Major Tian Authors

China Roundup: Transformers in China; Tencent’s stake in 58.com; and Hon Hai dumps Huawei

July 04, 2014

The week that was: Transformers raked in the riches in China; Chinese brands stole market share from global brands; Tencent picked up a stake in China’s Craigslist 58.com; and the exchange rate for the RMB was further liberalized.

Michael Bay’s latest movie doesn’t have the apocalyptic undertones in China as the word ‘extinction’ in the movie’s name Transformers: Age of Extinction suggests. During the premiere weekend, the film fetched more than $96 million in the Middle Kingdom, where nearly a third of the scenes in the movie were shot. That counts for about one-third of the film’s box office takings of $301 million globally, according to CNBC.

The movie features nearly a dozen Chinese brand product placements, including a car, milk, bank cards, liquor and even a municipal government in southern China. When the first movie of the series debuted in 2007, China only contributed 6% of its global box office revenue; the percentage grew to 9% and 16% for the two sequels.

Chinese consumers’ passion for Transformers is a sign of the growing consumption in the world’s second-largest economy. On Thursday, HSBC’s China service sector PMI for June stood at 53.1, a clear jump from May’s 50.7 and well above the 50 threshold between expansion and contraction. Morgan Stanley analysts called China’s consumer “the key to ensuring overall resilience in the macro-economy”, CNBC reported.

Spending millions of dollars for a 10-second slot in Transformers may not be the smartest marketing campaign for Chinese companies. But whatever they’ve been doing seems to be working.

According to the South China Morning Post, more than 60% of foreign brands in the non-durable consumer goods sector lost market share in China to domestic brands in 2013, a study by consulting company Bain & Co and market research firm Kantar Worldpanel showed. The study tracked 40,000 households in the mainland from April 2011 to April 2014 and the result showed that foreign brands have retreated the most (between 6.3% to 7.5%) in personal care products, cosmetics and carbonated soft drinks. Overseas players still dominate in some categories such as infant formula, baby diapers and chewing gum.

Foreign brands’ share is 45% in first-tier cities, 38% in second-tier cities and 28% in third cities. All figures shrank slightly over since 2012.

More from the SCMP: Tencent is trying to close its gap with Alibaba in the e-commerce area by acquiring a 19.9% equity stake in NASDAQ-listed 58.com. 58.com is a classifieds site that resembles the Craigslist, matching up local services to consumers while also helping consumer-to-consumer transactions.

Barclays’ analysts believe that Tencent’s WeChat, a popular messenger and social networking app with over 400 million users, is going to be a good platform to host some of the services provided by 58.com. WeChat already has a mobile payment function built in, which allows users to pay their taxi bills.

In March, Tencent picked up a 15% stake in JD.com, a popular e-commerce site only second to Alibaba’s dominating Taobao and Tmall platforms. JD.com later went to IPO in New York; now its market cap is about $38 billion.

China is taking another step toward fully liberalizing its currency. On Thursday, the People’s Bank of China (PBOC) permitted banks to set the exchange rate between RMB and the US dollar on their own for over-the-counter transactions, according to Reuters.

Banks previously need to set their rates within a 3% floating range (up or down 3%) from a parity rate published by the central bank on a daily basis. Analysts believe that Beijing is confident enough to make the move because authorities think that the Chinese currency is close to equilibrium and high volatility risks are small.

Interbank exchange rate, which is the major source of supply and demand of foreign exchange, is still locked in a 2% range around a government-set rate.

The Chinese government is controlling the exchange rate to avoid sudden capital flows, which may destabilize the economy. But as China deepens financial reforms, the government needs to give more and more power to the market, which, in most developed countries, decides both the exchange rate and the interest rate.

Last week, PBOC allowed banks in Shanghai to set their own interest rates for foreign exchange deposits.

Telecommunication giant Huawei is running into another “national security” obstacle, not in the US, but in Taiwan.

According to The Wall Street Journal, the Taiwanese electronics maker, which traded as Foxconn Technology Group, is abandoning the idea of using Shenzhen-based Huawei’s gear when building a mobile network on the island. The Journal reported that Taiwan’s regulators had warned Hon Hai that they would not allow equipment made by companies in the mainland, while Hon Hai Chairman Terry Gou said that he would move the company’s headquarters out of Taiwan if the project were not approved. Hon Hai reportedly planned to buy 30% of the equipment from Huawei, which is grabbing market share globally from competitors like Cisco and Ericsson.

Taiwan authorities apparently prevailed this time, but it probably won’t be a big blow to Huawei because the market in Taiwan is limited, the Journal said.

While companies like Huawei and ZTE are running into regulatory trouble in countries like the US, Australia and South Korea, firms at home are embracing their Chinese pals. State-owned enterprises, banks and tech companies like Alibaba are considering transitioning to domestic equipment from those made by IOE, which is short for IBM, Oracle and Ericsson.

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