 percent, according to TrendForce, a Taiwan-based research company.

Sales of iPhones in May shed 1.2 percent year on year in China’s mainland after they fell 26 percent in the first quarter from a year earlier, said Hong Kong-based market researcher Counterpoint Research.

COFCO cuts operations after merger with Chinatex

After taking control of competitor Chinatex Corp, the giant grain and oil processor and trader China National Cereals, Oils and Foodstuffs Corp (COFCO) announced on Monday it will close six departments at its headquarters and establish professional operating platforms to manage some of its businesses.

The State-owned Assets Supervision and Administration Commission (SASAC) approved the merger of the two State-owned enterprises (SOEs) on Friday.

COFCO said the combination will help increase its market share in the edible oil processing sector to 18 percent, which will make it No.1 nationwide, according to an e-mail COFCO sent to the Global Times on Monday.

The company’s cotton business will further develop and eventually hold 10 percent of the global market for the crop, COFCO noted in the e-mail.

Chinatex will become a subsidiary of COFCO, according to an announcement posted on the website of the SASAC on Friday.

Combining two former competitors is in line with China’s SOE reform -guidelines, which encourage the creation of giant, highly competitive entities in various industries, Feng Liguo, an expert at the Beijing-based China Enterprise Confederation, told the Global Times on Monday.

“However, COFCO has little experience in operating the textile and cotton-spinning businesses of Chinatex, which is likely to be challenging after the merger,” Feng said.

The companies have similarities, however, in grain and edible oil processing, as well as trade and logistics, and the tie-up will improve Chinatex’s competitiveness as well as its probability, COFCO Chairman Zhao Boya told a meeting held Monday morning.

Further streamlining operations and transforming the company into a “pilot investment firm” are the next steps that COFCO will take in restructuring, the company noted in the e-mail.

The number of staff at its headquarters will be downsized from 610 to less than 240, according to the e-mail. However, COFCO did not specify whether those employees will be transferred to other positions or be laid off.

COFCO had planned to reduce losses by more than 50 percent in the next three years and had identified 65 subsidiaries for improvement and 91 subsidiaries for intensive management, according to a statement posted on the website of the SASAC on June 13. Also, the company would restructure 102 subsidiaries through mergers and acquisitions (M&As), the post showed.

M&As are not enough, though and companies shouldn’t see them as crucial to SOE reforms. Building a modern corporate structure including an effective board of directors and an appropriate staff recruitment system has to be further emphasized, noted Liang Jun, a research fellow with the Guangdong Academy of Social Sciences.

“We are paying too much attention to downsizing the State sector now,” Liang said, noting that some media reports said the motivation behind the merger is that SASAC intends to reduce the number of SOEs to less than 100.

The shrinkage of the sector has been wrongly seen as part of the SOE reforms.

COFCO noted in the e-mail that the company will assign responsibility for asset allocation, production, research and development, employee evaluations, payroll and recruitment to 18 professional operating platforms.

By 2020, the company will develop two or three platforms that generate 100 billion yuan ($14.91 billion) in annual revenue and four or five that generate 50 billion yuan, the e-mail said.

COFCO will hire more professional managers and establish an incentive-based compensation system, it said.

However, the company didn’t give details about how those platforms will operate or what the hiring process will be, Liang noted.

“It’s still vague in terms of how COFCO will be transformed into an investment firm or a modern company,” he said.

As the next step in SOE reforms, COFCO should also separate its two major sectors. One is for edible oil and grain products traded in the market, the other is foodstuffs production and management for State reserves, Feng said.

Apprentice program to foster high job skills

Following a series of pilot projects, China is expected to promote a new model of apprenticeship to foster high-end skilled workers.

“Apprenticeship is an essential means to promote skill development and realize successful transitions from school to work,” said Yin Weimin, minister of Human Resources and Social Security.

“The initiative is for building high-quality apprenticeships and developing a workforce that possesses strong capabilities in both theory and practice and meets the needs of the labor market,” Yin said after the G20 Labor and Employment Ministerial Meeting on Wednesday.

Yin said skill development has always been a key topic of the G20 Labor and Employment Ministerial Meeting.

In August, the Ministry of Human Resources and Social Security promoted a new model of apprenticeship that combines company training with vocational schools. Every one of the total 13 provinces or municipalities chose three to five enterprises involving about 7,000 people. Everyone under the pilot project was a worker as well as a student.

