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China Roundup: China’s Manufacturing Activity Gathers Steam and the Alibaba Results

November 07, 2014

This week, the HSBC PMI showed an uptick in China’s manufacturing activity; news of the possibility of an RMB clearing house in Toronto made waves; and the Alibaba results did not disappoint.

The macro economy

China’s manufacturing activity picked up steam and reached a three-month high in October, according to the HSBC purchasing managers’ index (PMI) released on Monday.

The PMI reading stood at 50.4 last month, unchanged from the flash reading earlier. It’s a slight improvement from September’s 50.2. The breakdown of the survey, however, showed that new orders and new export orders both fell in October, suggesting sluggish demand from both in and outside of China.

In the housing sector, new home prices continued to decline in October, but at a slower pace. Following the 0.9% fall recorded in September, average prices in 100 major Chinese cities went down by 0.4%. However, the property market slump hasn’t impacted employment much, said a report by Capital Economics, a London-based research consultancy.

The report cited the official data that China added 10.8 million urban jobs in the first nine months of the year, meeting Beijing’s full-year plan of 10 million ahead of schedule. Wages for migrant workers also went up by 9.5% in the third quarter from last year.

On the other hand, China’s services sector growth slowed last month, HSBC’s survey showed on Wednesday. The services PMI stood at 52.9 last month, a retreat from 53.5 in September and the weakest reading since July. Qu Hongbin, Chief China Economist at HSBC told Reuters that the bank expects further easing measures in the coming months to support the economy. The services sector accounted for 46.1% of China’s gross domestic product in 2013—the first time it surpassed the manufacturing and construction sector as a share of the economy.

RMB moves

The Chinese currency is expecting another milestone on its way to become more international. Sources told Reuters earlier this week that Canada hopes to finalize the deal to set up a RMB clearing hub in the city of Toronto, the first in North America. The move is being welcomed by the Canadian Chamber of Commerce, as better access to the RMB would likely boost trade between the two nations.

On Tuesday, Qatar became the first RMB clearing center in the Middle East, where the Doha branch of Industrial and Commercial Bank of China (ICBC) serves as the clearing bank. The two countries’ central banks are also ready to make a RMB 35 billion (about $5.7 billion) currency swap, according to media accounts.

While the RMB’s global drive continues to be strong, investors might worry that the currency would depreciate in the short term due to the strengthening of the US dollar. Official data shows that China recorded a capital account deficit of $81.6 billion in the third quarter; the amount is bigger than the country’s current account surplus of $81.5 billion. Credit Agricole estimates that the deficit is due to a capital outflow of roughly $125 billion as foreign investors sold off in real estate, CNBC reports.

But as the deficit occurred, the RMB’s value actually went up, says Credit Agricole, suggesting that the demand for the RMB remained strong.

“Through-train” program still in limbo

The Shanghai-Hong Kong Stock Exchange program, which would allow investors on both sides to tap into each other’s stock market, has been delayed for weeks and it remains unclear if the “through-train” would kick off any time soon.

On Thursday the South China Morning Post reported that Hong Kong authorities said that they received a vague but positive response from Beijing, but declined to speculate why the program, which was expected to launch last month, is still waiting for the green light. Observers suspect that Beijing is holding off the launch date due to the on-going Occupy Central protest in Hong Kong.

But banks in Hong Kong are getting ready: HSBC, Citigroup and Standard Chartered, among others, have rolled out high-interest rate for short-term RMB deposits to build up their money pools. And some banks even offered rates higher than 6% for seven-day RMB deposits. RMB deposits in Hong Kong reached RMB 944 billion (about $154 billion) by the end of September.

Alibaba’s first earning show

China’s hottest internet company Alibaba posted its second quarter earnings on Tuesday and the results are quite strong—revenues rose 54% from the same period last year to $2.74 billion: gross merchandise volume (or GMV, which means the value of total transaction on a platform) climbed 48.7% to $90.5 billion.

One sweetener is that Alibaba, which started its business in the PC era, is drawing more and more mobile users to its shopping platforms. In the last quarter, the company added 29 million mobile users; monthly active users on mobile devices totaled 217 million and mobile GMV increased by 14.7% from the same period a year ago, reaching $32.4 billion, or 35.8% of the total GMV.

The stock price responded with a surge, reaching a high point of $109.74 on Wednesday.

However, some investors raised concerns about the company’s profitability, as net profit dropped 38.6% year-on-year in the last quarter. Although the drop is considered a one-time occurrence because of new incentive programs for its employees and hefty acquisition costs, Alibaba’s profit margin also decreased to 50.5% from 54.4% in the previous quarter. The fall is mainly due to consolidation of newly acquired businesses, planned investments in new initiatives and increased marketing spending, the company’s report says.

But betting against Alibaba would be a horrible idea, according to Daniel Rosensweig, former Chief Operating Officer of Yahoo and the facilitator of the company’s investment in Alibaba. “It’s inevitable the Chinese market grows. It’s inevitable e-commerce grows. It’s inevitable mobile grows,” he told CNBC. “And so why wouldn’t they be the continued winner in that space?

Xiaomi’s Latest Hire

As Alibaba stunned the Wall Street, another Chinese firm was making headlines in the domestic news circles.

Xiaomi, China’s second-largest smartphone company and the fourth-largest in the world, has made a high-profile new hire: Chen Tong, former Vice President of Chen was the editor-in-chief for Sina, where he oversaw not only the portal’s content, but also its affiliated platform Weibo. Having spent 17 years with Sina, Chen is regarded as the “godfather of Chinese internet news” with deep connections with China’s regulators (hello internet censorship). Chen is also one of the angle investors of Xiaomi four years ago.

Xiaomi founder and CEO Lei Jun told the press that Chen will be in charge of developing Xiaomi’s digital content, which the firm plans to use to support growth in its TV business and the entire ecosystem. Lei’s welcome gift to Chen is $1 billion under his management so that the news veteran can give Xiaomi’s content platforms a makeover.

Despite a valuation of $40 billion (some say $50 billion), the phone maker hasn’t indicated intentions to go public. But according to the South China Morning Post, sources said that the company is aiming for an initial public offering as early as next year. The company hasn’t decided where to list, the report said.

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