In the battle for China’s massive food-delivery market, Alibaba is in the unfamiliar position of falling behind its rival. The behemoth that’s feeding more of the country’s hundreds of millions of hungry customers is Meituan Dianping.
Led by billionaire founder Wang Xing, Beijing-based Meituan recently solidified its share of the country’s $84 billion food delivery market at a record 65%, well ahead of Alibaba’s Ele.me at 27.4%, according to consultancy and data provider Trustdata. The company’s Hong Kong-listed shares have soared 80% this year after it reported a surprise profit in the second quarter.
The stock defied the broader market decline in the city’s benchmark Hang Seng Index, which tumbled 9% since July amid ongoing anti-government protests in the city over the now suspended extradition bill. Wang, who derives the bulk of his fortune from his stake in Meituan, saw his net worth increase from $3.8 billion in the beginning of 2019 to $6.2 billion.
“A lot of people are now positive on Meituan, because they have proven that there is money to be made in the food delivery business,” says Wang Xiaoyan, a Shanghai-based analyst at 86 Research. “There will be fluctuations in its profitability margin, but it won’t bleed as much money as before.”
The company’s results were attributed to its ability to provide better services and the effectiveness of its subsidy strategy. It’s been more aggressive than Alibaba in inking exclusive delivery partnerships with restaurants, while boosting delivery time and reducing costs by matching order data and grouping more deliveries in one trip.
This has allowed users to stick to Meituan’s platform, even though Alibaba has tried to convince them to switch by doling out hundreds of millions of dollars in coupons and meal subsidies. David Dai, a Hong Kong-based analyst at Bernstein Research, says Meituan’s user loyalty is much stronger than Alibaba had initially expected.
“People may say that they are price sensitive, but not everyone would open two apps and compare prices before ordering a meal,” he says. “Meituan has more restaurants, more users and higher delivery efficiency, and this has formed a positive cycle.”
Now, in the face of reduced competition, Meituan is seeking to generate revenue from advertising on its platform, which boasts of 422.6 million annual active users. Restaurants can now pay to place banner ads, or have their offers displayed higher up in users’ search results.
Although Meituan’s market leadership will be hard to displace, Alibaba has already signaled that it won’t give up easily. Analysts say the e-commerce giant views food delivery as essential to its wider strategy, because it’s a high-frequency service that can be embedded in the Alibaba ecosystem to promote complimentary services like online payments. To chip away its rival’s dominance, Alibaba has been focusing on lower-tier cities, which are Meituan’s traditional strongholds.
“If Ele.me is determined to launch another price war, then Meituan has no choice but to follow up,” says Steven Zhu, a Shanghai-based analyst at research firm Pacific Epoch.
And this may well be the case towards year end, when the e-commerce giant launches its Singles Day shopping bonanza and uses discounts to attract shoppers. What’s more, Meituan may also have to pay more to couriers at that time, because cold weather in the winter season usually leads to increased delivery fees. Still, analysts say it has enough room for growth, which could lead to sustained margin improvements.
“Profitability improvement will come more from revenue growth instead of cost reductions,” says Bernstein Research’s Dai. “They can boost their take rate and improve advertising, and the space for revenue growth is still pretty big.”
I am a Beijing-based writer covering China’s technology sector. I contribute to Forbes, and previously I freelanced for SCMP and Nikkei. Prior to Beijing, I spent six months as an intern at TIME magazine’s Hong Kong office. I am a graduate of the Medill School of Journalism, Northwestern University. Email: email@example.com Twitter: @yueyueyuewang
My life changed when I discovered food delivery in China – mainly, I got a bit lazier, but it’s just so easier and there’s a ton of tasty western and Chinese food available. Some of the food isn’t even possible to get unless you order it through one of China’s food delivery apps. Right now, there are 2 that are very popular: ele.me and Mei Tuan Wai Mai. I prefer Meituan Waimai, and I breakdown how to use it in this video. I’ll show you how to setup a profile, how to order food, and I’ll even attempt to follow the delivery driver from the restaurant to my home. This is the video you need to watch if you want to learn how to get food delivered in China. Mei Tuan Wai Mai can be downloaded here: http://waimai.meituan.com/mobile/down… Once installed, follow the instructions in the video to setup a profile that includes your address for quick delivery. Tune in Tuesdays and Thursdays at around 3PM EST for new videos, including my series Chengdu: City of Gastronomy (https://goo.gl/kSSxw2), where I randomly pick a card that has a Sichuan dish on it and I hit the city to find it and try it. There’s so much good food in Chengdu, Asia’s first ever city to be named a UNESCO City of Gastronomy. —/// ABOUT ME \\\— I live in China and am constantly exploring and traveling the country and other parts of Asia. Subscribe to my channel to watch more adventures… and to learn a bit about food, cultures, and more. If you’re looking for more videos about living in China: https://goo.gl/e2kSVz —————————————————————————————– \\ Subscribe: http://bit.ly/2e8BCZv \\ Website: http://itchyfeetonthecheap.com/ \\ Email: firstname.lastname@example.org \\ Instagram: http://instagram.com/itchyfeetonthecheap \\ Facebook: https://www.facebook.com/itchyfeetont… \\ Twitter: https://twitter.com/itchyfeetcheap —————————————————————————————– 🎵 MUSIC 🎶 Music by Andrew Rothschild Youtube: https://www.youtube.com/channel/UCgkz… Bandcamp: https://andrewrothschild.bandcamp.com/ Itunes: https://itunes.apple.com/us/artist/an… Instagram: https://www.instagram.com/arothsmusic/
The best way to lose money in the markets is to sell when you are scared and buy/hold when you are happy with your profits.
