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China Growth Nowhere Near Official Estimates, Says Morningstar

China’s third quarter growth rate has fallen to 6%, says Beijing. No it hasn’t. It’s more like 3%, says Morningstar’s China economics team led by Preston Caldwell in a report dated October 29.

While Donald Trump and his economic advisor Larry Kudlow try to convince Wall Street today that trade talks are going well and the two sides will still ink their so-called Phase 1 mini-deal this year, investors are noticing something awry in China. Companies are sourcing product elsewhere in modest, yet increasing numbers. China’s usual high fixed asset investment numbers are falling. Economic policy makers could be afraid of debt burdens and don’t want to overstimulate the economy. Growth is slowing. Industrial production is contracting.

To make matters worse, the full brunt of tariffs hasn’t quite been felt fully by China. The average incremental tariff rate increased to about 12% in the third quarter from about 9% in the second quarter. If Phase 1 talks result in no signed agreement anytime soon, Morningstar predicts it would send the average U.S. tariff rate on Chinese imports to over 20% by the first quarter of 2020.

The dollar/yuan exchange rate has helped offset some of the tariff costs. The yuan has weakened by about 5% since the end of the first quarter. For exporters, China is still cheap.

Today In: Money

The bulk of the third quarter decline was due to the consumer durables index component of the Morningstar proxy for measuring GDP. It contracted 4.1% from 3.8% growth in the second quarter. Morningstar analysts believe there is a chance that the locals may be temporarily pulling back on spending in anticipation for new government subsidies. Still, slowing durables consumption matches the trend in place since early 2017. And stimulus has been trickling in since.

Two of the other Morningstar proxy components that brought them to the 3% figure also saw a marked decline in the third quarter. Their power proxy index is now in line with the other index components after being a positive growth outlier for about two years.

But it appears the real drag that brought Morningstar’s number down to 3% is industrial production. Industrial profits are down 5.3% year over year versus August’s contraction of 2%.

“Neither a surprise nor a market mover,” says Brendan Ahern, CIO of KraneShares in New York. “U.S. tariffs are still exacting their toll on export-focused manufacturers.”

The industrial sector slowdown might also be understated, especially if China is over-estimating inflation, Morningstar report authors warned.

Meanwhile, China’s dependence on credit to sustain economic growth has so far thwarted Xi Jinping’s attempts to convince the provincial governments to deleverage. Debt growth remains above nominal GDP growth rates.

“We’re not surprised that China’s economy has failed to recover, given that credit growth stalled after a slight rebound in the first quarter,” Morningstar analysts wrote.

China-bound investors will be watching for solid Singles Day sales on November 11. If they disappoint, emerging market funds who are mostly overweight China could finally start shifting positions.

China’s A-shares have been outperforming the MSCI Emerging Markets Index all year. Only Russia, as measured by the VanEck Russia (RSX) exchange traded fund, is beating the CSI-300, an index tracking mainland China equities listed on Shanghai and Shenzhen exchanges.

Official consumer spending showed a mixed picture in the third quarter. Nominal retail sales grew 7.8% year over year in September versus a high of 9.8% growth back in June. Real retail sales fell only 30 basis points from August.

China’s National Bureau of Statistics’ household survey data suggests that most of the spending went towards education, entertainment, and “miscellaneous services.”

Morningstar said that their own sampling of alternative consumer sales data such as box office revenue, telecom revenue, and air passenger volume suggests tepid consumer services growth. China’s number crunchers are more upbeat on that and Morningstar’s team is not, which brings their forecast so much lower than official figures.

E-commerce giant Alibaba – the company behind Singles Day – announced this week that Taylor Swift will be performing at the Mercedes Benz Arena in Shanghai where the shopping spree will have their telethon-like tally of sales. If Swift can hype Singles Day shoppers to spend, the China consumer bull narrative will remain in tact. If she fails, and Singles Day ends up being mediocre, all bets are on for more stimulus in the months ahead out of Beijing.

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Kenneth Rapoza

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.

Source: China Growth Nowhere Near Official Estimates, Says Morningstar

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China released third-quarter GDP figures on Friday showing the economy grew 6.0% from a year ago — the lowest in at least 27-1/2 years, according to Reuters records. CNBC’s Eunice Yoon reports.

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China Offers Special Breaks To Attract Taiwanese Startups, But Only 1% Find Success

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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.

More on Forbes: China Now Boasts More Than 800 Million Internet Users And 98% Of Them Are Mobile [Infographic]

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.

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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)

Courtesy of KKDay

Ralph Jennings

Contributor

As a news reporter I have covered some of everything since 1988, from my alma mater

Source: China Offers Special Breaks To Attract Taiwanese Startups, But Only 1% Find Success

Job Cuts And No More Snacks: China’s Internet Companies Brace For Slowest Growth In Years

Peolple walk past a sign for Chinese ride-hailing service Didi Chuxing (AP Photo/Mark Schiefelbein)

Job losses and other cost-cutting measures are beginning to emerge from China’s once unbeatable internet sector.

