David Fuller and Eoin Treacy's Comment of the Day
Category - China

    China and the world: New Frontiers, Fresh Connections

    Thanks to a subscriber for this report from HSBC highlighting the increasingly important role played by the Chinese economy in spurring global growth. Here is a section:

    The story now is that China has been increasingly moving up the value chain. In 1995, labour-intensive products such as toys and shoes (grey line in chart 13) accounted for 36% of China's overall exports. By 2015, this share was down to 26%. Meanwhile, the share of machinery and transport equipment (blue line) increased from 21% to 46% over the same period. Soon this transition was starting to have a global impact. Chart 13 shows China's world share by product. Although China's world market share had increased quite steadily for most categories of products, it is the improvement in machinery and transport equipment that is the most striking. In two decades, China's global market share rose from a mere 4% to 17%. Incidentally, this is how China has increasingly earned more in terms of trade surplus vis-à-vis the rest of the world (Chart 14).

    In more recent years, a decrease in China’s commodity exports has become another noticeable trend. Chart 15 shows China's declining dominance in the exports of primary commodities and metal products and an improving market share in manufactured goods such as lighting, telecoms, etc.

    So, where might China's trade go from here? On most metrics, China's export industry still has much room for improvement. China has recognised that it needs innovation to move up the value chain. It needs to differentiate its products through advances in technology, design or other attributes. The recent five-year plans have included elements related to innovation, R&D and even intellectual property rights. The transition from a low-cost producer to one that increasingly makes more value-add is a longer-term trend that has just begun and it is by no means an easy one. Greater openness to foreign investment, as well as domestic reforms, will help make this process a smoother one.

    And for other emerging markets, China moving up the value chain creates opportunities. Countries in parts of Africa and Asia with lower costs of production will likely benefit from a production shift away from China and towards even lower cost bases. China's rise up the ladder may pull a few countries with it. 

    Read entire article

    Buy Robot. Silicon Valley Misses a Trick as China Nabs Kuka

    This article by Chris Bryant and Nisha Gopalan for Bloomberg may be of interest to subscribers. Here is a section: 

    Adding robotics exposure makes sense, as rising Chinese labor costs are expected to drive a big increase in factory automation there. At present, China uses much less automated manufacturing than more developed economies such as South Korea and Germany. 
    China's robot sales rose 16 percent last year, according to the International Federation of Robotics, which predicts that by 2018 it will account for more than one third of industrial robots installed worldwide. 

    So you can see the strategic sense of a Kuka deal. But it still begs the question: why didn't Silicon Valley jump in here? Midea's offer values Kuka's equity at 4.5 billion euros ($5 billion), chump change for the likes of Google, Apple or Amazon.

    And yes, that whacking great premium is surely designed to see off any potential white knights, but -- just like China -- the U.S. tech giants aren't restricted by the usual rules of corporate finance.

    There's been a lot of big talk there about robotics, but besides Amazon's clever acquisition of Kiva, which makes robots that whizz around its logistics centers, we've seen little fruitful action. In March, Google beat a partial retreat by putting its Boston Dynamics unit up for sale.

    Of course, the U.S. reigns supreme in software, increasingly central to the success of robotics. But if you want to own the future, you'll have to marry that expertise to intelligent hardware. And it's here where Kuka excels.

    The German company has branched out beyond its car-plant robot roots to other sectors, including electronics and medical applications. It's taking a run at the so-called "internet of things" by making its machines easier to program. Its lightweight model called the iiwa is a technological wonder that can work side-by-side with humans, without a safety cage.

     

    Read entire article

    Email of the day on China and governance

    In Friday’s audio, you speculated about possible reasons for China’s tightening of social conditions.  The following report from an Australian reporter in China, leaves me with little doubt. Xi has already shown his cards.  If the country is opaque today, the future will be more so.  If governance is everything, China will be a laggard.

    My first assessment was that more centralization and tougher social conditions in China would delay economic growth but I now think the opposite is just as likely.  

    The need for economic reform has been obvious but progress has been slow.  Debt has increased, excess capacity remains a serious problem  while attempts to influence stock markets were ham-fisted.  The failure of the bureaucracy is evident but implementing tough economic policies in the face of public resistance has been difficult. The existence of the country’s strongest unions in the infrastructure and heavy industry sectors, seems to have made change impossible.