So it was for me a couple of days ago when bitcoin (BTC) was $9,500. I so wanted to close out 25% of my BTC and leave myself to run the rest, having taken out the cost of my position in cash and thereby run the rest as free carry. You can spin all sorts of narrative why that’s a smart idea or why that’s a dumb one, but the fall was the impetus and the desire to flee a normal human emotion. It is an instinct that traders and especially investors need to control.
Luckily, I’ve been playing the high risk game long enough to wait. When I want to sell an investment solely because it has dumped I wait at least two or three days before making such a move. If and when bitcoin hits $13,500, I will want to load up on more but I will likewise stop myself from buying into bullishness.
So I did nothing with my bitcoin and this happens:
Bitcoin jumped again on Monday
Once again doing nothing is the best move you can make with a good position.
So in my model, this is China and this is down to the trade war.
When bitcoin jumps, something bad has just happened in the U.S./China trade talks. We don’t know what it is, but soon enough we will find out.
Well today we get a Trump tweet and up BTC goes again. Yesterday, what happened? I guess whatever it was that made bitcoin pop, also left the U.S. president even more incandescent than normal.
This is still a theory, but it keeps on playing out. So what to do? In the short term the question is, is the China situation going to continue for long?
Continuation of the trade war means BTC up. The longer the war runs, the higher bitcoin will go.
For me it’s likely that the trade war is going to run and run. Both sides can’t buckle and like most wars, sides are prepared to take big losses, not to lose. This means holding through a rollercoaster ride of developments.
If we are in for a trade war of attrition, bitcoin will be above £20,000 by Christmas or sooner.
What we also have here if this theory is right is a gift to the extra greedy. When bitcoin flies, short the Dow, because when BTC flies, for no apparent reason, it is a high probability that something Dow slapping will come out of the trade war in a day or two’s time. While information may flow more slowly in the U.S., whatever goes wrong will nonetheless hit the U.S. equities market soon enough, but meanwhile the bad news will hit the Asia bitcoin market much sooner, about as long as it takes for the participants to get out of their meetings and past the revolving doors.
BTC down on Monday, should also give Dow up on a Tuesday and vice versa. Bitcoin is the gift that keeps on giving to traders.
Gold and the whole platinum group metals (PGM) will follow but at a much more refined and subdued pace; bitcoin delivering another leading signal to the stacker community or any trader that wants to play the dangerous game of levered commodities.
Signals like this don’t come by very often and can’t last for long, but while the stakes are in trillion dollar scale, quite a few million dollar crumbs are going to be left lying around the table.
I am the CEO of stocks and investment website ADVFN . As well as running Europe and South America’s leading financial market website I am a prolific financial writer. I wrote a stock column for WIRED – which described me as a ‘Market Maven’ – and am a regular columnist for numerous financial publications around the world. I have written for titles including: Working Money, Active Trader, SFO and Technical Analysis of Stocks & Commodities in the US and have written for pretty much every UK national newspaper. In the last few years I have become a financial thriller writer and have just had my first non-fiction title published: 101 ways to pick stock market winners. Find me here on US Amazon. You’ll also see me regularly on CNBC, CNN, SKY, Business News Network and the BBC giving my take on the markets.
Intelligent Investing is a contributor page dedicated to the insights and ideas of Forbes Investor Team. Forbes Investor Team is comprised of thought leaders in the areas of money, investing and markets.
China’s central bank will launch a state-backed cryptocurrency and issue it to seven institutions in the coming months, according to a former employee of one of the institutions who is now an independent researcher. Paul Schulte, who worked as global head of financial strategy for China Construction Bank until 2012, says the largest bank in the world, the Industrial and Commercial Bank of China, the second largest bank in the world, his former employer, the Bank of China, the Agricultural Bank of China; two of China’s largest financial technology companies, Alibaba and Tencent; and Union Pay, an association of Chinese banks, will receive the cryptocurrency.
