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China Roundup: Alibaba Bonds; and the China-Australia FTA

November 21, 2014

This week, we saw the debut of Alibaba’s bonds, the new China-Australia FTA, and China’s factory output shrank thanks to the APEC conference.

Output shrank because of APEC?

Beijing’s effort to clean up the air pollution for the APEC meetings by shutting down factories around the city had a curious side effect—China’s factory output shrank in November, the first time in six months.

According to the HSBC/Markit China flash purchasing managers index (PMI), the production of Chinese manufacturers stalled this month, resulting in a 50.0 reading (a reading below 50 means contraction ), worse than a Reuters estimate of 50.3.

The sub-indices revealed that while new orders picked up slightly, export orders dragged down activity; the factory output sub-index as a result fell below 50 to 49.5.

While some analysts, like Economist Intelligence Unit’s Robin Bew, think that the reading is a sign that China will continue to slow down, others, including Morgan Stanley’s Chief Economist of Greater China Helen Qiao, believe that things are not as dismal as they look if the APEC impact is factored in, according to CNBC.

Free trade between China and Australia

After almost 10 years’ negotiations, China and Australia have finally reached a free trade agreement that will eliminate tariffs for as much as 95% of Australia’s exports to China.

The two countries already share $129 billion of bilateral trade, and China is also Australia’s largest trading partner. With better access to the world’s biggest market, analysts believe the agreement will help Australia diversify away from mining, which accounts for half of the country’s exports. Dairy, beef and winery products from Australia are among the categories that will be exempt from tariffs. However, the process is going to take four to 11 years.

Of course this is a sweet deal for China too. Except for the elimination of import duty of China’s industrial products, Australia is now part of China’s plan to internationalize its currency, the Renminbi. The Sydney branch of Bank of China, the country’s fourth-biggest bank, is designated as the first RMB clearing house in Australia. Sydney is the latest Western city that hosts overseas RMB clearing banks; others include Frankfurt, Paris, London and Toronto.

Apple nails key China partnership

Unlike physical goods, there’re no tariffs for mobile phone apps, but it doesn’t mean that it’s easier to sell to China online. Apple can surely attest to that. Before this week, Chinese users of the company’s App Store couldn’t use their UnionPay credit cards to buy apps. Apple only accepted UnionPay debit cards and users had to make at least a RMB 50 deposit into their Apple account even if they just wanted to purchase a RMB 5 app.

But the situation has changed: through a partnership Apple locked in with UnionPay this past weekend, consumers now have the option to check out with their UnionPay cards, debit or credit, without having to make a deposit with Apple.

This small change may make Apple some significant money—the App Store raked in more than $10 billion last year, and its revenue has grown 8% year-on-year in the quarter ended on September 30. Apple does not disclose its China revenue from apps, but the tie-up with UnionPay, China’s only payment and inter-bank clearing house (foreign banks may be allowed to expand soon) with more than 3.5 billion cards can only be good news.

Google and Facebook return to China?

While Apple jumped over a payment hurdle, Google’s Android app store Google Play remained blocked in China. Chinese Android users, even with VPNs used to bypass the Great Fire Wall, cannot access Google Play, as all Android smartphones sold in China don’t include the software framework needed to run Google-made apps like Gmail and Maps (unless you “jailbreak” it to have root access).

But now Google is considering launching an app store specifically for China, which it mostly exited back in 2010 over censorship disputes and cyber attacks allegations. Recently, Google representatives reportedly told its app developers that the company hopes to help them distribute their apps in China through a new store.

Sources told the Wall Street Journal that Google would likely need to have a local Chinese partner to host apps and data centers in the mainland; identification and payment systems may also need to be separated, as Google adopts a one-account-for-all-services approach.

The absence of Google Play has given a handful of Chinese app stores a chance to split the billion dollar market. Bigger players like Tencent, Baidu and Qihoo all have their own Android app stores.

Speaking of returning, Facebook, which never intentionally left (but is blocked), is not seeing any immediate “coming back” of its website on the Chinese internet. However, the firm’s advertisement business is thriving in China—though it’s largely inaccessible in the mainland, local firms hope to use the platform to market themselves in front of a global audience.

And Facebook CEO Mark Zuckerberg has shown his interest in the world’s second-largest economy in many ways, including speaking Mandarin during an event in China last month. This week, another Facebook executive, Vice President Vaughan Smith, opened his speech at a Chinese event with a short introduction in Mandarin as well.

When asked by the audience if he thinks the ban on Facebook’s website would be lifted, Smith said the company will instead focus on helping Chinese clients advertise overseas.

The most popular borrower

One important reason companies go public is that they can borrow cheaper through corporate bonds because of better credit, and Chinese e-commerce giant Alibaba is taking advantage of just that.

On Thursday the Hangzhou-based company sold $8 billion of bonds in its debut sale, the biggest dollar-denominated bond offering by an Asian company, according to Bloomberg. The yields are also lower than what were originally planned, since lenders generously offered more than Alibaba wants—$57 billion (Reuters has a breakdown of the yields).

While most Chinese dollar bonds are called “junk bonds” for their ultra high yields, in Alibaba’s case, “it feels like new-issue concession is non-existent”, said a New York-based money manager who decided not to buy the bonds, according to Bloomberg.

But Barclays’ head of Asia-Pacific debt capital markets Jon Pratt told the South China Morning Post that Alibaba is in a positon to “re-price the Chinese credit curve” by helping lower yields for Chinese issuers, who have borrowed $179 billion of dollar bonds in total this year, up 61% from 2013. The flipside is that only about 14% of those bonds are available for US-based investors due to regulatory arrangements; Alibaba is of course one of them.

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