Games operator NetEase, ride-sharing giant Didi Chuxing and e-commerce firm JD.com are reportedly cutting jobs and reducing employee perks amid faltering growth in the wider economy and increasing regulation of China’s internet companies.

“No matter its Didi, NetEase or JD.com, the only reason for them to do this is business performance pressure,” says Zhang Yi, founder of Guangzhou-based consultancy iiMedia Group. “Their old businesses are fraught with uncertainties, while the new business lines haven’t taken off. It is inevitable to have cut jobs during this process.”

The number of jobs vacancies at China’s internet companies declined 20% in the final quarter of 2018 from a year earlier, according to Zhaopin.com, a Beijing-based recruitment firm. And analysts are expecting to see further pressure down the road, as more internet companies grapple with the country’s sputtering economy.

More On Forbes: China’s Didi Cuts 2,000 Jobs In Business Restructuring

Didi Chuxing is a case in point. Once touted as a national champion that drove Uber out of China in 2016, the company is now cutting 15% of its workforce, or about 2,000 employees. Also gone are the free snacks and complimentary yoga sessions that employees had once enjoyed, as the company reportedly seeks to stem mounting losses. Regulators have been scrutinizing its ride-sharing service following a series of passenger safety scandals. Didi has since issued a public apology, while installing safety measures such as in-app police assistance and sharing vehicle routes with friends and family members. The company is now betting on an international expansion plan as a catalyst for new growth, and says that it intends to hire more people to support that effort.

Other companies have been rolling out new strategies to cope with the challenges. A NetEase spokesperson said the company is “optimizing its structure to stay more focused,” but would not confirm local media reports of “wide-scale layoffs” at its e-commerce, public relations and farming units. Like the rest of the gaming industry, NetEase has to contend with a regulator that has been slow to approve new titles following a 10-month suspension of new licenses in 2018.

Billionaire Richard Liu, founder and CEO of JD.com Inc. (Photo: Billy H.C. Kwok/Bloomberg)© 2017 Bloomberg Finance LP

Meanwhile, a spokesman for JD.com declined to comment on reports that it was in the process of cutting 10% of its senior ranks. Instead, China’s second-largest e-commerce site said it would be hiring 15,000 new employees primarily for entry-level positions at its logistics and customer service units. JD.com’s growth in active customers slowed to 4% in the final quarter of last year, down from 15% in the previous quarter, as competitors like budget shopping service Pinduoduo continued to grab a larger share of the market.

To be sure, not all of China’s internet firms are cutting back. Alibaba’s CEO Daniel Zhang vowed not to lay off any staff this year, stating in a  post on China’s Twitter-equivalent Weibo: “When the economy is bad, the biggest advantage for online platforms is to create jobs.”

More On Forbes: The Reality Of China’s Economic Slowdown

Compounding the challenges faced by China’s internet companies is a slowdown in consumer spending. Beijing is now targeting economic growth of between 6% and 6.5% this year, marking the slowest growth in almost three decades, as government and corporate debt mounts and trade tensions with the U.S. have depressed manufacturing output and consumer sentiment. With China also trying to curb risky funding to reduce financial risks, capital flows to investment funds has been slowing. Private equity firms raised 1.01 trillion yuan ($149 billion) last year, falling almost 30% from 2017, according to Beijing-based research firm Zero2IPO Research.

This means there is less funding available for China’s smaller startups, which are now struggling as investors grow increasingly cautious. “A lot of startups can’t raise money, so they have to cut headcounts,” says Ken Xu, a partner at Shanghai-based investment firm Gobi Partners.

Aware of such struggles, Chinese policymakers recently announced as much as 2 trillion yuan ($298 billion) in corporate tax cuts, and told local banks to grant more loans to private enterprises. But analysts say it remains to be seen if Beijing’s stimulus measures will bring about enough changes as the details still have yet to be clarified.

“They will be helpful, but whether the impact will be as big as people think is a matter of debate,” says Cui Ernan, an analyst at Beijing-based research firm Gavekal Dragonomics. “The job market is likely to remain weak in the first half this year before recovering a bit in the second half.”

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Source: Job Cuts And No More Snacks: China’s Internet Companies Brace For Slowest Growth In Years

China’s C919: A Challenge to Airbus & Boeing – CGTN

On Friday, the first Chinese-built passenger jet C919 made its maiden flight, widely seen as a milestone for the Chinese aviation industry. The aircraft is expected to compete with the updated Airbus A320 and the new-generation Boeing B737 currently dominating the market. But it won’t start commercial operations till sometime between 2020 and 2022. How can it challenge the duopoly of passenger jet manufacturing? Turn to CGTN to learn more.

 

 

 

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