A separate source, who’s involved in the development of the cryptocurrency, dubbed DC/EP (Digital Currency/Electronic Payments), confirmed that the seven institutions would be receiving the new asset when it launches, adding that an eighth institution could also be among the first tier of recipients. The source declined to provide the name of the additional company. Speaking under terms of anonymity, the source, who previously worked for the Chinese government, confirmed that the technology behind the cryptocurrency has been ready since last year and that the cryptocurrency could launch as soon as November 11, China’s busiest shopping day, known as Singles Day.
At the time of launch, the recipient institutions will then be responsible for dispersing the cryptocurrency to 1.3 billion Chinese citizens and others doing business in the renminbi, China’s fiat currency, according to the source. The source added that the central bank hopes the currency will eventually be made available to spenders in the United States and elsewhere through relationships with correspondent banks in the West. “That’s the plan, but that won’t happen right away,” the source said.
The plan to use a diverse set of China’s trusted intuitions to disperse the cryptocurrency is reminiscent of a number of other ideas currently percolating around the world. For instance, Facebook’s planned libra cryptocurrency will be backed by a basket of currencies issued by central banks with support from companies like Mastercard and Uber in the United States, Vodaphone in England and Mercado Pago in Argentina. And last week, Bank of England governor Mark Carney floated the idea of a new currency backed by a number of central banks to replace the U.S. dollar as the global reserve currency.
What sets China’s DC/EP apart from libra and Carney’s “synthetic hegemonic currency” (SHC), according to Shulte, is that while libra is little more than early-stage computer code and the SHC doesn’t appear to have gone much further than Carney’s mind, the Chinese cryptocurrency is ready to launch. “China is barreling forward on reforms and rolling out the cryptocurrency,” says Schulte, who now runs an eponymous bank research firm. “It will be the first central bank to do so.”
At the time of publication, neither the People’s Bank of China nor any of the seven institutions mentioned by Schulte had responded to Forbes requests to confirm or deny his claim. However, the two-tiered strategy, where the central bank creates the currency and others distribute it, aligns with previously unreported statements made by Mu Changchun, deputy director of the Paying Division of the People’s Bank of China (PBOC) and the new head of China’s cryptocurrency research lab. In a speech on August 10 at the China Finance 40 Forum, since revised and posted on the PBOC’s WeChat channel, Mu described the central bank’s “two-tiered” system, wherein the bank would create the cryptocurrency and a small group of trusted commercial businesses would “pay the central bank 100% in full” to be allowed to distribute it.
In addition to preventing regional banks and other organizations from being disintermediated, Mu said the two-tiered system is designed to “curb” public demand for other cryptographic assets, consolidate China’s national currency sovereignty, ensure that the central bank maintains control over monetary policy affecting the currency, increase the likelihood of people using the currency, distribute the risk of having all the authority directly in the hands of the central bank and encourage competition between the organizations that receive the cryptocurrency.
“This dual delivery system is suitable for our national conditions,” said Mu. “It can not only use existing resources to mobilize the enthusiasm of commercial banks but also smoothly improve the acceptance of the digital currency.”
The composition of the organizations Schulte says will receive the DC/EP also aligns with Mu’s comments. Later in his speech, Mu added that only after the technical specifications for the DC/EP were completed in 2018 did the central bank realize the similarity between its design and that of libra, the cryptocurrency being developed by Facebook and about 30 other early-stage partners.
One key difference, according to Mu, is that while libra is being designed to handle 1,000 transactions per second, the DC/EP was designed to handle 300,000 transactions per second. For context, Mu added that during last year’s Singles Day the peak volume of all transactions in China was 92,771 transactions per second, dwarfing what the other platforms could support, but well within the DC/EP specifications. “At present, we belong to a state of horse racing,” Mu said according to the translation.
How Blockchain Went From Bitcoin To Big Business| 37:20
The DC/EP can achieve this kind of volume only because it is not a “pure blockchain architecture,” according to Mu, and therefore it doesn’t need to wait for groups of transactions to settle in a block. Like other permissioned blockchains that not anyone can use, the DC/EP is centrally managed, in this case by the central bank, meaning the digital currency remains a liability of the bank and the debtor/creditor relationship is unchanged, according to Mu. Also, instead of using an algorithm to limit supply, like bitcoin, Mu says the PBoC itself will control supply. Crucially, Mu says, the DC/EP is being designed to replace the physical notes and coins in circulation, not the renminbi sitting in bank accounts in a digital form.
“The central bank’s digital currency can be circulated as easily as cash,” said Mu. “Which is conducive to the circulation and internationalization of the renminbi.”