Yu Zhiwei, vice-president of LinkedIn China, said the mismatch of the labor market has two aspects.

“On one hand, we have an excessively large group of medium- and low-skilled workers who cannot find proper jobs; on the other hand, we have an acute shortage of professionals, innovative talent and high-end talent.”

According to The Human Capital Report 2016 released by the World Economic Forum, approximately 25,000 new workers will enter the labor market in developing countries every day until 2020, while more than 200 million people globally continue to be out of a job. Yet, simultaneously, there is expected to be a shortage of some 50 million high-skilled job applicants over the coming decade.

Li Shanxiang, deputy head of human resources at Linyi Mining Group in Shandong province, said the company has signed a contract with Shandong Coal Technician College, aiming to leverage the skill level of 100 medium-skilled workers in two years.

“We are very keen to cultivate our workers into high-skilled ones. The new apprenticeship model provides one teacher for three to five apprentices and provides special training for them.”

Baosteel prepares to slash capacity through 2018 in supply-side reform

Baosteel Group, China’s second-biggest steelmaker, plans to cut its production capacity over the next two years as it pursues supply-side reform, it said on its website on Tuesday.

Baosteel’s announcement comes as the Chinese government works to reduce capacity gluts in the steel and coal sector.

The government has earmarked 27.6 billion yuan ($4.12 billion) to pay for closures in the sectors as the country has pledged to cut up to 150 million tons of steel capacity and 500 million tons of coal output in the next three to five years.

Overcapacity in China’s steel sector has also created trade tensions as India, Australia and the U.S. have imposed duties on Chinese steel exports amid allegations of dumping.

Baosteel pledged to cut 9.2 million tons of crude steel capacity between 2016 and 2018, the company said, equivalent to about one-quarter of its 2015 production.

The capacity shutdowns will include facilities in its flagship plant in Shanghai and branches outside of the city. The company will not resume production after the closures, it noted.

Baosteel’s cutbacks follow a statement by the State-owned Assets Supervision and Administration Commission on Friday that China’s government-run steel and coal companies will cut capacity by about 10 percent in the next two years and by 15 percent as of 2020.

The listed units of Baosteel and Wuhan Steel Group, the country’s sixth-largest mill, separately said in June they would restructure, without specifying details.

Baosteel Chairman Xu Lejiang told a government meeting on July 8 that large State-owned steel companies should use mergers and acquisitions to improve the concentration level of the industry and urged the government to step up efforts to close inefficient capacity, the company said on its website on Monday.

In April, a Chinese government official said the country has 1.13 billion tons of crude steel production capacity.

Domestic FMCG sales post faster rise

Sales of domestic fast moving consumer goods grew 4.4 percent last year, twice as fast as global brands in China, according to a latest report yesterday.

The domestic brands, unlike their global counterparts, managed to capture more effectively trends such as consumers pursuing higher-end products, the OC&C Strategy Consultants’ annual Global 50 report said.

“Increased average household incomes and a growing middle class boost consumer demand for better-quality products, which explains why many FMCG categories are going after high-end products, especially those related to health and quality of life,” said Jack Chuang, partner of OC&C Strategy Consultant in China’s mainland, Hong Kong and Taiwan.

“Domestic players have better relationships and expertise managing distributors and it is easier for them to tailor to local tastes and innovate faster,” he added.

Two Chinese companies, WH Group and Tingyi, took the 18th and 47th spots respectively in the top 50 ranking, the report said.

Switzerland’s Nestle was No. 1 by grocery sales, followed by Procter & Gamble, PepsiCo and Unilever.

The slowdown in the Chinese economy is having an impact on the whole industry, with alcoholic drinks falling 6.1 percent in 2015 in China.

Annual sales grew for 70 percent of all domestic FMCG brands, compared with 50 percent of global brands operating in China.

Dalian Talent emerges as leading candle supplier

A man makes scented candles shaped in the form of pine trees at Dalian Talent Gift Co Ltd’s exhibition hall in Dalian.

Dalian Talent Giftis peddling its decorative candles across the globe even as it brightens the domestic market

At the exhibition hall of Dalian Talent Gift Co Ltd, visitors are treated to sights of scented candles in various forms like yellow lemons, chocolate pine nuts and reindeers carrying gifts.

