This Week In China - China’s Economy Will Surpass Japan’s Imminently

China is set to overtake Japan as the second largest economy in the world in a resurgence that is changing everything from the global balance of military and financial power to how cars are designed.

China’s GDP in 2009 was $4.98 trillion and Japan’s was $5.07 trillion. In 2010, China’s GDP was $1.335 trillion for the April-June quarter – a period for which Tokyo has yet to report. China is growing at 10% a year while Japan’s expansion this year is forecast at no more than 3%.

“On that basis, the crossover probably happened last quarter,” said Julian Jessop, chief international economist for Capital Economics in London.

China came close to surpassing Japan in 2009. It technically overtook Japan as the second largest economy in the world in the fourth quarter of 2009 since China produced more goods and services than did Japan.

China is already the biggest exporter, auto buyer and steel producer, and its worldwide influence is growing. The fortunes of companies from Detroit automakers to Brazilian iron miners depend on spending by China’s consumers and corporations. Chinese pressure helped to win developing countries a bigger voice in the World Bank and International Monetary Fund.

 If China can maintain 5% growth per year in the 2020s, it will have maintained growth for 50 years that would be unprecedented in history.

The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.

China is a leading member of the G20, which since the 2008 financial crisis has become the world’s premier economic policy-setting forum.

The rise of China wasn’t new, either, of course. But the speed at which the shift is taking place, and the fact that China has remained so stable and prosperous during the financial crisis has called into question Japan’s export-based growth model. China is moving up the food chain faster than anyone thought possible, and even beginning to challenge Japan at the very core of its economy: high-end manufacturing.

China mostly still exports low priced goods to the West, but the government has made it clear that they want to go for higher-end goods and have been offering subsidies to more innovative companies, payments for patent filings, and all sorts of tax breaks and supports to entrepreneurs in areas like green technology and energy-efficient cars and fuels 

Although per capita income is still lower, China’s consumers are so avidly courted by global companies that products from autos to home appliances destined for sale worldwide are designed with their tastes in mind. This year, French luxury goods maker Hermes Group unveiled a brand, Shang Xia, to be designed specifically for Chinese customers.

China’s ascent to become the world’s second largest economy may be overshadowed by the global influence that it has already attained.

Adam Roseman,

Founder & Managing Director

ARC China

The Rising Power Of The Chinese Worker

Cheap labor has built China’s economic miracle. Its manufacturing workers toil for a small fraction of the cost of their American or German competitors. At the bottom of the heap, a “floating population” of about 130 million migrants work in China’s boom-towns, taking home RMB 1,348 a month on average last year. That is a mere $197, little more than one-twentieth of the average monthly wage in America. But it is 17% more than the year before. As China’s economy has bounced back, wages have followed suit. On the coasts, where its exporting factories are clustered, bosses are short of workers, and workers are short of patience.

The hands of China’s workers have been strengthened by a new labor law, introduced in 2008, and by the more fundamental laws of demand and supply. Workers are becoming harder to find and to keep. The country’s villages still contain perhaps 70 million potential migrants. Other rural folk might be willing to work closer to home in the growing number of factories moving inland. But the supply of strong backs and nimble fingers is not infinite, even in China. The number of 15- to 29-year-olds will fall sharply from next year. And although their wages are increasing, their aspirations are rising even faster. They seem less willing to “eat bitterness”, as the Chinese put it, without complaint.

Higher Chinese wages would be good for the West. This may seem odd, given how much the rich world has come to rely on cheap Chinese labour: by one estimate, trade with China has added $1,000 a year to the pockets of every American household, thanks to cheaper goods in the country’s stores, cheaper inputs for its businesses and stiffer competition in its markets. Just as expanding the global labor force by a quarter through the addition of cheap Chinese workers helped to keep prices down in the West, so higher Chinese wages might start to export inflation. Furthermore, from the point of view of the global economy, labor is a resource, like land or oil. It would not normally benefit from the dwindling of China’s reserves of labor any more than from the drying up of Saudi wells.

Source: Economics

China-Focused Private-Equity Firms Look To Stocks

With attractive opportunities among private Chinese companies in short supply, private-equity firms are striking an increasing number of deals to take stakes in China’s publicly traded companies.

 The trend marks a shift away from the traditional private equity strategy of getting in on a private company early and cashing out when the company goes public or is sold. Investors who pledge money to private equity funds are often skeptical of such investments in public companies because they are often already easily available on the open market, without the 2% management fee and 20% performance fee that funds charge.