    In the West we are seeing how democratically elected governments are being taken over by populists whose promises are unrealistic and mostly damaging to their economies.  In Australia we are at day nine in an eight week election campaign where the economically conservative government, which is acutely aware of the nation’s unsustainable path, is struggling to sell a moderate budget which sees debt continuing to increase while depending also on continuing world economic growth and financial stability.  

    Premier Xi has no intention of allowing China to go down that same path.  He can see the country’s problems as clearly as we can but the system has failed.

    I can easily see Xi blaming bureaucrats and weak leadership in the provinces.  The scene is being set for a major purge.  A second cultural revolution.  Xi can see what the markets are saying and he could  use his power to implement tough economic policies.  There will be significant short term social pain and major economic risks but a strong turnaround in the economy is likely to emerge. China could regain its position as an economic powerhouse.

    The period of turmoil will see China’s markets collapse. This will be a black swan event.  Knock-on effects around the world will be serious but, as is often the case, will be another good long term buying opportunity.

     

    Read entire article

    Asked the general trend of the first quarter start

    This missive attributed to an “authoritative source” from the central government of China highlights the challenges facing the administration as overcapacity in a number of key sectors is unwound. Here is a section from the Google Translation:

    However, it is undeniable that we are faced with the inherent contradiction has not fundamentally resolved, some new problems have also been exposed. "Stability" of the foundation is still mainly rely on the "old way", that is investment-led, large fiscal balance pressure in some areas, increased economic risk probability. Especially private enterprises to invest in a substantial decline in the real estate bubble, an increase in excess capacity, non-performing loans, local debt, equities, foreign exchange, bonds, and so the risk of illegal fund-raising point. Some lower market-oriented, industrial low-end, single structure of the region, economic downward pressure is still increasing, highlighting the problem of employment, social conflict has intensified. Thus, in the face of the main contradiction is down structural than cyclical situation, "into" is "stable" foundation. "In" is to solve the economic operation of the supply side, structural and institutional issues, which will take time, is still in the initial stage, the new power is also not afford to pick beam.

    Comprehensive judgment, our economy can not be U-shaped, but can not be V-shaped, but the L-shaped trend.

    Want to emphasize that this is an L-shaped stage, not a year or two past. The next few years, the overall weak demand and overcapacity coexist hard for fundamental change, economic growth is not possible, as once picked up it will continue upward as before and one after another to achieve high growth years. "Step back" in order to "two steps forward." We are confident about the development prospects of China, China's full economic potential, toughness, large room for maneuver, if not exciting, not much speed down. In this regard, it must be internalized in the heart outside of the line. Some economic indicators to rebound, do not visibly; some economic indicators down, do not panic.

     

    Read entire article

    CLSA Sees China Bad-Loan Epidemic With $1 Trillion of Losses

    This article by Paul Punckhurst for Bloomberg may be of interest to subscribers. Here is a section:

    Cheung’s assessment adds to warnings from hedge-fund manager Kyle Bass, Autonomous Research analyst Charlene Chu and the International Monetary Fund on China’s likely levels of troubled credit. The IMF said last month that the nation may have $1.3 trillion of risky loans, with potential losses equivalent to 7 percent of gross domestic product.

    ‘Shadow Banking’
    CLSA estimates bad credit in shadow banking -- a category including banks’ off-balance-sheet lending such as entrusted loans and trust loans -- could amount to 4.6 trillion yuan and yield a loss of 2.8 trillion yuan.

    CLSA cites a diminishing economic return on stimulus pumped into the economy as among the reasons for a worsening outlook, with Cheung saying at a briefing that bad loans had the potential to rise to 20 percent to 25 percent.

    “China’s banking system has reached a point where it needs a comprehensive solution for the bad-debt problem, but there is no plan yet,” he said in the report.

     

    Read entire article

    China Rolls Up Welcome Mat

    This article by Andrew Browne for the Wall Street Journal may be of interest to subscribers. Here is a section:

    No, China isn’t closing for business. Compared with many other developing countries, it remains wide open. It is the world’s largest manufacturer, biggest trader and a magnet for foreign investment. About three-quarters of China’s high-tech exports come from foreign-invested companies.

    China’s antiforeign turn is driven by several related trends. First, President Xi Jinping has a much lower tolerance than Deng for the unwelcome intrusion of foreign ideas about democracy, press freedom and individual rights that come along with trade and investment—what Deng called “flies and mosquitoes.”