Whether anyone outside China would actually use a digital renminbi for transactions in their own country is unclear. As the Bank of England governor’s comments about replacing the U.S. dollar indicate, much of the world is tired of having their financial stability tied to the United States’ monetary system. But China may not be the best alternative. Earlier this month, as part of the escalating trade war between the United States and China, U.S. President Trump accused China of being a “currency manipulator.” After China’s renminbi fell to its lowest in 11 years, hitting 6.9225 renminbi per dollar on August 5, according to a Financial Times report, it has recovered significantly, trading at 7.15 renminbi per dollar today. While China has denied the charge and called the U.S. “protectionist” in a press statement, the perception of manipulation could be harmful to broader adoption of a digital currency linked to the renminbi.
In December 2017, another country accused of devaluing its currency, Venezuela, revealed plans for its own cryptocurrency, backed by oil and called the petro. After much hullabaloo, the currency somewhat officially launched in 2018, but it isn’t available on most international exchanges because of a U.S. embargo and has been almost impossible to accurately value. Another obstacle to adoption could be uncertainty about the benefits of a technology that’s intended to replace fiat currency but is still under centralized control. While it’s obvious that any central bank wishing to more closely observe how citizens are using a cryptocurrency would prefer a transparent ledger like the bitcoin blockchain, which makes transactions easily traceable, most of the benefits to users of current blockchains, such as instant settlement and digital transactions without the need of a middleman, could be undermined by central control.
One person who’s not concerned about the obstacles to adoption of China’s cryptocurrency is Charles Liu, chairman of HAO International, a private equity firm investing over $700 million in Chinese growth companies. After largely focusing on solar, organic fertilizer, and wastewater treatment technologies since 2012, Liu says he is an angel investor in “the first blockchain company to be able to sign an official contract with the People’s Bank” of China.
Liu declined to reveal the name of the firm or its technology but lent support to Mu’s comments about the potential benefits to businesses using China’s cryptocurrency. In addition to being a more efficient way to track money laundering, bribery and other transactions, Liu says, the cryptocurrency will give banks increased confidence in the creditworthiness of borrowers, let merchants receive payments instantly and lower transaction fees. While Liu says that banks in the United States have been resistant to such improvements that eat away at their bottom line, he adds that China doesn’t have that problem, because the government owns the banks.
“What will facilitate commercial transactions and enhance efficiency, the central government decides and they go ahead and do it,” says Liu, adding that “China’s strategic plan is to integrate more closely with the rest of the world. Cryptocurrency is just one of the means to have a more internationalized renminbi. It’s all strategic. It’s all long term.”
I report on how blockchain and cryptocurrencies are being adopted by enterprises and the broader business community. My coverage includes the use of cryptocurrencies such as Bitcoin, Ethereum and Ripple, and extends to non-cryptocurrency applications of blockchain in finance, supply chain management, digital identity and a number of other use cases. Previously, I was a staff reporter at blockchain news site, CoinDesk, where I covered the increasing willingness of enterprises to explore how blockchain could make their work more efficient and in some cases, unnecessary. I have been covering blockchain since 2011, been published in the New Yorker, and been nationally syndicated by American City Business Journals. My work has been published in Blockchain in Financial Markets and Beyond by Risk Books and I am regularly cited in industry research reports. Since 2009 I’ve run Literary Manhattan, a 501 (c) (3) non-profit organization dedicated to showing Manhattan’s rich literary heritage.
Since the People’s Bank of China (PBOC) allowed the yuan to surpass the dreaded level of 7 to the dollar on August 11, rivers of ink have flowed citing a new matter of contention between the U.S. and China, namely using currencies to gain competitiveness or, more simply, a “currency war.”
To describe the events as a currency war may seem logical because another type of “war” between the U.S. and China, namely the trade war, has been on everybody’s mind for the past year and a half. Moreover, the Trump administration itself has continued this game by classifying China as a “manipulator” of its currency immediately after this latest devaluation.
In the same way as the U.S. Treasury is not following its own script when classifying China as a currency manipulator, neither should we think of the yuan mini-devaluation as China initiating a currency war with the U.S. The reason is simple: the yuan–which is not convertible–cannot afford a war with the dollar, nor can the U.S. Federal Reserve control its currency so as to use it as a weapon against China.
In other words, neither of the two rivals have the instruments to successfully engage in a currency war against each other. Starting with the dollar, there is no doubt that its value is determined by the market, as it could not be otherwise being the reserve currency of a world still governed by flexible exchange regimes for major currencies.
The Fed can influence the dollar with expansive or restrictive monetary policies, but there are many other factors that it and the Treasury simply cannot control. One important factor is risk aversion: the more the Trump administration tightens the screws on China and, thereby increases the risk of recession globally, the more the dollar appreciates, contrary to what Trump wants.
Moving to the yuan, the PBOC is much closer to determining its value than the Fed can for the dollar, as it retains control on capital flows and does not need to intervene in a highly liquid forex market like that of the dollar. Nevertheless, the reality is that capital is ubiquitous, so capital controls will never be completely effective.