So far this year, almost one third of private equity deals in China have been private investments in public equity, known as PIPE deals. That’s up from 8% in 2006, according to Asia Private Equity Review. Last year, 43% of private equity deals done in China were PIPE deals, according to the Review.

The trend illustrates the difficulty many firms face in finding good investment opportunities for the $47.6 billion investors have plowed into China-focused funds since 2006. Buyout deals have always been hard to come by in Asia, and it hasn’t gotten any easier with fund sizes getting larger, creating the need for bigger deal sizes, as well as increased competition for deals from local competitors such as yuan-denominated funds.

Source: Wall Street Journals

Beijing Billionaire Who Grew Up With Mao Sees No Housing Bubble

From her leafy, 11th-floor rooftop terrace at the headquarters of Soho China Ltd., billionaire Zhang Xin scans the relentlessly expanding Beijing skyline she helped create. Zhang’s avant-garde buildings — some sleek as chopsticks, others stepped like rice terraces — became part of the hottest real estate market on Earth in 2010.

Zhang says she’s well aware of the chorus of investors and economists who predict that China’s property boom is about to go bust, taking the global economy down with it. The doomsday scenarios don’t intimidate Zhang, a onetime penniless sweatshop worker who ascended to Wall Street by defying the odds. She hopes to prove skeptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai, Bloomberg Markets magazine reports in its September issue. 

“I don’t see any bubbles,” says Zhang. “The next few months will be a fantastic time to buy.”

If China’s real estate takes a dive, so will its economy, analysts say. Property investment and related industries make up about 20 percent of the country’s gross domestic product, Citigroup Inc. research shows. The economy, which expanded 10.3 percent in the second quarter, may slow to 5 percent in the third period if housing plummets, says Jim Walker, chief economist at Hong Kong-based Asianomics Ltd. 

China’s economic rulers moved earlier this year to engineer a soft landing. In April, China’s cabinet, led by Premier Wen Jiabao, began imposing stringent restrictions on lending to curb speculation, particularly on luxury dwellings.

Officials raised down-payment requirements and interest rates on housing purchases, boosted the proportion of deposits that banks must hold in reserve and, in Beijing, banned families from buying more than one new home.

The measures cooled the economy after it grew at a sizzling 11.9 percent pace in the first quarter. Housing prices, which jumped a record 12.8 percent in April, eased to 11 percent in June.

Source: Bloomberg

China Plans Oil-Storage Spree

Beijing may be tapping the brakes on growth, but oil-market bulls can take heart: The tanks are on their way.

China is on the cusp of a major expansion of its oil storage capacity that will boost its oil imports and underpin its refinery runs going forward, even if the country’s gross domestic product doesn’t again reach the 11.9% growth seen in the first quarter of the year.

According to Xinhua news agency, China’s oil product storage capacity may reach close to 500 million barrels by 2015, nearly 50% above last year’s level 

In addition, the country is expanding its strategic petroleum reserve for crude oil with a view to adding capacity of 338 million barrels in two phases to existing stocks of 102 million barrels of crude.

With stagnant demand in many big oil-consuming countries, like the U.S., China has been the driving force behind the rise in global oil demand in recent years, especially with government stimulus channeled into energy-intensive infrastructure projects since 2008.

The International Energy Agency, the developed world’s energy watchdog, predicts China will remain the engine of oil demand in 2010, forecasting consumption to rise 761,000 barrels a day this year to 9.13 million barrels a day, accounting for more than 40% of the estimated total global growth.

Demand growth projections point to an eye-catching acceleration in stockpiling. In its medium-term oil market report, the IEA forecast China’s total oil use will rise to 11.6 million barrels a day by 2015.

Source: Wall Street Journal

China Gets Top Ranking In Survey Of World’s Emerging Economies

China ranks No 1 among 27 emerging economies due to its huge consumer market and rapid economic growth, according to the Emerging Markets Opportunity Index released by US accounting firm Grant Thornton.

The index takes account of key factors such as the size of the economy, wealth, involvement in world trade, growth potential and levels of human development.

China scores 454 points, double the India’s score (222 points) in second place and almost triple that of Russia (163 points) in third place.

“China leads the way thanks to the country’s huge consumer market, an increasingly open economy and extremely rapid trade growth, which offer a myriad of business opportunities for potential investors,” said Xia Zhidong, partner and vice-chairman of Grant Thornton China.

According to figures from the United Nations Conference on Trade and Development, China attracts the most foreign investment among the BRIC (Brazil, Russia, India and China) countries.

Last year, the inward foreign direct investment (FDI) flow to China was $95 billion, followed by Russia at $39 billion and with India and Brazil posting $35 billion and $26 billion respectively.

