China Roundup: Google and Foxconn Partner; Lenovo profits up; and Internet Finance under the Scanner
The week that was: the People’s Bank of China weighs in on internet finance; Chinese trust firms have slower growth; and Google and Foxconn partner for robotics.
Beijing considers regulating internet finance
Chinese internet companies are crowding into finance, and the authorities are taking notice. On Tuesday, The Wall Street Journal reported that China’s central bank, the People’s Bank of China (PBOC) is working with banking, insurance and security regulators to come up with regulations that aim to better protect individual investors.
This may not be bad news at all for the industry—an anonymous official told the Journal that the government’s goal is not to “crack down on the sector, but to foster its healthy development”, which could give suspicious consumers more confidence in parking their money at those new non-banking institutions. The rules under discussion are supposed to prohibit illegal fundraising, improve information security and demand adequate risk disclosure about the investment products.
Products of tech giants like Alibaba, Tencent and Baidu, often offer high returns (more than 6% annually) and liquidity than traditional banks, with low risks and thresholds. And the best part is that it can all be done on your smart phone.
China trust sector grows slower
Wealth managed by Chinese trust firms grew to RMB 10.9 trillion at the end of December, said the China Trustee Association on Thursday. That means a 46% year-on-year growth, slower than the 71% and 60% growth rates clocked in the second and third quarters, Reuters reported.
Observers may associate it with the PBOC’s effort to tame shadow banking, as the trust sector is the major player that makes loans outside banking regulations. But a 46% increase is still no small number. In comparison, China’s domestic bank loans only rose by 14% in 2013, according to Reuters.
This disparity can be partly explained by how the trust products are marketed—firms usually partner with commercial banks to sell wealth management products to affluent savers, and loans made out of these funds are off the banks’ balance sheets.
But it can be problematic if the loans go bad. Last month, the default crisis of a $500 million trust product, issued by China Credit Trust and distributed by Industrial and Commercial Bank of China, caught great public attention. Luckily, three anonymous parties stepped in last minute to bail out the product, returning the full principal amounts to investors.
Cheap Chinese shares puzzle the pros
Most analysts may agree that Chinese stocks are cheap, but the more important question is whether they’ll go cheaper.
On Monday, CNBC had an interesting discussion about why China shares are cheaper than those of Turkey and Argentina, both struggling economies facing the danger of recession. According to David Goldman, Managing Director at financial services company Reorient, the estimated 2014 price-to-earnings ratio of 8.1 of China stocks “makes no sense to us”, since the country’s industrial profits are growing at a strong pace (12.2% year-on-year). “This can’t be right.”
Low evaluations may make an entry point for investors betting on a comeback of emerging markets this year, and China may bounce even stronger than its peers. CNBC quoted Deutsche Bank’s Chief Economist Jun Ma as saying that the fundamentals of China’s economy are “much healthier than most other emerging markets”, and it is also “one of the least vulnerable” emerging market to US tapering.
But it’s the Chinese investors who are experiencing first hand the “disconnect” between China’s growing economy and its bleak stock market. Having seen too many bullish predictions burst in the past, it could be hard for them to trust the pros again.
Lenovo earnings beat expectations
The world’s largest PC maker just posted its third quarter profits yesterday—a 30% hike to $265 million from a year ago, beating the estimates of $247 million, according to BBC.
The rise in earnings and revenues (15% to $10.8 billion) is attributed to strong sales of computers and mobile devices in emerging markets. Lenovo sold 32.6 million of them in three months, or nearly five devices per second.
But Lenovo also warns that future earning reports may be negatively impacted by the recent takeover of IBM’s low-margin server business and Motorola’s mobile division. The Beijing-based company will spend about $5.4 billion on those two money-losing businesses. Over the long term, Lenovo CEO Yang Yuanqing believes that the acquisitions are good fits for the company’s strategy and would contribute to its performance “from day one after closing”. Yang is confident that Lenovo will turn around Motorola in five quarters.
Foxconn partners with Google in robotics
Mostly known as the maker of “i” gadgets, the Taiwanese contract manufacturer is also working with Google to develop new robotic technologies, according to a report earlier this week on The Wall Street Journal.
One of the largest employers of the world, Foxconn is trying to speed up its automation process and transform itself to a high-tech manufacturer, the report says, in the face of rising labor costs in China. It aligns well with Google’s effort to beef up its robotics group, targeting electronics assembly and retailing. The New York Times in December reported that Google acquired eight robotics companies last year; and Foxconn could serve as a testing ground for Google’s new robotic software, analysts say.
According to the Journal, Foxconn Chairman Terry Gou recently met with Andy Rubin in Taiwan to discuss collaborations on new robotic technologies. Rubin, former Android CEO and now head of Google’s robotics division, reportedly asked Gou to help integrate a tech company that Google is buying.
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