In other words, the value of the yuan is not exempt from the forces of demand and supply, nor is its value in the medium term, no matter what the PBOC may opt to do on a specific date or period. Considering the yuan’s mini-devaluation, the beginning of a currency war is a mistake for one more very important reason. The PBOC has accommodated market pressure by devaluing while central banks tend to move against the market during currency wars.
It’s true, though, that the timing of the devaluation could mislead us towards the idea of a China-initiated currency war because it happened right after the U.S. announcement of additional import tariffs on Chinese products.
More than a war, we should see this reaction as a tantrum of Chinese policy makers facing additional pressure from the U.S. Besides, as happens for every tantrum, its consequences may not be the desired ones as such mini-devaluation will only prompt more capital outflows from China, undoing part of the monetary stimulus that the Chinese central bank has been carrying out for more than a year to sustain economic growth. In other words, it will not help China to grow, but rather the opposite.
Thus, it is important to distinguish between a war and a tantrum. In the former you control your weapons, in the latter you do not.
I’m the chief economist for Asia Pacific at Natixis. I also serve as a senior fellow at European think-tank BRUEGEL and am a non-resident research fellow at Madrid-based political think tank Real Instituto Elcano. I am also is an adjunct professor at the Hong Kong University of Science and Technology and member of the advisory board of Berlin-based China think-tank MERICS, an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR) and the Asian Development Bank (ADB) as well as a member of the board of the Hong Kong Forum and cofounder of Bright Hong Kong. I hold a Ph.D. in economics from George Washington University and have published extensively in refereed journals and books. I’m also very active in international media as well as social media. As recognition of my leadership thoughts, I was recently nominated TOP Voices in Economy and Finance by LinkedIn.
Last week’s announcement by Trump of more tariffs coming for everything shipped to the U.S. from China and Monday’s move by Beijing to allow for a weaker yuan begins Act III in the trade war.
Here’s the plot twist:
Treasury just hit China with currency manipulator status after market hours on Monday. It came at a time when nothing was trading. Investors were stuck in the Twilight Zone. Tuesday morning is going to be a madhouse rush for “sell China” orders by the algos. Wait for it.
As one hedge fund manager told me, “we’ve just thrown gasoline on the fire.”
Currency manipulator status gives Beijing less wiggle room because if they weaken the yuan to make up for tariffs, tariffs will likely go up to compensate.
We are in unchartered waters. At risk is what amounts to sanctions on key U.S. commodities like soybeans and pork by the Chinese government, and political risk involving Hong Kong as civil unrest continues there, putting its special trade status in the crosshairs of a China-bashing American Congress.
In isolation, a 10% tariff on $300 billion in combination with a 10% yuan depreciation would be functionally equivalent to Chinese households writing a check for $30 billion to the U.S. Treasury. “Trump may not have gotten Mexico to pay for its border wall, but he is getting China to pay (the government) for its tariff wall,” says China bear Brian McCarthy, chief strategist for Macrolens, a big picture investment research firm.
Currency manipulator status makes the trade war worse for China.
Meaningful and enduring negative feedback about China will lead to extreme financial market volatility in Asia, especially in China’s mainland equity market where a gambler’s approach to trading by the dominant retailer investor class there might cash out. And why not? China’s mainland stock indexes are up over 20% this year and this may be seen as the time to take money off the table.
Short sellers shouldn’t discount the possibility of the People’s Bank of China pumping money into the A-shares this week.
It’s too early to start expecting widespread defaults on China’s corporate dollar-denominated debt (which some firms estimate to be around $800 billion). A default would deal a harsh blow to foreign investors who have been big buyers of Chinese bonds as that market opens up and joins the major indexes.
The transmission mechanism from yuan devaluation to global securities is expressed more obviously through Europe and other emerging markets, especially those heavily linked to China — such as South Korea and Brazil. Both currencies had an ugly looking chart on Monday.
Meanwhile, the Fed can potentially isolate the U.S. economy from any economic fallout by cutting rates. Though this opens up a whole other can of worms, namely rates sinking to zero in the event of a recession.
The yuan settled at 7.05 to the dollar today after the central bank set the daily rate at just over 6.9 to the dollar. The currency is allowed to trade within 4% of that daily fixed rate. The yuan is now at its weakest level in over 10 years.
“These moves represent a significant escalation in the trade war,” says Joseph Brusuelas, chief economist for RSM, a global financial advisory firm.
“There is a specific logic and order of operations with respect to the tit-for tat retaliation likely to play out that will not result in longer-term inflation, but will instead create conditions for deflation and negative nominal interest rates along the U.S. maturity spectrum if a longer-term trade compromise cannot be reached,” he says.
I’ve spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes. My work has appeared in The Boston Globe, The Nation, Salon and USA Today. Occasional BBC guest. Former holder of the FINRA Series 7 and 66. Doesn’t follow the herd.
