China’s Electric Car Revolution

It may seem shocking, but China is the world’s leading consumer in electric powered vehicles. In fact, the Chinese drive more electric cars than “the rest of the world combined.” The fast-growing industry, like many in China, is held up by government funding and subsidies. The Chinese want to lower their fossil fuel usage and output, and more importantly they want to severely cut down on the public-health crisis that is Beijing’s air quality.

The Chinese government is spending over a billion dollars to replace the 70,000 gas powered taxis that run daily in Beijing. These taxis are responsible for a large amount of the pollution that now regularly results in road blockages and airport closures. The government is buying electric taxis, at approximately $20,000 each. Critics note that this would only result in a dent in the problem, and wouldn’t affect the smog that drifts north to Beijing from steel factories.

Even without government purchases, the electric car market is huge in China. The market is growing each year; one estimate pegged last year’s market growth at 27%, and many expect this number to keep growing. Chinese automakers like Chery and Geely are cashing in on the trend and heavily investing in newer and more affordable electric models. These cars aren’t comparable to the luxurious and speedy Tesla models available in the US. Analysts say that these Chinese EVs “sell on price.”

These endeavors are finally becoming profitable, and government subsidies will be reduced to zero by 2020. So it appears the investment on behalf of the government is a success. Investors around the world, including Warren Buffett, are taking notice in the massive market growth and the potential for the Chinese automakers to expand to the international market. GAC Motors brought one of their electric vehicles to the Detroit Auto Show in January, and announced plans to enter the American market as soon as 2019. The American electric car market has been seeing weak growth and investment, especially as a result of the oil supply glut that has bottomed out energy prices. So it will be interesting to see if American consumers embrace Chinese vehicles, or electric ones at all for that matter. One survey (accuracy debatable) suggested that as high as 60% of Americans were not aware of the consumer availability of electric vehicles at all.

 

Sources:

 

http://www.reuters.com/article/us-usa-autoshow-china-electric-idUSKBN14V1H3

https://cleantechnica.com/2017/01/25/china-electric-car-sales-demolish-us-european-sales/

http://www.curbed.com/2017/3/9/14867380/china-beijing-smog-air-pollution-electric-cars

http://www.curbed.com/2017/1/4/14169632/beijing-air-pollution-highest-red-fog-alert

https://cleantechnica.com/2017/01/01/survey-60-americans-arent-aware-plug-electric-vehicles/

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China’s Leftover Women

Due to China’s One Child Policy (独生子女) and attempts to bolster the economy, the Chinese government and parents alike have recently favored men to women (独生子女). Men now outnumber women by a figure of thirty-four million. One in every three Chinese women in their late twenties are single. Many of these “leftover women” (剩女) are urban and over the age of 27. Some are seeking a Western education. However, these women are still discriminated at home and in work environments. Many companies will not hire a leftover woman, citing the lack of stability of the woman’s home life.

Traditional Chinese values have emphasized the importance of continuing family lines. Today, new economic phenomenons are breeding older singles who put their careers before prospects of marriage. Generational belief shifts have bred more independent women who place more importance on their careers than marriage. The younger generation of Chinese Millennials are now dating more freely on their own terms. Due to the lopsided gender gap that has resulted from the One Child Policy, Chinese men are consistently marrying down in both age and economic status.

The Shanghai marriage market, which translates to “the blind date corner”, is a market where parents of late-twenty to early-thirty year-old singles come to advertise their children’s physical, economic, and educational statuses, and mingle with like-minded parents. Oftentimes, the children have no knowledge that their parents are pawning them out until they are notified of a blind date. There is scarce data regarding the success rate of the marriage market, as no professionals have done adequate research. Freelance businessmen, known as matchmakers, claim to have high success rates for blind date creation, and charge parents $1-3 per meeting. Aside from the physical marriage market, online retailers have cropped up which offer boyfriend rentals to women intending to fool their parents about their relationship statuses. Tinder and other online dating services are also gaining ground in China.

http://i.cdn.travel.cnn.com/sites/default/files/styles/inline_image_624x416/public/2011/09/30/d_0.jpg?itok=M76nis6A

Perhaps the new wave of online dating and a shift in generational norms will pave the way for organic relationships and a Western mindset regarding careers and marriage.

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Bankruptcy and a Shifting Focus

The Chinese government has long supported growth in heavy industry with subsidies and other incentives. But now, as the economy looks to balance towards a more diverse mix of industry and services, the government is doing more to aid the transition. Recently, a fund to spur growth in service-oriented businesses was established, and although a majority of the money came from foreign investors,
this is still a step in the right direction.

