Major Tian Authors

China Roundup: China’s Economy May Need a Boost and Alibaba Triples Profits Ahead of IPO

August 29, 2014

This week, we contemplate whether China’s economy needs another stimulus given that the state of various economic indicators. In other news, the Shanghai Free Trade Zone plans to become an international trading hub for various commodities and Alibaba’s profits stunned company watchers.

Does the economy need more stimulus?

Since China barely missed its GDP growth target in the first quarter of the year, Beijing has initiated a series of “mini-stimulus packages” that include railway expansions, affordable housing projects and reserved ratio cuts for selective banks. Those measures are believed to have helped China meet its goal in the second quarter, during which the economy grew 7.5% and industrial output stabilized. The official industrial Purchasing Managers’ Index (PMI) reached 51.7 in July from June’s 51, marking a 27-month high.

But there are signs that China’s industrial activities are slowing down again—firms’ profits grew 13.5% year on year in July, a slower pace than the 17.9% rate in the previous month. Profits of the coal industry dipped 47.3% in the first seven months due to the government’s effort to reduce overcapacity.

And things are not looking up in August, as the HSBC/Markit Flash PMI of China’s manufacturing sector fell to 50.3, closer to the threshold of 50 between contraction and expansion. Economists say that the figure suggests that more supportive measures are needed to maintain the momentum of recovery.

But stimulus usually comes with side effects, and Beijing has to remain cautious of how to support growth with minimum costs. This week, People’s Bank of China (PBOC) announced a RMB 20 billion (about $3.3 billion) re-lending quota to its local branches, which will guide financial institutions to help the agricultural sector.

And expectations for more easing measures have lured offshore capital into China’s stock market, which has been on a rally since the end of July. The iShares China Large-Cap ETF, BlackRock’s exchange traded fund that duplicates the performance of 25 Chinese stocks, including those of Tencent and China Mobile, has attracted a net inflow of $518 million since the beginning of August. ETFs under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme in Hong Kong had gained RMB 8.2 billion (about $1.3 billion) in July, or 14.5% of assets under management, according to the data by Morningstar, an equity research firm.

However, overseas capital in another format—in this case foreign direct investment (FDI) in China, has declined. In the first seven months of the year, FDI fell 0.4% compared with a year earlier; and July’s $7.81 billion was the lowest monthly figure in two years. Japan, Europe and the US led the decline for reducing their investment in China by 45%, 17.5% and 17.4% respectively. Analysts believe that rising labor costs in China have caused multinational corporations to look for manufacturing opportunities elsewhere.

Another reason behind the drop might be a more hostile regulatory environment for foreign companies in China, as authorities have been hunting in the auto industry for anti-monopoly law violators. A dozen Japanese auto part manufacturers were fined more than $200 million last week, and according to Reuters, at least three German car parts suppliers have been told by the regulator that they can no longer run their China operations on their own, which means that they have to bring in domestic partners to form joint ventures, like foreign carmakers currently do. China Business News, a Chinese paper in Shanghai, said that they couldn’t verify the claim (link in Chinese) through their sources in the Ministry of Commerce and no such regulations have been made public.

International observers have accused the Chinese government of unfairly targeting foreign firms and failing to provide them due process in those anti-monopoly investigations.

More reforms might help

Some analysts are skeptical about whether China can restructure its economy, but at least Beijing is trying.

On Wednesday, Shanghai announced an action plan to develop eight international commerce platforms for commodities like crude oil, iron ore and cotton within its Shanghai Free Trade Zone (FTZ) by 2015. Becoming an international trading hub is essential to secure the city’s role also as a financial center, where the authorities plan to experiment with capital account liberalization of the renminbi (RMB).

On the same day, China’s Ministry of Commerce announced that it will allow wholly foreign-owned hospitals to operate in seven cities and provinces, including Beijing, Tianjin, Shanghai, Jiangsu, Guangdong, Hainan and Fujian (the last four are provinces).

This is probably good news for China’s beleaguered healthcare sector. State-owned hospitals are usually over-crowded because they have the best medical resources, while smaller and private hospitals are unable to cater to a large enough share of patients due to lack of capability and credibility (except for a small number of private clinics meant for the social elite). Public hospitals in China (13,440 of them in total) reportedly account for 90% of the country’s medical care, leaving 10,877 private ones little room to grow.

Alibaba goes full throttle before IPO

China’s largest e-commerce company continued to make headlines this week, as the date for the company’s US public listing (set for September 16) is fast approaching. On Thursday, the Hangzhou-headquartered Alibaba Group announced a 46% year on year revenue growth in the second quarter to $2.54 billion, faster than the 38.7% growth rate posted in the first quarter. Net income attributable to ordinary shareholders nearly tripled to $1.99 billion.

Although the price of Alibaba’s shares (which will trade under the ticker “BABA”) is not out yet, Bloomberg has listed its co-founder and Chairman Jack Ma as China’s richest man. According to the financial service company’s billionaire index, Ma’s assets are worth $21.8 billion—$5.5 billion more than Pony Ma, Tencent’s CEO, who ranks No. 2 on the list. Jack Ma ranks No. 35 in the world, according to the same index.

At the same time, Alibaba is beefing up staffing at its US office, as the company will go on a roadshow to market its shares next week. Last month, the firm hired Google’s former investor relation head Jane Penner; and this week, it brought on board Robert Christie, the former communication chief of The New York Times Company as its Vice President of international media.

Projections of Alibaba’s IPO size vary but some among the investing community believe that the company is going to raise more than $20 billion, the largest in US history. And the company has maintained a high profile during the “quiet period” before its stock issuance by actively buying into sports and media production companies like Evergrande and ChinaVision Media respectively (by the way, Youku-Tudou, China’s Youtube equivalent, has also set up a studio to produce its own movies).

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