The ongoing US-China trade war is a distraction from China’s big problems: the blowing of multiple bubbles and the country’s soaring debt, which will eventually kill economic growth.
It happened in Japan in the 1980s. And it’s happening in China nowadays.
The trade war is one of China’s problem that dominates social media these days. It’s blamed for the slow-down in the country’s economic growth, since its economy continues to rely on exports. And it has crippled the ability of its technology companies to compete in global markets.
But it isn’t China’s only problem. The country’s manufacturers have come up with ways to minimize its impact, as evidenced by recent export data. And it will be solved once the US and China find a formula to save face and appease nationalist sentiment on both ends.
One of China’s other big problems , however, is the multiple bubbles that are still blowing in all directions. Like the property bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of starting a family, as discussed in a previous piece here.
New Home Prices 2015-19
Unlike the trade war, that’s a long-term problem. Low marriage rates are followed by low birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few.
Then there’s the unfavorable “dependency rates” — too few workers, who will have to support too many retirees.
And there’s the impact on consumer spending, which could hurt the country’s bet to shift from an investment driven to a consumption driven economy.
Japan encountered these problems over three lost decades, even after it settled its trade disputes with the US back in the 1980s. China experience many more.
Meanwhile, there’s the infrastructure investment bubble at home and abroad, as discussed in a previous piece here. At home infrastructure investments have provided fuel for China’s robust growth. Abroad infrastructure investments have served its ambition to control the South China Sea and secure a waterway all the way to the Middle East oil and Africa’s riches.
City overpass in the morning
While some of these projects are well designed to serve the needs of the local community, others serve no need other than the ambitions of local bureaucrats to foster economic growth.
The trouble is that these projects aren’t economically viable. They generate incomes and jobs while they last (multiplier effect), but nothing beyond that—no accelerator effect, as economists would say.
That’s why this sort of growth isn’t sustainable. The former Soviet Union tried that in the 1950s, and it didn’t work. Nigeria tried that in the 1960s ;Japan tried that in the 1990s, and it didn’t work in either of those cases.
That’s why bubbles burst – and leave behind tons of debt.
Which is another of China’s other big problem s.
How much is China’s debt? Officially, it is a small number: 47.60%. Unofficially, it’s hard to figure it out. Because banks are owned by the government, and give loans to government-owned contractors, and the government owned mining operations and steel manufacturers. The government is both the lender and the borrower – one branch of the government lends money to another branch of government, as described in a previous piece here.
But there are some unofficial estimates. Like one from the Institute of International Finance (IIF) last year, which placed China’s debt to GDP at 300%!
Worse, the government’s role as both lender and borrower concentrates rather than disperses credit risks. And that creates the potential of a systemic collapse.
Like the Greek crisis so explicitly demonstrated.
Meanwhile, the dual role of government conflicts and contradicts with a third role — that of a regulator, setting rules for lenders and borrowers. And it complicates creditor bailouts in the case of financial crisis, as the Greek crisis has demonstrated in the current decade.
I’m Professor and Chair of the Department of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.
It was 27 years ago when Deng Xiaoping observed that “Saudi Arabia has oil; China has rare earths.”
Talk about a prescient observation. In the early 1990s, China’s then-supreme leader had zero inkling of the iPhones, Tesla cars, drones, robots and high-tech fighter jets yet to come. Yet China’s dominance over these vital inputs is more relevant than ever as the trade war intensifies.
There is a pervasive view that President Xi Jinping’s government has less leverage over Donald Trump’s. Why, then, is Xi the one walking away from a truce? With Trump increasingly desperate for a win, any win, on the global stage, China could get off cheap.
Xi’s team could be misreading the moment. Or putting testosterone ahead of geopolitical peace. A more interesting reading: Beijing reckons it has more cards to play in this game than investors recognized.
In May, Xi made a pointedly-timed visit to a rare earth facility. Though not quite Saudi oil, China’s massive store of elements vital to myriad tech products gives Beijing considerable leverage over Silicon Valley.
It’s but one example of how China may have Trump over a barrel. What other cards are up Xi’s sleeve?
Louis Gave of Gavekal Research just put out one of the more intriguing lists of possibilities. On it: banning rare-earth exports; making life “impossible” for U.S. executives operating in China; devaluing the currency; dumping huge blocks of U.S. Treasury securities; engineering a plunge in global energy prices; sharp drops in orders of goods across the board.
There are a couple of other options. One, dissuading mainland consumers from visiting America. Two, pull a Huawei Technologies on pivotal U.S. companies. This latter step could wreak immediate havoc with the Dow Jones Industrial Average.
Imagine the blow if Xi’s government suddenly closed off Boeing’s access to Asia’s biggest economy. Or if General Motors found its cars parked at Chinese customs. Halting Apple Inc.’s sales would send its own shockwaves through corporate America. Curbing Chinese imports of American soybeans would do the same in agricultural circles.