Graphs illustrating increase in corporate bankruptcy cases. Image Credit: Wall Street Journal

When Professor Murphree came and spoke, we heard about rising labor costs and the slowing pace of Chinese manufacturing. As the economy grows, workers are paid more and more, resulting in fewer opportunities for the labor arbitrage that helped China’s economy grow so quickly over the past three decades, growth that has recently contributed to global overcapacity in several heavy industries. The government, however, has begun to make greater use of one course of action that had not been used as frequently over the years: bankruptcy. In the past, government funds were used to support failing manufacturing businesses because the political costs of unemployment and layoffs were higher than the financial cost of supporting the companies. Now, however, an increase in bankruptcy cases shows that this model is losing popularity. In 2016, Chinese courts accepted 54% more bankruptcy cases than in 2015, with most resulting in liquidation, likely due to more companies taking on higher loads of debt. This rapid uptick in borrowing and bankruptcy is a pronounced change from past policy, a change that will likely grow in significance over the next few years. Many of the liquidated companies are so-called “zombie firms,” unprofitable manufacturers that have been kept operational by government money. The fact that these firms are losing support may indicate a broader policy shift.

Between increased foreign funding for service industries and bankruptcies reducing the workforce and production capacity of heavy industry, it seems that the government is beginning to pivot its goals for economic growth and look to new sectors to shoulder the burden. Only time will tell if reducing manufacturing employment through bankruptcy will be balanced by growth in other industries, or if this new policy will bring political opposition and unrest.

 

https://www.forbes.com/sites/sarahsu/2017/02/21/china-takes-another-step-towards-a-service-economy/#48bdaecc28c1

http://www.businessinsider.com/r-china-february-factory-growth-beats-expectations-as-orders-pick-up-2017-2

http://www.marketwatch.com/story/chinas-service-sector-grows-at-slower-pace-2017-02-06

https://www.wsj.com/articles/as-growth-slows-china-highlights-transition-from-manufacturing-to-service-1453221751

http://www.cnbc.com/2017/01/31/china-official-january-services-pmi-rises.html

http://www.news.com.au/finance/economy/world-economy/why-the-made-in-china-tag-may-soon-cease-to-exist/news-story/ab31ca2c00a9b2a8200ce913a013a1e0

https://www.wsj.com/articles/china-shifts-stance-letting-dying-firms-go-bankrupt-1488586442

https://www.ft.com/content/35fa6886-fcc9-11e6-96f8-3700c5664d30

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Alibaba, a Brief Overview and Singles Day Performance (11/11)

Alibaba’s rise to become one of the biggest internet firms in the world has been nothing less than meteoric, a growth trend that is correlated to a degree with the rise of Amazon, a company that Alibaba is frequently compared to.  Founded in 1999, Alibaba is a wide ranging conglomerate that provides consumer-to-consumer, business-to-consumer, and business-to-business sales services via web portals.  It also provides services in electronic payments, shopping search engines, and data-centric cloud computing.  Their E Commerce wing is the strongest section of their conglomerate, with main divisions including Taobao (most popular C2C website in the world), TMall (Alibaba’s B2C platform- competes with Amazon), and their cloud services (second largest in China).  As of April 2016, it is the world’s largest retailer surpassing even Walmart with operations in over 190 countries.  The numbers speak for themselves in Alibaba’s retail dominance, as they generate more revenue than Amazon/Ebay combined, with online sales/profits surpassing all US retailers (Walmart, Amazon, eBay) combined (Forbes).  80-85% f al E-commerce transactions in China are from Alibaba!

Jack Ma, their CEO, is one of the most respected individuals in China and is credited with fostering entrepreneurial ambitions among the country’s youth.  Pursuant of Jack Ma’s philosophy, Alibaba upholds a reputation in consumer friendliness among their products.  Reflective of their trust with the Chinese public, Alibaba’s Taobao is considered an intricate part of people’s daily lives, with many consumers trusting Taobao for loans rather than government banks/SOE’s.  This trust is seen in the number of users, as Alibaba’s China retail marketplaces boast some 440 million active users shopping the virtual stores of millions of businesses (no other platform comes close in scale).  It is because of this positive conception with the Chinese public that allows Alibaba to see major gains during Singles’ Day, a popular Chinese holiday among the younger demographics which celebrates being single.  Singles’ Day has become the largest online shopping day in the world, and a way of life.  in 2016, Alibaba passed $14B in revenue on Singles’ Day, more than double the $5.8 billion in sales of the combined U.S. e-commerce holidays of Black Friday and Cyber Monday.  Similar to Amazon’s popularity with millennials, Alibaba hopes to continue to build their trust with Chinese millennials, a demographic that accounts for 58% of all internet users in a country with the world’s biggest e-commerce market at $672 billion in 2015 (McKinsey & Co.).  Their spending power is crucial to many businesses on Alibaba’s platform, and this group will be set to drive future 11.11 spending.

