Archives June 2015

Biggest swing since 1992 sends stocks lower

Chinese stocks edged down amid volatile trade, with the benchmark Shanghai index swinging the most since 1992, despite the rate cut announced over the weekend.

The Shanghai Composite Index slumped 3.3 percent to close at 4,053.03 on Monday, extending the loss from its peak on June 12 to more than 20 percent. The gauge swung between a loss of 7.6 percent and a gain of 2.4 percent within the market hours.

The Shenzhen Component Index sank 5.8 percent to 13,566.27 at the close.

“Interest rate cut and targeted reserved requirement ratio (RRR) cut simultaneously are a dramatic move. But the market has been anticipating such a move,” said Hong Hao, chief strategist at BOCOM International Holdings, in a note released on Monday.

The People’s Bank of China has lowered the RRR by half a percentage point and the benchmark interest rate for a third time this year by 25 basis points, announced the central bank on Saturday.

The one-year benchmark deposit rate has been lowered by 115 basis points since the beginning of this year and is now 2 percent, while that of the lending rate has been cut down by 100 basis points in total to 4.85 percent.

“Traders will likely seize the fleeting technical reprieve to exit their positions, and continue to induce short-term volatility,” said Hong, adding that the outstanding balance of margin trades through non-brokerage channels can be double the official data of as high as 2 trillion yuan ($322.2 billion).

“The risk led by margin trading is manageable, as pressure tests have shown that the overall leverage ratio is still in check and below the cautious line,” said a spokesperson of the China Securities Regulatory Commission in a written reply to media enquiries on Monday.

The forced closure of margin trades over the past two trading days via the HOMS system amounted to no more than 4 billion yuan, and another 2.2 billion yuan was closed on Monday morning, added the spokesperson.

The outstanding balance of margin debt on the Shanghai Stock Exchange fell for a fifth day as of Friday, according to the bourse’s data.

Regulators are considering suspending initial public offerings to stabilize the country’s tumbling stock markets, reported Bloomberg citing insiders familiar with the matter.

The CSI 300 gauge closed at 4,191.55 points on Monday, down 3.3 percent.

Asia’s economic power triggers a capital flood into startups

Raising capital for a startup has traditionally been one of the most difficult parts of getting a business off the ground. But times are changing and many Asian startups have become billion-dollar success stories.

In just four years, Xiaomi Corp, China’s largest smartphone vendor, became the world’s most valuable technology startup with a valuation of more than $46 billion in December.

“Given Asia’s high GDP growth and rapidly growing market size, it was natural for investors to look at China and other parts of Asia as places to invest,” said Raman Chitkara, who leads the global technology practice at PricewaterhouseCoopers.

“They see the power of Asia?rapidly growing markets, rising new middle class, and growing urbanization?as accelerators for growth and high valuations. There is an entrepreneurial culture in Asia, particularly in China and India, and startups present a certain level of excitement.

“That, plus the potential for economic prosperity by building large-scale value over a short period of time, attracts people to start a business.”

Zhongguancun district in Beijing alone gave birth to 49 startups a day last year. The State Administration for Industry and Commerce said nearly 3 million people set up their own businesses for the first time in the nine months from March last year, after China reduced the threshold for those who want to register a business.

At present, China has more than 1,600 technology incubators and hosts more than 1,000 entities investing in startups, with total venture capital exceeding 350 billion yuan ($56 billion).

Early this year, the government decided to set up a new national venture capital fund to help startups and promising entrepreneurs. The $6.5 billion fund will be used to support seed-stage technology startups in the country.

Peng T. Ong, founder of Match.com, the pioneering online dating service set up 20 years ago, recalled his tough days of searching for an investor for his startup business.

“It was harder then,” said Ong, who now runs Monk’s Hill Ventures, a venture capital firm in Singapore that invests in technology startups in Asia.

“But things have changed dramatically. With more business successes, huge Internet penetration and more mobile telephones, the Asian startup scene is altogether different now.”

Flipkart, India’s largest retailer by sales, has a success story similar to that of Xiaomi. Now valued at $15 billion, it was started by two friends a few years ago with $6,000 saved from their earnings.

Ma Rui, partner for China at the seed fund and accelerator 500 Startups, said the spectacular success of Internet-based businesses is fueling startup growth.

“Tech entrepreneurship is one of the few ways a talented young person with few resources and dollars can create something that affects millions of people in a fairly short amount of time.”

Successful private enterprises are jumping on the bandwagon by developing incubation centers and investing in a growing number of tech startups in the region.

The Internet giant Tencent Holdings Ltd is building a center for technology startups in Chongqing, in partnership with the municipal government. It plans to develop 25 such ideas incubators across the country.