So far, China has kept retaliatory moves to a minimum. Xi seems to be rolling the dice that Trump will get distracted or impatient and move on to another target—like Japan. His calculation also seems aimed at 2020. Why give away the store to Trump when Americans might elect a less erratic leader?
Weaponizing rate-earths minerals might be Xi’s first real shot across Corporate America’s bow. The U.S. has other sources, of course. If U.S. deposits don’t suffice, companies could turn to Australia, Myanmar, India, Brazil or Thailand. And Trump seems tight enough with Vladimir Putin to score some stock from Russia. But the supply chain disruptions would surely have top CEOs — who tend to be big campaign donors — calling Trump to register their dismay.
It could backfire, too. In 2019, Beijing deprived Tokyo of rare-earth metals and China’s market share has never been the same since. “Unfortunately,” Gave says, “this would give China a ‘feel-good’ boost, but be as productive as landing a mild blow on Mike Tyson’s nose. Such an export ban would undermine China’s long-term production capacity, for the simple reason that rare earths are not that rare.”
The dumping-dollar-debt option could be especially dangerous. Just like an “uncontrolled currency depreciation,” says Michael Hirson of Eurasia Group, selling huge blocks of U.S. Treasuries would “threaten blowback to China’s economy.”
Any surge in bond yields could devastate the American consumer. The shockwaves would quickly zoom from Wall Street to Shanghai. Xi might be hinting at such a move, though, as Beijing buys fewer and fewer Treasuries. At present, China has more than $1.1 trillion of U.S. government securities. Xi seems to think that’s more than enough.
Even so, markets may live in semi-constant fear of a massive bond route bearing Chinese fingerprints. Or any number of ways in which China would ratchet up tensions with Trump and vice versa.
“The path to a potential de-escalating deal is fraught with challenges as both sides dig in, and how markets react will likely help determine the outcome of talks,” say analysts at Fitch Ratings. “Over the longer term, we maintain our long-held view that protectionist trade policy led by the US is likely to persist in the years ahead, marked by cycles of escalation and de-escalation.”
Roughly a week after Xi’s rare-earths pilgrimage, he visited Jiangxi Province, the starting point of Mao Zedong-era 1934-1936 “Long March.” There, Xi called for a new one as Trump’s America does its worst to halt China’s march to the top of the economic rankings.
That hardly sounds like a Chinese leader who’s going to cave to Trump. More like one who’s in this trade battle for the long haul.
Chinese President Xi Jinping visits a memorial hall marking the departure of the Long March by the Central Red Army in Yudu County, Ganzhou City, during an inspection tour of east China’s Jiangxi Province.
Global markets continue to digest the impact of President Donald Trump’s Sunday evening tweetstorm. Meanwhile, analysts from some of the world’s biggest investment banks including UBS and Bank of America Merrill Lynch have detailed their forecasts for what a full-on trade war between the U.S. and China would look should the worst happen.
Among the many hair-raising projections is the prospect of the S&P 500 entering a correction by losing 10% of its value, which would almost certainly trigger a long-feared recession. That particular forecast was made by UBS analyst Keith Parker, according to CNBC. Parker specified that key European and American cyclical markets would bear the brunt of the declines.
| Source: Yahoo Finance
“FASTEN YOUR SEATBELT AND DON’T HOLD YOUR BREATH”
There is an old saying that when two elephants fight, it is the grass that suffers. In this case, both elephants will also sustain a significant amount of damage if Parker’s projections hold true. He predicts that a full-scale trade conflict between the world’s two biggest economies will see China shed anything from 1.2% to 1.5% of its GDP, which is equivalent to a drop of between $132 billion and $165 billion.
If China responds to Donald Trump’s threatened 25% tariff with a tariff increment of its own from 7% to 15% on approximately $60 billion worth of American imports, this could see the U.S. shed 0.1% of its GDP, or about $14 billion. In the ensuing scenario, Bank of America projects that China may hike tariffs on U.S.-made vehicles and reduce its soybean imports from the U.S. Meanwhile, Chinese imports of American soybeans have already fallen off a cliffsince 2017, dropping roughly 98% last year as China looks toward less antagonistic partners like Brazil.
According to a Bank of America report also cited by CNBC:
“Fasten your seatbelt and don’t hold your breath. The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”
As the two elephants knock heads, the amount they are erasing from each other’s economies is equivalent to the GDP of mid-sized nations. European and Asian economies will also feel some pain, according to UBS.
IS TRUMP BLUFFING?
According to the White House, the new 25% tariff regime that could potentially kick off this entire sequence of events will come into effect just after midnight on Friday. Expectedly, markets have been in virtual freefall since Monday, with the NASDAQ and S&P 500 both shedding close to 1% on Monday alone. The miserable market conditions continued through Tuesday, with little sign of respite as investors react with horror at the thought of a damaging 20th-century-style trade conflict between economic superpowers.
