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China Roundup: The Chinese economy and structural changes; Baidu Eye; and Apple’s New Problem

by Major Tian

September 5, 2014

Skyline-of-Beijing-China

This week, figures from the HSBC/Markit PMI implied that the Chinese economy might finally be on the path to the much-need structural change; local government financing got a new breather; and Baidu launched its Google Glass competitor, Baidu Eye.

The Broader Picture

Last week, a flash Purchasing Manager Index (PMI) reading from HSBC and Markit spurred discussions about whether the Chinese economy needs another stimulus to continue the recovering momentum. This week, several surveys showed a more mixed picture: while manufacturing slowed in August, activities in the service sector picked up.

The final manufacturing HSBC/Markit PMI for the last month eased to 50.2 from July’s 51.7; the number released by China’s statistics bureau is 51.1, down from the identical official reading of 51.7 in July. HSBC/Markit’s sub-index of new orders and employment both fell, indicating considerable downside risks in the macro economy, economists said.

However, the non-manufacturing PMI from HSBC/Markit jumped to a 17-month high to 54.1 in August, a sharp reverse of July’s 50.0 reading. The official number from China inched up to 54.4, a rebound from July as well. Both markets in Shanghai and Hong Kong welcomed the readings. The Shanghai Composite extended its three-day rally when the service sector PMI came out on Wednesday; Hong Kong’s Heng Seng Index went up 1.9% that day as well.

Opposing readings from the two sectors reflect the fact that structural changes have started to kick off in the Chinese economy, whose growth will now start to depend more on consumption than manufacturing and exports. Though economists welcome the transformation, they warn that risks of a hard landing remain if industrial decline outpaces growth in consumption.

A New Policy 

Last weekend, China’s top legislature—the National People’s Congress, formally overturned a 20-year-old ban on municipal bonds, giving local governments a new way of raising money.

Local government debt has been considered one of the major risks to the Chinese economy. The National Audit Office estimated that local governments in China owed RMB 17.89 trillion ($2.91 trillion) as of the end of June, and about 20% of the debt is set to come due in 2014.

Not allowed to issue bonds, cash-strapped cities created Local Government Funding Vehicles (LGFVs)—a mechanism in which government-backed enterprises received loans from banks and invested the fund back into public projects that the government led. The arrangement lacked transparency and kept Beijing in the dark about how much local governments actually owed.

Introducing local governments to the open market seems to be a good way to diversify their financing channels. But experts worry that whether China’s rating agencies are sophisticated enough to evaluate the financial risks of those bonds; they may also be under political pressure to give higher ratings to the bonds.

Ten local governments have been granted quotas to issue a total of RMB 109.2 billion (about $17.7 billion) this year in a pilot program that kicked off a few months ago. Future issuance will be conducted under close watch by Beijing.

Tech Companies

The past few months have been rather quiet for Apple in China—state media reports on its security loopholes never made big waves, the customer service incident last year now seems like old history.

But China Labor Watch and Green America, two US-headquartered activist groups, have made new accusations that Apple’s supplier in China violated labor laws. A report released by the groups said that violations at Catcher Technology’s factory in the eastern city of Suqian had not been addressed since the issue was brought up to Apple last year; worker’ conditions even worsened in the past year, the report claimed.

An undercover investigator found that workers in the factory had to work 100 hours of overtime every month, which is way beyond the legal standard of 36 hours. Wages were also not fully paid to the 20,000 employees of the factory. The report also said that some workers didn’t have protective gear and fire exits were locked; an aluminum-polishing workshop was filled with metal dust, a fire hazard. On August, a huge factory explosion caused by dust killed 75 workers and injured 185 in the city of Kunshan.

Apple said in a statement that it’s looking into the report and the facility in Suqian has exceeded international safety standards during inspections.

On the other hand, Apple’s scheduled release of iPhone 6 next week would likely boost China’s exports for the rest of 2014 by 1% to 2% , according to Bank of America Merrill Lynch.

Prior to Apple’s big launch event, a number of Chinese tech companies have already introduced new products. This week, search giant Baidu showed off two of its own devices: a pair of “glasses” and a “smart” chopsticks.

However, the Baidu Eye, a headset device that can be worn like glasses, doesn’t have glasses. Baidu’s global media director Kaiser Kuo said that a screen on glasses will impair users’ vision; so instead, Baidu Eye is connected to users’ smartphones when the display function is needed; it still carries a camera and a voice-control system. The software is developed by Baidu’s artificial intelligence group, which is led by Andrew Ng, a recently hired expert who used to work for Google.

While you can call the Baidu Eye a response to Google Glass, the chopsticks are unique to the China market, where food safety is a major concern. By swirling the smart chopsticks in cooking oil, you can detect the quality via a reading displayed on a connected smart phone. Submerged in over-recycled oil, the reading will be “bad”. Baidu said that in the future, the chopsticks would be able to detect a variety of nutrients and additives.

Both the headset and the chopsticks, now real on-going projects, were initially April Fools Day pranks.

An IPO

No, it’s not the Alibaba IPO.

Still reading?

China Auto Rental, the country’s largest car rental company, launched a $468 million IPO in Hong Kong this week. The company plans to use the proceeds to expand its fleet by adding 45,000 to 60,000 cars. (It had 55,000 cars as of the end of March.)

The car rental market is picking up slowly in China, and the market fragmentation is high. Most companies have less than 50 cars, according to consulting firm Roland Berger, and the biggest five companies only have 14% of market share in total. Roland Berger expects the market to grow to RMB 65 billion (about $10.5 billion).

US car rental company Hertz had a 20% stake of China Auto Rental before the IPO.

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