Major Tian Authors

China Roundup: China PMI index up; raids on Microsoft and Alibaba invests in Kabam

August 01, 2014

This week, China PMI index (Purchasing Managers Index) showed a slight improvement as did the Shanghai Composite Index; Microsoft likely to face anti-monopoly charges; and Tesla changes its stance on charging stations.

Numbers You Should Know

Even as the world is still taking in all the economic data released by the US this week, here are some China numbers you should take note of.

After posting a second quarter GDP growth of 7.5% earlier this month, the world’s second-largest economy’s Purchase Management Index (PMI) rose to 51.7 in July. This is marginally higher from 51 in June, according to the National Bureau of Statistics. This marks the biggest expansion of China’s manufacturing activities in 27 months, as both domestic and foreign demand picked up, suggesting that the economy continued to stabilize.

What’s in sync with the broader picture (surprisingly) is China’s stock market—the Shanghai Composite Index rose about 7.5% in July, which is the biggest monthly gain since December 2012. The surge may partially be attributed to the bullish views of global institutions including JP Morgan and Goldman Sachs—the quota given to Qualified Foreign Institutional Investors (QFII) has gone up by 16.5% from the end of 2013 to $57.9 billion. An upcoming trial program called the Shanghai-Hong Kong Stock Connect is also believed to have pushed the A share index higher, as investors look for arbitrage opportunities among dual-listed stocks.

The strong stock market is accompanied by the strengthening of the RMB, whose value against the US dollar took a heavy blow between January and April this year. The RMB has picked up gradually since its lowest point on April 30th, and has recovered 1.5% so far. The currency is still down by 2% for 2014.

Unlike the RMB, Chinese housing prices continued to fall. An independent survey of 100 Chinese cities has shown that average new home prices slipped 0.8% month-to-month in July, making it the third consecutive monthly drop. Prices are also declining at a faster pace, compared with 0.3% and 0.5% fall in May and June. The gloomy market has prompted more than 30 local governments to ease home purchase restrictions, whether it would work to support prices and sales remains unclear.

Companies in the spotlight

Aside from food supplier OSI Group, which remained at the epicenter of a meat safety scandal that has engulfed almost all foreign fast food chains in China, Microsoft is another US company that made a lot of headlines this week.

On Monday, news began to circulate on social media saying that government authorities had suddenly landed up at four offices of the software giant in different cities. Officials of the State Administration for Industry and Commerce (SAIC) later announced that they are investigating Microsoft for potential anti-monopoly charges, copying away contractual documents and financial records; the Seattle-based company also released a statement saying that it’s fully co-operating with the regulator.

Microsoft’s Windows operating system runs on almost 89% of Chinese computers, but its former CEO Steve Ballmer reportedly said in 2011 that the company’s revenue from China was less than that from the Netherlands, thanks to the country’s notorious piracy problems. China also banned Windows 8 from being installed on government computers in March, citing cybersecurity concerns.

The raids may very well offset the one bit of cheery news that the company had this week: Microsoft has partnered with China’s second-largest e-commerce website to sell its Xbox game consoles.

For western firms in China, staying out of the government’s crosshairs is vital; and some companies may also need to revise their own agendas to embrace those of the state. Tesla, which started delivering its Model S electric cars to its Chinese customers in April, planned to install its own supercharging stations to ensure consistent service quality. But the idea of being independent from the government’s blueprint was quickly disapproved—earlier this month, the Chinese CEO of Tesla told reporters that the company is willing to work with Chinese authorities to introduce a universal charging standard, with which Tesla would comply.

Tesla’s change of stance is not hard to understand, given that the company wants a third of its network service centers to be located in China by the end of 2015. Earlier this week, when analysts asked Tesla CEO Elon Musk whether he’s worried about a potential backlash from the Chinese government, which might want to instead promote domestic car brands, he said he doubted “that’s going to be the path going forward for them”, even though the authorities “have done some parochial actions in the past”.

Last but not least, e-commerce giant Alibaba, which is in a “quiet period” before its IPO, is not so quiet this week. To reinforcing its commitment to expand in the mobile gaming space, the company on Thursday announced a $120 million investment in Kabam Inc, a California start-up that develops online games and is valued at more than $1 billion. Alibaba has backed at least 10 start-ups in Silicon Valley since it launched its investment arm in October.

The announcement came together with news that Alibaba is one of the companies that are in touch with Snapchat, which is looking for another round of financing. Sources told Bloomberg that the deal may value the messaging app company at a whopping amount of $10 billion.

In addition to actively buying into gaming, entertainment and sports, Alibaba is also investing in human resources; the company just hired Google’s head of investor relations Jane Penner, who will join the Chinese firm on August 11. Penner joins other Silicon Valley stars like Xiaomi’s Hugo Barra and Baidu’s Andrew Ng who have chosen to work with Chinese tech giants.

Also in the news

China is set to become the largest beer market by 2017; Tencent’s WeChat’s monthly-active users reached 396 million, and its functions are diversifying with 5.8 million public accounts; the International Monetary Fund said that China should set a growth target between 6.5% to 7% for 2015 to focus on implementing the ambitious reform goals.

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