Not everyone believes that the panic is warranted, however. JPMorgan CEO Jamie Dimon, for example, believes that the shock announcement by Trump was nothing more than a way of cornering a formidable opponent and forcing them to negotiate. Speaking to CNN Money’s Poppy Harlow, Dimon stated that regardless of the market’s reaction, Trump will count it as a win because it has become the only successful way of getting the Chinese to the negotiating table on his terms.
Whether this is a considered masterstroke of strategy or simply a typical Trump action, it certainly appears to have done the trick. Chinese Vice Vice Premier Liu He will be part of a trade delegation to the U.S. later in the week, which at the very least is a sign that China is willing to give ground so as to avoid a damaging trade war.
I am a busy writer, journalist and entrepreneur with an interest in tech and finance. When I’m not contributing to CCN and traveling around Africa, you can catch me in the writers room at ‘The Other News’, Nigeria’s weekly answer to ‘The Daily Show’ with nearly 2 million viewers.My work on ‘The Other News’ was featured in the New Yorker Magazine, and that was then cited in the Washington Post so I’m not sure that counts as a feature but I’ll definitely mention it too!I have been nominated by the US State Department to take part in the 2019 Edward R. Murrow Program for journalists under the International Visitors Leadership Program.I also like hamsters.
Hung Hsiu-chu (brown coat), former head of Taiwan’s Nationalist Party, and her delegation visit Vstartup, a startup group, in Beijing in 2016. (Photo: VCG/VCG via Getty Images)
Taiwan’s government says many of the island’s young entrepreneurs are ready to seek their fortunes in China because mainland officials are offering incentives for them to launch their startups in the world’s second-largest economy. China has been reaching out to Taiwan’s investors as part of its efforts to bring self-ruled Taiwan closer to the mainland. China claims sovereignty over the island, where a government opinion survey released in January showed that more than 80% of its citizens prefer autonomy.
But only 1% of the Taiwanese-backed startups in China succeed, according to Taiwan’s Mainland Affairs Council. “They’ve run into some difficulties,” says the council’s spokesman Chiu Chui-cheng. “We’ve reminded our youth to beware of the risks.”
Startups tend to fail due to a lack of savvy about China’s business environment, not the level of incentives, people close to the market say, and they tend to find success by localizing their businesses.
Language fluency, office space, rent breaks and cash
Localizing might come easier to Taiwanese founders compared to peers further afield. They speak China’s official language and get the culture, says Lin Ta-han, CEO of the crowd-funding consultancy Backer-Founder in Taipei.
To help, government agencies in China are said to be offering tax breaks, fast-track permits to set up offices and subsidies for startups in sectors such as healthcare. “For truly small enterprises or for first-time startup founders, these are definitely incentives,” Lin says.
A startup incubator near Shanghai, for example, is offering free office space, subsidized rent for housing and tax breaks, according to a report in the Japan Times. Some entrepreneurs can qualify for up to $31,000 in cash. About 50 other hubs like this one are spread around China. These measures complement 31 broader incentives that China introduced in February 2018 to bring Taiwanese investors and workers over. Those measures cover breaks on taxes and land use. Taiwan’s government responded with its own rack of incentives to keep business people onshore.
Among the more successful Taiwanese-operated startups, MIT Media Lab graduate Edward Shen sold his Taipei-based startup StorySense Computing in 2015 to a firm in Beijing, according to a report from Tech in Asia. His company’s flagship product was a phone number search app called WhatsTheNumber.
Incentives alone won’t be enough to ensure success in China, says Steven Ho, a former Yahoo employee in Taiwan who moved to the mainland in 2012 and started a company that helps new brands enter the market. Internet startups must understand that “there’s the internet and the China internet, two different worlds,” says Ho, 51, and back in Taipei running a company with 400 employees. China’s internet is dominated by local firms and government controls. Startups from anywhere, incentivized or otherwise, need to adapt their businesses to the local conditions rather than continue operating as did at home, he says.
“The absolute number of people in China is big, but that doesn’t correlate to the number of startup successes,” Ho says.
Taiwan government warns of failures
Taiwan’s Mainland Affairs Council reiterates the message by reminding entrepreneurs that the competition in China is “stiff” and some founders may not adapt well to a different set of laws, customs and societal norms there. And perhaps most important of all–a different financial system.
To get paid online in China normally requires a deal with the domestic payment services Alipay or Wechat, which “tend to be stricter on the services that can be sold” compared to overseas peers, says Danny Levinson, past chairman of the American Chamber of Commerce Shanghai’s IT committee.
KKDay CEO Chen Ming-ming plans to expand his company’s travel services in China after receiving venture capital from an Alibaba fund for Taiwanese entrepreneurs. (Photo courtesy of KKDay)