Going forward, the company’s growth projection looks strong based on their recent e-commerce quarter performance driven by 11/11 promotions.  Their online marketing services and commission revenues showed better growth Y/Y, and their search advertisement revenue for China retail business is likely to grow 50% Y/Y (32% M/M growth).  The Y/Y growth is mainly driven by the growth of click volume, in which the average cost per click was flat Y/Y.   Tmall GMV grew 32% Y/Y in October 2016, and high growth will continue partially due to the low base in October 2015 and partially due to the early promotions of 1/11 sales events.  With mobility such a crucial aspect of today’s society, Alibaba’s Tmall mobile adoption continues to grow faster.  There were 138M incremental downloads of Mobile Taobao and 92M incremental downloads of Mobile Tmall from 1012/2016 to 11/128/2016.  The ranking of Taobao’s iOS App went up from 17 in September to 9.8 in October 2016.

Ultimately, Alibaba is guided by a strong CEO that recognizes adaptability methods to changing consumers and society, and is willing to continue to further internet penetration not only in China but also the rest of the world.  Ma’s statements for major expansions worldwide echoes the company’s commitment to growth.

Citations:

T.H. Data Flash – Alibaba Group – October 2016

What Everyone Should Know about Alibaba – Quora

Chinese Millennials set to drive 11.11 Spending (Alizila): http://www.alizila.com/chinese-millennials-set-to-drive-11-11-spending/

Alibab’s Singles’ Day: What do we Know About the World’s Biggest Shopping Event.  https://www.forbes.com/sites/franklavin/2016/11/06/alibabas-singles-day-what-we-know-about-the-worlds-biggest-shopping-event/#13867a506da7

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Is China the new hub for Technology?

Through the semester we have come to realize that China can no longer sustain on low skilled jobs. The economy needs to begin to move into a more complex industry in order to continue growing maintain a competitive edge. While we may not see headlines in the United States yet, private companies in China may have already begun taking huge stakes in the internet.

Uber has long been the largest private internet company but many Chinese companies aim to take Uber’s place. Back in April 2016, people were valuing Ant Financial at around $60 Billion dollars, a Chinese financial assistance company, beating Uber by $9 billion dollars. Today, while Ant financial no longer has the same valuation as before, two Chinese companies follow Uber: didi chuxing (滴滴出行) at #33.8 billion and Xiaomi (小米科技) at $46 billion.

Didi Chuxing is a ride-sharing company exactly like Uber. Besides being created in China and User-Interface differences, the two apps operate the same way and yet Uber lost almost a billion dollars in 2015 trying to compete with Didi Chuxing. Last year, after a long hard battle, Uber decided to be bought by Didi Chuxing particularly due to losses totaling to almost a billion dollars again. With such an acquisition, Didi Chuxing now looks to expand into the global market and perhaps one day overtake Uber in valuation. 

Xiaomi is the fourth largest phone manufacturing company behind Huawei, Samsung and Apple. Like Huawei, people do not recognize the brand Xiaomi very often in the United States but have constantly released their own line of processors and smartphones. Xiaomi’s low-budget smartphones may have limited their global launch but they have begun starting in India. At an event in Dubai, they showed three new models ready for launch in India and North Africa.

So we must keep a close eye on these industries as they slowly begin entering the global market. Both Xiaomi and Didi Chuxing have yet to fully enter and achieve a worldwide presence thus it will be interesting to see how they plan to enter their respective saturated markets in the United states. Didi Chuxing could face the same fate as Uber if they expand to the States and Xiaomi may simply never make a dent in the smartphone market.

Sources:

https://www.cbinsights.com/research-unicorn-companies

Alibaba’s financial spinoff is now the world’s most valuable private internet company

https://www.wsj.com/articles/china-s-didi-chuxing-to-acquire-rival-uber-s-chinese-operations-1470024403

http://www.globaltimes.cn/content/1034391.shtml

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Does China’s Investment in Africa Have Ulterior Motives?