In April, Alibaba Group Holding Ltd announced it would set up a startup incubator for mobile Internet and mobile commerce in the Indian city of Bangalore, and Google has launched its startup incubator Campus Seoul in South Korea.

In India, startups have received some huge investments lately. Based on data compiled by a startup news website, YourStory, in the first quarter of this year 147 deals were put together. Indian startups raised $1.7 billion, registering a 300 percent annual growth. In the first quarter of last year alone, startups in the country raised $450 million. A total of 300 deals were closed last year. Kris Gopalakrishnan, co-founder of Infosys, one of India’s biggest IT companies, said most of the investments from global investors or venture capitalists are happening at the seed stage.

“Angel funding typically happens locally,” added Gopalakrishnan, who is also chief mentor of Startup Village, a technology business incubator in the southern state of Kerala.

Justin Hall, principal of Golden Gate Ventures of Singapore, said there is now more venture capital in the Asia-Pacific region than at “any other time in recent memory”.

“It has had a tremendous catalyzing effect on the formation of new startups, from Singapore to Indonesia. These are exciting times for the sector,” added Hall.

Taiwan’s export orders drop for second consecutive month

Taiwan’s export orders dropped for the second consecutive month to 35.79 billion U.S. dollars for May, down 5.9 percent from a year earlier, according to statistics released by the island’s economic authority on Tuesday.

For the first five months of this year, overseas buyers placed orders worth 180.47 billion U.S. dollars with manufacturers in Taiwan, a decrease of 0.6 percent year on year.

Export orders are an indicator of actual exports a month or two later, and Taiwan is known as a big production base for electronics. Taiwanese export orders are, therefore, seen as a key reference for the global electronics sector.

Growth in export orders in May was only recorded in the information and communication sector, with an increase of 2.3 percent year on year, driven by strong demand for hand-held and wearable devices.

The electronics sector, however, posted a decrease of 3.5 percent due to emerging market’s weak demand for smart phones and a drop in orders for televisions from Japan, the economic authority said.

In addition, two-digit year-on-year declines in export orders were reported in sectors including precision apparatus, plastic and rubber products, chemicals, base metals, and machinery

The largest orders came from the United States, totaling 9.79 billion U.S. dollars in May, up 5.2 percent from the same period last year, according to the economic authority.

Qualcomm plans advanced facility for chip research

U.S. company teams up with Chinese vendors; analysts say move will boost market position

Qualcomm Inc is setting up a high-end semiconductor research facility with China’s top chip makers. This is the United States-based company’s biggest move in China after regulators imposed a record $975 million fine on Qualcomm for anti-competitive practices earlier this year.

Semiconductor Manufacturing International Corp, one of the largest chip foundries in the country, will be in charge of the daily operations of the new research center, which will be located in Shanghai, multiple sources told China Daily on Thursday.

Huawei Technologies Co Ltd and Imec, a Belgium-based nano-electronics research center, will also join the collaboration.

The agreement will be announced in the coming days during Belgian King Philippe’s visit to China.

“It will be a ground-breaking partnership for Qualcomm, especially as it has not formed such an alliance till now,” said a person familiar with the matter. At least three sources, working for the companies involved and for a third-party organization, confirmed the alliance. Qualcomm and SMIC declined to comment. Huawei and Imec were not reachable on Thursday.

It is unclear how Qualcomm will contribute to the partnership, but local vendors are eager to acquire chip design and manufacturing technologies from the world’s largest mobile chipmaker. SMIC and Qualcomm are working together on chips made with the 28 nanometer process technology. The Chinese company is eyeing more techniques with higher precision.

Nicole Peng, research director at Canalys China, said any sort of technology transfer will be welcomed by the government as the company continues to remedy its relationship with authorities.

In February, the National Development and Reform Commission fined Qualcomm nearly $1 billion for violating China’s antitrust law. But the investigator did not upset its patent licensing model, leaving the California-based company still hugely profitable in the country. China, the world’s hub of electronics, accounted for half of its $26 billion in revenue last year.

“This is a good initiative for Qualcomm especially when it wants to consolidate and strengthen its market position in China,” Peng said. “Investing in a R&D center can also allow Qualcomm to leverage its local talent pool.”

Cisco Systems Inc said on Wednesday it is investing more than $10 billion in China over the next few years, despite a security-concern-led sales slump in the country.

Personal computer vendor Hewlett-Packard Co also sold the majority of its stake in a communications equipment subsidiary last month to a local partner to win more government procurement orders.

