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China Roundup: Alibaba Invests in Smartphone Brand Meizu

February 12, 2015

This week, Qualcomm got a rap on its knuckles and a $975 million fine; Alibaba invested in smartphone brand Meizu; and the Chinese imports figure plunged.

Bad Data

The most recent indicators of the Chinese economy don’t look good. Imports fell sharply by 20% in January from a year earlier, the biggest drop since May 2009; exports also slipped by 3.3%, resulting in a record monthly surplus of $60 billion.

Some analysts say that the plunge in imports may not be as bad as it sounds, if you factor in the timing of the Chinese New Year and low commodity prices. China’s lunar new year, which fell in January last year, is on February 18 this year. Manufacturing activities usually slow down drastically during the period, leading to lower demand for overseas raw materials. But the data still points to a lack of steam in China’s industrial sector, given that the property market slump is not yet over.

On the other hand, consumer good prices remained largely flat last month, as the consumer price index (CPI) edged up only 0.8% from the same period last year, the lowest in five years. Meanwhile the producer price index (PPI) dropped 4.3% annually, compared with a 3.3% dip in the previous month. Although consumer prices are likely to pick up in February because of the holiday shopping, some economists worry that the mounting deflation pressure is keeping the financing costs of businesses high and margins low, making further cuts on interest rates or the required reserve ratio (RRR) imminent.

Marrying the Government?

Over the weekend, China’s Caixin reported that Ant Financial Services Group, Alibaba’s most important affiliate, is selling shares to outside investors at a valuation of $30 billion.

Claiming that the Chinese law requires domestic ownership of financial services companies, Alibaba founder and Chairman Jack Ma secretly spun off Alipay, the predecessor of Ant Financial back in 2011, causing strong protests from overseas investors. The parties eventually agreed to settle the dispute by requiring the financial arm to contribute part of its earnings to the mother group. Alibaba will also be entitled to a significant share of Ant Financial if the latter goes public one day.

As for this round of financing, Caixin reported that except for private equity funds, Ant Financial is also introducing state-owned institutions such as the China Development Bank, Postal Savings Bank of China and the social security fund, who may take about 11% of the company.

Analysts say that teaming up with the state may help Ant Financial explore opportunities in China’s rural areas, where the previously mentioned banks have done well. On Tuesday, Ma reiterated his future plan to provide financial services to Chinese farmers during a presentation to officials at China Securities Regulatory Commission, according to media accounts.

“Be in love with the government, but don’t marry it,” Ma once said about managing the relationship with Chinese authorities.

A New Phone Brand to Watch

Knowing Xiaomi and Huawei is not enough now: meet Meizu, a company Alibaba just invested $590 million in.

Once known for its MP3 players, the Shenzhen-based smartphone company is one of first Chinese electronic manufacturers to switch focus to handsets in 2008. Meizu made headlines when it introduced its first phone: a cheap device sold only online that mimicked the user experience of an iPhone.

But in the following years it’s Xiaomi, not Meizu, that rose to prominence with its unique approach to business. Now with the fresh war chest, Meizu, whose executives routinely dismissed Xiaomi’s success, may be able to up with the ante against Xiaomi. The latter sold more than 60 million handsets last year, while Meizu’s shipment is estimated to be less than 10 million.

It’s not the first time that Alibaba and Meizu have teamed up. In November last year, the two announced a joint effort to make operating systems for Meizu’s new models. Alibaba’s own YunOS, introduced in 2011, has failed to gain any traction so far.

Hefty Fine, But Not the Worst

The jury is finally in for Qualcomm—the chipmaker was fined $975 million by Chinese regulators for violating anti-trust laws. The company will also make changes to its licensing terms in China, which will benefit Chinese phone makers that depend on its patent licenses.

However the ruling doesn’t seem to worry investors too much—in the following days Qualcomm’s share price continued its upward momentum, rising nearly 4.7%. People close to the matter told The Wall Street Journal that although the fine is heavy, Chinese authorities spared the worst punishment for Qualcomm, including clawing back more of its China revenue, because China doesn’t want to deter foreign investment too much. The fine represents about 8% of Qualcomm’s sales in China in 2013.

Under the new arrangement, Qualcomm will calculate royalty fees at 65% of the wholesale prices of phones instead of 100%; it will no longer require its clients to cross-license their own patents neither. As a result, analysts believe that the decision will help increase profitability for Chinese phone makers. However, since the cross-licensing arrangement is gone, younger companies like Xiaomi and Meizu might face legal challenges from their Chinese competitors. In the old system, Qualcomm’s Chinese clients could use each other’s patents without paying extra fees.

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