Wang Lixin, chairman of Talent, said every year the firm makes billions of candles at its factories at Dalian in Northeast China’s Liaoning province, Chiang Mai in northern Thailand, and Zabno in southern Poland?the world’s only candle maker with a global footprint.

One of China’s top three candle makers, Talent said the overseas market contributes 90 percent of its annual sales.

Now, it is establishing a global R&D center at Cannes in France, aiming to recruit top perfumers for the design, research and development of fragrant products like scented candles.

“France boasts the world’s best manufacturing bases and human resources for perfumes. It is easier to find seasoned perfume makers to work with us,” said Wang.

The R&D center is expected to better serve the company’s mission to produce fragrant products and high-end candles to beautify homes and signify evolved lifestyles. Wang said Talent is committed to environmentally friendly and sustainable growth.

So, although Dalian is an important petrochemical base in China, and Talent is only 60 kilometers away from its paraffin supplier, the company decided to avoid dependence on fossil energy, and turned to vegetable oil.

Vegetable oils such as soybean oil and palm oil have superseded paraffin wax as the main raw material in Talent’s candles. It buys only certified ISPO (Indonesia Sustainable Palm Oil) and rejects those that may cause illegal deforestation.

The renewable oil now accounts for more than 85 percent of its raw materials. “If making money is at the expense of environment, it is worthless,” Wang said.

With its high-quality products and pro-green policy, Talent has established long-term and stable cooperation agreements with global retail giants such as Germany’s Metro AG, Sweden’s Ikea Group and America’s Wal-Mart Stores Inc.

That is commendable for a company that was established as a craft workshop in 1997 at a village in Dalian. Ever since, overseas markets have been key to its success.

But the United States and the EU imposed anti-dumping sanctions on China’s candle manufacturers in 2006 and 2009 respectively.

China’s candle industry was hit seriously as sanctions continued for several years. More than 1,500 Chinese candle makers used to export to the EU before the sanctions. No less than 100 of them had annual export volume exceeding 1,000 tons. However, when the anti-dumping measures were lifted last September, their number had dwindled to only 10, said Wang.

Amid all this, Talent thrived. Wang believes sanctions helped Talent grow by leaps and bounds. For, it adopted a creative response to them.

“Thanks to the allocation of global resources, we not only avoided (the adverse impact of the sanctions) but upgraded our products,” he said.

That’s not all. It opened new plants in the ASEAN region and the EU, changing unfavorable factors into advantages.

First, the subsidiary in Chiang Mai was founded in 2007. As an ASEAN member, Thailand offers its handicraft industry convenient logistics. More importantly, it is immune from the trade barriers of European and American markets, said Wang.

Next, in the same year, Talent imported advanced automated assembly lines from Germany. The annual output soared to 25,000 tons and exports reached $60 million, ten times that of 2002.

Then, in 2009, in response to the EU’s sanctions, Talent took over a candle factory in Poland, a major European candle manufacturing base.

It hired more than 200 local workers and made it one of the biggest manufacturing firms in Zabno. It is now expanding the facility.

It is not easy to set up a factory in another country due to challenges like different languages and cultural backgrounds. But buying out an existing firm worked well for Talent.

“We need not stick a label of our nationality. International vision and international attitude will help a lot to participate in local economic and social development and life,” said Wang.

This year, sales volumes are expected to increase by 20 percent, said Wang. What’s more, the European and American markets are stable.

According to the National Candle Association of the US, candles are used in seven out of 10 US households. Annual retail sales of candles in the US are estimated to be around $2 billion.

The domestic market is not exactly thriving. But it is growing with more Chinese people starting to use fragrant products like scented candles.

For instance, Shang Wanning, 29, has been using scented candles for several years now. When she comes home from work in the evening, she usually lights a candle and plays some light music.

“The room becomes more comfortable and cozy. It’s really a good choice for relaxation and stress reduction,” said Shang.

She usually buys candles from Ikea, online stores or from stores abroad.

“There’s no difference. Wherever I come across beautiful candles, I bring them home,” she said.

Wang of Talent said attempts to satisfy the olfactory sense are innate to human physiological needs. When people are satisfied with vision and taste, the demand for fragrance arises, he said.