China is moving to locally made information technology products over fears that products provided by foreign companies may have security issues. The change in attitude made an array of overseas providers apprehensive that they were being driven out of the world’s most vibrant technology market.

Pledging jaw-dropping investments and patent transfer is becoming a common practice for foreign tech companies to show they value the Chinese market and are eager to be part of government-backed IT projects.

Net giants make inroads in movies

Filmmakers insist they have retained their independence despite new investors

In an era of rapid change, it takes only a year for a whisper to grow into a chorus.

This time last year at the Shanghai International Film Festival, Yu Dong of Bona Film Group lamented that all filmmakers in China would eventually become subsidiaries of BAT?short for Baidu, Alibaba and Tencent, the country’s triumvirate of Internet giants.

Indeed, this year’s festival seems to have been taken over by these outsiders. At a forum called “Big Data: Empowering the Movie Industry”, only one of the six panelists was a filmmaker. Xu Zheng, whose 2012 film Lost in Thailand broke the box-office record for a domestic release, is working on a follow-up feature, Lost in Hong Kong.

Alibaba, whose tentacles are all over the movie map, was one of the sponsors of the forum. Late last year, the e-commerce titan increased its stake in Huayi Brothers Media Corp to 8 percent, as did Tencent, making the two the film producer’s second-largest shareholders. Early this year, Alibaba paid 2.4 billion yuan ($387 million) for 8.8 percent of Enlight Media, another major film studio, again taking the second-largest shareholder position.

The Internet behemoths have invested heavily in movie-related operations, including crowdfunding and ticketing, but they have yet to show stellar results for movie production.

Some, such as Youku Tudou-affiliated Heyi Pictures, have taken minority stakes in a few titles, but none of them have become runaway hits. Alibaba Pictures has many projects in the pipeline, and it needs a slew of solid winners to establish itself in the content business.

Wang Changtian, Enlight’s CEO, said he does not feel he is working for Alibaba founder Jack Ma. “All of our products are designed to satisfy the need of the whole country, so we work for the Chinese film audience,” he said.

Bona’s Yu Dong, after announcing a 26-picture slate that aims for a total box office return of 10 billion yuan, said he is not ready to decide which Internet giant to work with. “When I hold firm to my own core competency and make good movies, I can fit in with the environment of any of them,” he said.

Yu, who is taking his company private because its market capitalization?about 5 billion yuan?is a fraction of the Internet-affiliated rivals such as Huayi, at 79 billion yuan, or Englight, at 73 billion yuan, said that the market is treating his company unfairly for his nonaffiliation with technology leaders.

Meanwhile, Zhang Qiang, CEO of Alibaba Pictures, said he is reassessing the position of his company.

Instead of making it a traditional film production organization, it will use technology to “reshape the business and make it an entertainment company that spans the whole industry chain”.

Liu Chunning, CEO of Alibaba Digital Entertainment Group, said: “The Internet raises efficiency with changing technologies while content remains the king. No matter how I hype technology, if I don’t produce good movies, people won’t go see them.”

Alibaba to launch video service

Company aims to create China’s equivalent of Netflix

Chinese e-commerce giant Alibaba Group Holding is set to launch streaming video service in two months, a PR representative from the company told the Global Times on Monday, without elaborating on how the service will operate.

Alibaba is not yet ready to announce whether the service will be offered through Internet set-top box or online video platform, the staff said, noting that more details will be disclosed in a month.

Liu Chunning, president of Alibaba’s digital entertainment business group, was quoted by Reuters on late Sunday that the online streaming video service will be named as TBO (Tmall Box Office), aimed at redefining home entertainment and creating the Chinese equivalent of HBO (Home Box Office Inc) and Netflix Inc.

As an affiliate of US media and entertainment group Time Warner Inc, HBO focuses on pay-television and subscription video on demand service, according to the company’s website. And over 62 million subscribers of Netflix can watch more than 100 million hours of TV shows and movies per day on nearly any Internet-connected screen via a set-top box, according to Netflix’s website.

Contents streamed on TBO are expected to be bought from China and other markets, and the in-house productions will also be an option, according to Liu.

Alibaba has been pushing its digital and entertainment strategy since 2014. Alibaba Investment, an investment arm of Alibaba Group, announced purchase of a 60 percent stake in ChinaVision, later renamed as Alibaba Pictures Group, for the price of HK$6.24 billion ($803.7 million) in March 2014, which was seen as a step to explore the cultural and digital entertainment sector.

In July 2014, Alibaba, which had bought 16.5 percent of Youku Tudou’s shares in April 2014, announced a tie-up with U.S. entertainment company Lions Gate Entertainment Corp to gain access to the U.S. partner’s TV shows and movies.