    The other day, Mr. Xi was railing against “Western capitalist values” invading the Communist Party’s own training schools.

    Second, Mr. Xi is pushing ideology harder than any leader in decades. Increasingly, China sees itself in ideological confrontation with the West. In addition to stressing Marxism, Mr. Xi’s administration is seeking to revive traditional Chinese culture to counter Western ideas—thus, the hostility to crosses.

    And Mr. Xi is promoting a strident form of nationalism. One aspect of this is much greater Chinese assertiveness in territorial disputes with neighbors, including Japan, Vietnam and the Philippines. Another is an explicit set of government policies aimed at helping Chinese firms replace their foreign rivals in the domestic market.

    All of this adds uncertainty to the outlook for foreigners who have landed on China’s shores. The 2010 census put their number at almost 600,000, not including residents from Hong Kong, Macau and Taiwan.

     

    Read entire article

    Cloudy with a chance of monetization

    Thanks to a subscriber for this report from Deutsche Bank which many of interest. Here is a section

    US colleagues Karl Keirstead and Ross Sandler describe public cloud services as "the biggest and most disruptive trend impacting the technology industry." DB estimates the total addressable market for cloud to be USD500b. Cloud service providers have captured only a low-single-digit piece of this TAM. In China, the opportunity is even younger and less penetrated. AliCloud is the clear hometown favorite, with 65% of DB survey respondents using its solutions. Alibaba is our preferred play on cloud over Tencent and Baidu, which have much smaller cloud businesses that should also grow appreciably.

    China: catching the “growth story” even earlier on; both public and private
    The value proposition of the public cloud is simple: enabling deep cost savings and freeing up resources for enterprises to pursue more core business activities. While public cloud revenues at AliCloud and others continue to grow in the triple digits, China is also seeing strong growth in private cloud, as government bureaus, SOE’s and large private companies heed government exhortations to reform their hidebound IT regimes behind its “Internet+” initiative. Before the introduction of the cloud, about 70-80% of companies’ IT budgets and time were spent on low-value-added areas such as infrastructure maintenance, upgrades and integration. With external cloud operators taking over these burdens, management is able to concentrate on growth-centered initiatives, with cloud assisting in saving time and expense. Some 72% of respondents to our survey indicate that they are reducing significantly their IT spend through the use of cloud computing services. Alibaba Research Institute, for instance, estimates that 70% of computing costs can be saved.

    China's CIO speaks: results of DB proprietary survey
    As part of our overview of China's nascent cloud industry, we surveyed more than 50 CIO's, CTO’s, Directors and VPs of IT. Results revealed cloud computing to be the #1 priority this year, followed by security services at #2, and IT infrastructure and datacenters at #3. These companies expect to spend approximately 27% and 30% on cloud computing services in 2016 and 2017, respectively, compared to 20% in 2015. Over 50% of the respondents stated that they were able to save up to 40% of their IT spending thanks to cloud computing. 

    Read entire article

    Eoin's personal portfolio: profit taken in stock market and commodity longs

    Panama Papers probes opened, China limits access to news on leaks

    This article from Reuters may be of interest to subscribers. Here is a section:

    Leading figures and financial institutions responded to the massive leak of more than 11.5 million documents with denials of any wrongdoing as prosecutors and regulators began a review of the reports from the investigation by the U.S.-based International Consortium of Investigative Journalists (ICIJ) and other media organizations.

    Following the reports, China has moved to limit local access to coverage of the matter with state media denouncing Western reporting on the leak as biased against non-Western leaders.

     

    Read entire article

    China's Shadow Banking Evolves to Dodge Crackdown

    This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section: 

    “If you talk to a bank, they’ll say it’s somebody else’s credit risk,” Smith said. “But the ultimate credit risk doesn’t disappear. The brokers for sure are not taking this on in exchange for a few basis points, so ultimately the banks are still holding onto this credit risk. If it all goes bad, the brokers don’t have the balance sheet to support it, and somebody else has to come in and take it over."

    Shadow banking hit the headlines in 2014 when a 3 billion yuan product issued by China Credit Trust Co. to raise funds for a coal miner faced default. The product was bailed out four days before the payment was due, though it wasn’t clear who provided the funds. Growth in AMPs has slowed every year since 2012, when rules on brokerages’ asset management businesses were first eased and such plans surged 575 percent.

    Read entire article