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China roundup: APEC agreements; Alibaba’s Single’s Day Sale Booty; and a New Bankruptcy Law

by Major

November 14, 2014

Chinese flage in a keyboard

This week, the much awaited APEC conference came to a close, Alibaba netted more than $9.3 billion in Single’s Day sales; and Xiaomi announced its intent to invest in Youku-Tudou.

APEC outcomes

If Chinese President Xi Jinping’s idea of the “Asian-Pacific dream” sounds all too vague to you, here’s a taste of how his plan is unfolding: during the annual Asia Pacific Economic Co-operation (APEC) forum in Beijing on Monday, Xi and South Korean President Park Geun-hye announced that the two countries are set to sign a bilateral free-trade agreement that will eliminate 90% of import tariffs across 17 areas over the next 20 years. China is by far South Korea’s largest trading partner: bilateral trade between the two totaled $230 billion last year.

The agreement, achieved after two years’ negotiations, is a good start of China’s ambitious goal of establishing the FTAAP—Free Trade Agreement of the Asia-Pacific, which is seen as a counter measure to the TPP (Trans-Pacific Partnership Agreement) led by the US. Although the two countries are seen competing for greater influence in the region, China and the US have found ways of working together on some issues: except for a climate change agreement to contain both parties’ greenhouse gas emissions, the two nations also agreed to eliminate tariffs on technology products, including software and a wide range of hardware from game consoles to semiconductors.

Details about the elimination process are still unclear, and observers suspect that it will likely be in phases given the fact that China has a track record of protecting its domestic tech industries from foreign competition. Some even worry that Chinese tech firms will be squashed once foreign products flood in.

Singles Day sale

The term comes from an internet phenomenon of celebrating bachelorhood (in a self-deprecating way) on November 11, and China’s e-commerce companies quickly made it the eastern version of Cyber Monday and the most important sales day of the year. The logic is simple: “I’m sorry that you’re single, now let me make it up to you by offering this very cheap detergent.”

This year, a new record was born: Single’s Day sales on Alibaba’s platforms Taobao and Tmall breached the $9 billion mark during the 24-hour shopping frenzy, a big leap from last year’s $5.8 billion and four times larger than America’s Cyber Monday. JD.com, China’s No. 2 e-commerce platform that focuses more on consumer electronics, received 14 million orders on November 11, more than doubling last year’s number; but the company didn’t give out the dollar value of those sales.

However, the one-day online shopping spree is not the best gauge of China’s broader economy. Retail growth in October has fallen to an eight-year low to 11.5%, according to official statistics released early this week. Meanwhile, a 7.7% growth of industrial output was also weaker than expected and the second slowest since the global financial crisis.

The anemic numbers may prompt Beijing to roll out new stimulus measures to spur growth. After confirming a nearly RMB 770 billion ($126 billion) injection into the banking system during the past two months, this week, the People’s Bank of China (PBOC) is reportedly pumping another RMB 10 billion ($1.6 billion) into city banks in selected provinces including Jiangsu and Zhejiang in eastern China. The money is lent to banks through an operation called mid-term lending facility (MLF), which in the most recent case means three-month loans at an interest rate of 3.5%.

Analyst believe that the use of MLF and SLF (standing lending facility), which stands for a type of shorter-term loans, is going to be the “new norm” for China’s central bank, as the operations are more targeted than universal cuts of required reserve ratio, which sends a stronger easing signal.

Chinese cities can go bankrupt like Detroit?

As China goes through the pain of rebalancing growth, Beijing is also pushing forward fiscal reforms at both the local and central levels.

According to the Chinese press, a research group within the Ministry of Finance has made a proposal for the ministry to draft a bankruptcy law for local governments. This means that instead of guaranteeing a bailout, Beijing is willing to let local governments default on their debt so that they are forced to come up with sensible budgets in the first place.

Currently local governments heavily rely on financing vehicles to access bank loans—the system lacks transparency and is considered a major risk to the Chinese economy. Since June Beijing has allowed selective local governments to issue a certain number of municipal bonds to finance their budgets. The scheme is expected to expand further in 2015.

Xiaomis content push

Last week Xiaomi made headlines by hiring a former Sina executive (and arming him with a $1 billion fund) to lead its content development. On Tuesday, the smartphone maker announced that it will invest in video streaming platform Youku-Tudou, or China’s Youtube.

Neither party has disclosed details of the investment, but since Youku-Tudou is a public company listed on NASDAQ, the deal will take place in the open market.

Youku-Tudou claims to have 500 million monthly active users who watch more than 800 million videos on the platform everyday. Earlier this year, Alibaba bought a 16.5% stake in the company for $1.2 billion.

Analysts expect Xiaomi, the world’s fourth biggest smartphone maker, to profit more from content consumption because its phones are marketed as very low-margin. But according to an internal document obtained by the Wall Street Journal, Xiaomi is already making big bucks—net profit reached $566 million in 2013 and it’s projected to increase by 75% this year.

Tencent earnings

Tencent reported mediocre third quarter results this week, but its stock price has gone up.

Revenue between July and September increased 28% from the same period last year to RMB 19.8 billion ($3.2 billion), while net profit rose 46% to RMB 5.7 billion ($923 million). Profit margin also increased from 25% to 29%.

Nearly 57% of Tencent’s revenue came from its online gaming business, which grew by 34% in the third quarter. But on the mobile gaming front, Tencent is facing headwinds—revenue from this area declined by 13% to RMB 2.6 billion, mainly due to issues between its games and Apple’s App Store, according to the company’s Chief Strategy Officer James Mitchell.

But so far Tencent remains the dominant player in China’s mobile gaming sector and according to TechCrunch, the company has teamed up with Japanese company LINE in a $110 million investment in a South Korean game studio called 4:33 Creative Lab.

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