The launch of TBO is believed to be another big move in Alibaba’s digital and entertainment strategy.

But analysts said that the operation of TBO, either as an online video platform or set-top box, will be challenging for the e-commerce giant.

“If Alibaba is considering developing Internet set-top box, the company’s priority should be to figure out how to cooperate with a government-approved license provider,” Lu Jingyu, an analyst from Beijing-based market research consultancy iResearch, told the Global Times Monday.

The State Administration of Press, Publication, Radio, Film and Television (SARFT) requires Internet TVs and set-top boxes to only have access to online content provided by seven licensed providers, which are mainly State-owned companies such as China Network Television, BesTV New Media Co and Wasu Media, according to a document released by the country’s top media watchdog in October 2011.

The SARFT held talks with major online video websites in September 2014, setting a deadline within the month for them to remove their TV apps.

“Such moves hindered the opening of the Chinese Internet TV service,” and affected online video platforms and set-top box developers, said Lu.

According to the Reuters report, about 90 percent of Alibaba’s online contents would be paid for, either on show-by-show or monthly subscription basis.

“It is a bold move for Alibaba to charge fees for the majority of its online content, as most Chinese people enjoy free online videos, and online video providers like Baidu’s iQiyi and Youku Tudou mainly make money from advertisements,” Luo Lan, an analyst from Beijing-based market research firm Analysys International, told the Global Times Monday.

A survey of 17,909 Internet users in February by Penguin Intelligence, a research arm under Tencent Holdings, showed that over 75 percent of the participants frequently watched online videos. However, only 20 percent of the participants said they intend to pay for online content.

Three major Chinese airlines to provide in-flight WiFi services

Passengers use WiFi services to surf Internet on mobile gadgets on a flight of China Eastern Airlines.

Three major Chinese airlines, including China Eastern Airlines, China Southern Airlines and Air China, have been approved to provide in-flight Wi-Fi services.

Passengers on these airlines won’t have long to wait before they can log on and stay plugged-in during their flights.

China Eastern Airlines has become the first Chinese carrier to provide Wi-Fi services on both domestic and international flights.

According to the Ministry of Industry and Information Technology, the carrier is allowed to use the AsiaSat-6 satellite for Wi-Fi services on its 21 aircraft from June 5.

The services are expected to be offered in a month as the airline clears up several formalities ahead of the launch.

Zhang Chi, deputy director of the company’s transition department, explains what this means for the airline.

“According to our market research, over 86 percent passengers will take flights with internet services as a priority. So providing wifi service is an important strategy for the company to attract passengers, and that’s why we’ve decided to make this a standard service in our entire fleet. To make it happen, over 70 aircraft will be modified to install the necessary equipment before 2017.”

After the installation is completed, through the AsiaSat-6 satellite, airplanes in the sky can get connected with network devices in base stations on the ground.

China Southern Airlines’ senior engineer Mi Jisheng says the state-to-the-art technology enables air passengers to experience faster wifi service on plane than even at home.

“First, with the new technology, the bandwidth will be about 50-fold faster than that of the previous traditional technology. Second, the communication network will be much larger than before, and this time with global coverage. About 99 percent of intercontinental routes will be covered with satellite signals.”

Currently, American Airlines, Qatar Airlines and many other foreign airlines offer wi-fi services on flights, with charges ranging from several US dollars to over twenty dollars.

However, Zhang Chi with China Eastern Airlines says their service charges are expected to be free.

“Through wifi access, we will offer a variety of internet services which are free for passengers. The service charges will be shared and paid by the airline and its business partners. We have collaborated with China Union Pay for passengers on the plane to make real-time payment through a cloud platform, which is a breakthrough for online shopping during flights.”

With the commercialization of the service, passengers on plane can also enjoy a wide range of duty-free goods.

Experts predict the Wi-Fi service could bring about new business opportunities, especially in social media and data services.

Last year, around 390 million domestic Chinese passengers took flights and spent 1 billion hours in the air.

VAT net to be widened to realty, finance and consumer services

The government is likely to come out with a fresh value-added tax reform plan for the real estate, finance and consumer-oriented services industries next month, ending the three-year reform on all service industries, according to unconfirmed reports.

The Ministry of Finance is believed to have already drafted the plan and the same would be announced after approval from the State Council, the cabinet, Xinhua-affiliated Economic Information Daily said on Thursday, quoting unidentified people close to the ministry.

Even if the plan is sent to the State Council this month and approved in July, it would take another few months to finalize the implementation mechanism. So in all probability, the reforms are likely to be implemented by the end of this year, the sources said.