However, a lack of skilled labor, increasing labor costs and the low per capita gross domestic product (GDP) pose major challenges to foreign investment in China.

Source: China Daily

China: A New Core Rises

Almost every Chinese city has an industrial park or two but few are as attractively named as the Big Peach Flower industrial zone in Hefei. And even fewer are growing as quickly. Gree, the country’s biggest maker of air conditioners, opened a plant less than two years ago that already employs 10,000 people. Next door Midea, another air conditioner-maker, also has a vast factory.

What is most remarkable about these new plants is their location. Hefei is the capital of Anhui province, a rural backwater 400km inland from Shanghai, whose main role in the boom of the past three decades has been to supply labor to the factory towns on the south and east coasts. Now, however, the modern industrial world of the coastal region is coming inland to Anhui.

After an impressive rebound from the global crisis, China is running into new headwinds. The government is scaling back its massive monetary stimulus, prompting a slowdown in the growth of activity. Meanwhile, rising demand for exports from consumers in the US and Europe can no longer be relied upon. Increasing domestic demand is more important than ever given the mounting signs that the recovery in the rest of the world is faltering. Yet there are plenty of doubts about where any new growth will come from.

In provinces such as Anhui, Hunan and Jiangxi, previously unfashionable cities are entering a phase of “industrial take-off”. A combination of rising costs and wages on the coast, better rail and road infrastructure, and stimulus spending is encouraging Chinese companies to join a rush that started as a trickle a decade ago. Hefei is one of the most striking examples.

The boom in Anhui and other parts of the center is the result of a mix of government push and market pull. Public spending on transport infrastructure has transformed the sense of distance in parts that used to feel much more isolated from the coast.

Anhui, for instance, will be one of the biggest beneficiaries of heavy investment in high-speed railways.

Source: Financial Times

China Revs Up Renminbi Expansion

China’s quest to transform the renminbi into an international reserve currency – and thereby challenge America’s dominance of the global monetary system – may take decades, if it happens at all. But this month, for the third time this year, China took another big step in that direction.

Regulators lifted a raft of restrictions blocking the free flow of renminbi in Hong Kong, the semi-autonomous region that is open to international investors and is the designated launchpad for the renminbi’s global expansion.

Any company in the world can open a renminbi bank account in Hong Kong and exchange the currency as they please, while financial institutions in the former British crown colony are free to create investment products denominated in the Chinese currency.

There are also no longer any restrictions on the type of corporations that can be granted renminbi loans or on the type of loans that can be extended – a key liberalisation that could eventually trigger an offshore renminbi credit boom.

“[The new rules are] a big step in promoting the international use of the renminbi,” said Frances Cheung, a strategist at Crédit Agricole in Hong Kong.

As soon as the measures were announced, Hong Kong banks unveiled a slew of renminbi-denominated products, scrambling to gain a foothold in a market they hope will surge over the coming years.

Beijing last month announced a huge expansion of the renminbi cross-border trade settlement scheme, extending it from Hong Kong, Macau and a handful of nations in south-east Asia to companies in all countries, and domestically from five cities to 20 provinces.

Cross-border trade in renminbi totalled Rmb 70.6 billion ($10.3 billion) in the first half of the year – about 20 times the Rmb 3.6 billion ($527 million) recorded in the second half of 2009.

Source: Financial Times

Nielsen: Online Shopping Gaining Ground In China

Online consumers from China are the most prolific online shoppers in the Asia Pacific region and nearly 95 percent of them are planning a web purchase in the next six months, said John Burbank, chief executive officer of Nielsen Online, the online division of research firm Nielsen.

According to the survey, books and clothing, accessories and shoes top the list of planned online purchases in the next six months for Chinese online consumers. Compared with other countries in the Asia Pacific region, Chinese online consumers are the keenest to purchase clothing online, followed by consumers in South Korea (56 percent) and Philippines (37 percent).

As of June 2010, the number of Internet users in China climbed to 420 million, 36 million more than the end of 2009, according to a report from the China Internet Network Information Center. But the country’s Internet penetration rate, which was 31.8 percent by the end of June, still lags behind many other countries.

Online retail sales increased 117 percent annually between 2007 and 2009, and is expected to reach RMB450 billion ($66.45 billion) this year, according to the research center of Alibaba Group, which runs the global e-commerce site Ali-baba.com.

Though e-commerce in China is growing at a rapid pace, online shopping’s share of total retail sales in China is still lower than the US and the rest of world. “Online payment security, ensuring product quality and after sales services are the key barriers for online shopping,” said Burbank.

Source: China Daily