Neelima Mahajan and Major Tian Authors

China Roundup: Apple inches ahead of Samsung in China; China’s Staggering Debt; and a New Food Scandal

July 25, 2014

The week that was: Apple is making a comeback and beating Samsung in China; China has a debt-to-GDP ratio of a whopping 251%; and fast food giants find themselves battling a new food scandal.

Will Apple eat Samsung’s pie?

Although the earnings report of Apple’s third fiscal quarter of 2014 (Apple’s fiscal quarter runs from end September 2013-end September 2014) sent a mixed picture (profit beat but iPad sales dropped), the Cupertino-based company is doing surprisingly well in China.

While Apple’s revenue grew 6% worldwide, its Greater China revenue jumped 28% from last year. iPhone and Mac sales were up 48% and 39% respectively, while iPad sales increased by a whopping 51% (compared with a 9.2% global decline). One may recall that Apple’s fortunes in China had started to take a tumble last year.

Observers contributed the success to Apple’s January tie-up with China Mobile, the world’s largest mobile company by subscribers (over 700 million). Earlier estimates suggested that with the rollout of China Mobile’s 4G services, the carrier would be able to sell between 12 million to 15 million of iPhones within 2014.

While iPhone’s market share in China still lags behind Samsung, Lenovo, Xiaomi and Coolpad, the much-anticipated launch of the iPhone 6 in September will likely give Apple another great push. The company’s continuing focus on high-end users seems to be paying off well, said Reuters, and its Korean competitor Samsung is starting to feel the pressure. The world’s largest smartphone maker posted a 24% decline in operating income in the second quarter, according to Bloomberg.

A New Record for China’s Debt

A new report by Stephen Green, Chief China Economist for Standard Chartered, says that China’s aggregate debt level has reached 251% of GDP, CNBC reported. In layman terms, this is almost 2.5 times the size of the Chinese economy–and hence something that policymakers in Beijing should worry about. “Total financial credit has surged to 251 percent of gross domestic product from 147 percent at the end of 2008,” CNBC quoted the report as saying.

Over the last couple of years, China has relied heavily on debt to boost economic growth. “…but the alarming pace of credit growth has triggered worries for investors, especially as rapid build-ups in debt have signaled the onset of financial crises in other economies,” the CNBC report said.

Speaking to the Financial Times, Chen Long, China Economist at Gavekal Dragonomics, said: “China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones… In other words China has become indebted before it has become rich.” Others on Standard Chartered’s list included the US with a total debt-to-GDP ratio of 260%, the UK with 277%, and Japan with 415%.

So is it a doomsday scenario for China? Maybe not. Writing for The Telegraph, columnist Ambrose Evans-Pritchard says: “This does not mean that China is about to crash. It has a state-controlled banking system. Therefore any bust scenario will play out in a different way, probably through much lower growth and two decades of Japanese-style extend and pretend.”

And if you feel like you have had to deal with too much gloom here, see this page for China’s ‘Debt Clock’, a fun way to look at China’s debt.

MBS comes back to China after seven years

Mortgage-backed securities (MBS), which led to the 2007 US subprime crisis and the following global economic turmoil, are coming back to China.

China hasn’t issues any MBS since 2007, the Wall Street Journal reported, but on Wednesday the Postal Savings Bank of China announced that it is offering RMB 6.8 billion (about $1.1 billion) of such securities–and it has been oversubscribed by 25%.

The bank has priced the returns of most of the notes between 5.3% and 5.8%, according to the Journal, and the loans packages into the securities were made to homebuyers in 12 cities across 10 provinces. The bank expects stable cash flows from those households because the buyers are actually living in those homes and they are not speculative (and hence dangerous) real estate investors. In addition, analysts usually point to low debt levels of Chinese households when assessing the risks of the country’s home mortgages.

Allowing banks to shrug off mortgages to investors would free up capital for them to increase lending, but whether this is a move by the government to support the declining housing market or just an isolated issuance remains unclear, analysts said.

Finger Lickin’ Bad!

Yum! Brands, the company that owns KFC and Pizza Hut, is in the thick of (yet another) tainted food scandal thanks to one of its suppliers. (You’ll probably ask what’s new?) The good news for the company is that this time they are not the only ones weathering this storm: other chains such as McDonalds, Starbucks, Burger King and also 7-Eleven stores are all in damage control mode.

According to a Bloomberg report, Dragon TV, a local broadcaster, aired a report showing “workers repackaging old meat and changing expiration dates before shipping it to retailers”. The undercover video was shot at the Shanghai Husi Food Co., the Chinese unit of the Illinois-headquartered OSI Group Inc.

Yum! and other fast food chains have since stopped buying from OSI China, and the police have detained five people from that unit.

This is not the first time that Yum! has faced this problem. In December 2012, China’s national broadcaster CCTV accused KFC of selling chicken laden with antibiotics. This snowballed into a massive scandal and Yum!, which garners nearly 40% of its total operating profits from China, saw its China sales fall by an eye-popping 41% in January 2013. Ever since the company has been trying to recover from the scandal, even launching a major store and menu revamp exercise in March this year.

Hopefully, for Yum!, the latest scandal will blow over soon.