VAT rate for the real estate sector may be set at 11 percent, and for finance and consumer-oriented services industry at 6 percent, the report said. The ministry declined requests to confirm the report.

China started a pilot program to replace business tax with VAT in January 2012 in an effort to avoid double taxation, ease companies’ tax burden and encourage the service sector. Reforms have already been implemented in sectors such as transportation, telecommunication and modern services, with real estate, finance and consumer-oriented services the only three sectors untouched.

Policymakers intend to wrap up the reforms this year. It is the debate over some specific issues that has hampered the progress. Among all technical challenges, “credit mechanism” is a focal point, experts said.

The VAT only taxes the “value added” at each stage of the supply chain, which generally allows businesses to credit tax incurred on business-related purchases. The VAT rate is generally higher than the current business tax. Any failure to “credit business expenses might actually increase the tax burden”, which is contrary to what the policy intends to achieve.

“VAT invoices may not be readily available for some purchases, therefore the claiming of input VAT credit for the purchases may be limited. Besides land, major cost for developers will likely be raw materials (brick, lime, sand, stone, etc.) and labor. Suppliers of these may be individuals, or small business owners, who may not be able, or may have difficulty in issuing VAT invoices,” said Alan Wu, national indirect tax leader at PricewaterhouseCoopers China.

The reforms also pose challenges to the projects that are under construction, or those where construction is completed but the sale is still going on, as it would be impossible to get input VAT invoices for the cost already incurred for credit claims. Since the applicable tax rate might be 11 percent and the current business tax rate is 5 percent, the costs would certainly go up, Wu said.

“A transitional measure might be more helpful to address these difficulties,” Wu said.

For the finance industry, controversies are greater. Most countries exempt VAT on financial products. Kenneth Leung, indirect tax leader at Ernst & Young Greater China, said financial services subjected to VAT could be divided into three categories: Interest, earnings from financial trading, and service fees. According to the current policy discussions, the VAT charged on interest expenses and financial products might not be creditable as input VAT temporarily.

However, Wu said the reform will be less effective if any part of the chain is broken (input VAT not creditable), or if VAT on interest is not allowed as input credit. Regarding application of VAT to financial trading, one possible way out would be to continue the current net basis arrangement under business tax, while allowing a net negative position to be carried forward, without limitation, to offset against future positive position.

Gender balance remains elusive

University students at a job fair in Nanjing, capital of Jiangsu province. Women are less likely than their male co-workers to believe that pay equality and equal opportunities exist for both genders in the workplace, a survey shows.

Although progress has been made, equality between male and female professionals remains a critical issue in China.

According to a survey released by global recruitment specialist group Hays on Tuesday, women are less likely than their male co-workers to believe that pay equality and equal opportunities exist for both genders in the workplace.

Hays polled 521 professionals in China, 55 percent of whom were female. Only 7 percent of women aged 25 or under think there is gender inequality of pay. But as they progress in their career, that number increases. About 29 percent of women aged between 26 and 40, and 35 percent of women aged 41 or above think there is gender inequality of pay.

In general, transport and distribution, mining and resources, as well as professional services, drew the most negative answers among both male and female professionals concerning equal pay.

But the majority of polled men think that the situation is not that bad, as only 13 percent of them think that equally capable men and women are not paid or rewarded equally.

“This suggests that most people in executive and senior management roles?the majority of whom are men?still fail to see any inequality when it comes to pay and career opportunities between the sexes. This makes it difficult to see how we will see any significant advancement in this area while the majority of people in senior roles do not recognize it as an issue,” said Christine Wright, managing director of Hays in Asia.

In terms of career opportunities, 64 percent of the respondents think that the same career opportunities are available regardless of gender. But when it goes deeper down to study the answers of each gender, it is found that 47 percent of the women said that the same career opportunities were not open to equally capable colleagues of both genders, while only 24 percent of the male interviewees responded similarly.

However, the results in the Chinese market were better than the global average. But this is not a result of Chinese companies’ spontaneous efforts to improve workplace equality. The incredible pace of growth in China and the skills shortage in the job market mean that “the country does not have the luxury to discriminate by gender”, said Wright.

But it cannot be denied that most companies in China have been supportive of gender diversity policies. About 60 percent of the respondents working in the financial services sector said their companies have a gender diversity policy in place, followed by construction, property and engineering, and information technology and telecommunications.

Lawrence Lee, human resources vice-president for greater China and Mongolia at Hilton Worldwide, said that the company has networking and mentoring programs for female staff, as well as gender equality in its Leadership Committee dedicated to better understanding the needs of female employees. Reflecting the result of Hilton’s efforts in this regard is the fact that 51 percent of the leadership positions in China are now held by women.