In December 2015 the Chinese promised a $60 billion aid package to boost infrastructure and economic development in a wide range of African nations. While Chinese investment in the region is not new, the price tag certainly is. In 2008, the Chinese sent only $7 billion, ramping it up to $30 billion in 2013. This increase is even more significant is more astounding given uncertain economic times in China due to a well-covered slow down. While China sends foreign aid to South East Asia and the Middle East, those figures dwarf its recent African investment. While China makes no direct efforts to conceal exactly what this money is going to, it also isn’t forthright with its intentions through some central plan, data tracking, or grand presentation on its goals. That can only leave those of us in the Western world to hypothesize.

http://www.diplomaticourier.com/wp-content/uploads/2015/12/Photo-by-REUTERS-Christopher-Herwi.jpg

So, what is driving China’s decision to inject this much capital into diverse areas of the continent. Some would be quick to say humanitarian aid. While China’s targets have been economic stimulation and not specific aid initiatives like food for areas facing famine or aid in the recent ebola outbreak, even a socialist state would admit a rising tide lifts all boats. China is potentially trying its hand at creating a little capitalist growth by investing in individual firms to lift entire areas. This could be purely a selfless exercise on the part of the Chinese government, however experts are cynical.

Then there is the other extreme believing China is attempting to buy influence in the region. 63% of African nations approve of Chinese influence in the region. Most of the African nations targeted specifically by investment initiatives prefer the Chinese economic model to the American. There are dozens of conspiracy websites laying out why specifically China would be amassing influence in Africa, however no matter the reason, the investment has certainly upped its esteem in the region. Maybe China is planning to amass allies for political and economic gain in the future in the case of a trade war or other economic tension that could arise between China and the West.

http://www.chinaafricarealstory.com/

The theory with the most traction is a somewhat middle ground between the completely altruistic view and the influence buying view, believing that China is targeting its investments to produce a reliable source of cheap resources.  While some would call buying coal mining operations and access to oil and gas a form of modern colonialism, firm level investments have aided both Chinese investors and African business owners. Africa also hosts many rare resources such as metals used as semi-conductors in technological manufacturing carried out largely in China. As the Chinese learned through their own rural development initiatives, cheap resources and products are nothing without the infrastructure to move them from point A to point B. African infrastructure let’s China transport the resource it acquires more efficiently. By investing in ways to make raw materials cheaper, China helps cut some of the costs of manufacturing, which have been rising as of late.

While the Chinese are not necessarily open with their intentions in Africa, this will be important to watch in the next few years, particularly as China continues to develop into a service oriented economy and away from sole reliance on manufacturing.

 

Sources:

http://knowledge.wharton.upenn.edu/article/chinas-investments-in-africa-whats-the-real-story/

https://www.brookings.edu/wp-content/uploads/2016/06/Why-is-China-investing-in-Africa.pdf

http://www.cnn.com/2016/11/03/africa/what-africans-really-think-of-china/

 

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Overview of China’s Healthcare System

Total Health Expenditures of Countries (% of GDP) http://www.nejm.org/doi/full/10.1056/NEJMp1413937

Possessing a viable healthcare system is essential for the social and financial wellbeing of a country. The Chinese healthcare system has changed dramatically since 1949 and the rise of the Communist Party of China. Since 1949, healthcare coverage has gone from universal to almost none in 1982, to now, reportedly, 95% (Wordbook 2012). The Health and Family Planning Commission aims to have universal health care by 2020. While coverage is broad, its depth has been questioned recently. In 2014, China spent 5.5% of its GDP on healthcare, compared to the U.S. who spent 17.1% of its GDP n healthcare for a population a fraction of China’s (World Bank).

Part of China’s most recent healthcare reform in 2008 is to provide a vast network of primary care, especially for those in rural areas which contain the majority of the Chinese population. The Chinese healthcare system is organized into three tiers of increasing intensity of care. With primary care facilities in villages or towns as the first tier, county hospitals as the second tier, and tertiary hospitals, usually located in major cities. As a patients visit facilities on higher tiers, their copayments often increase by orders
of magnitude for each tier (Bumenthal et al.). This can lead patients to fail to seek out necessary treatment.

The Chinese healthcare system is overseen by the Health and Family Planning Commission to ensure fair healthcare across all of china, however with 45% of hospitals privately owned and mainly for-profit, quality of care and professionalism can vary (The Commonwealth Fund). The majority of Chinese hospital profits come from prescriptions, which are often not covered by the general government provided health insurance. Hospitals are allowed a 15% markup in distribution of prescription drugs, givi
ng providers financial incentive to generate demand for more expensive drugs (The Commonwealth Fund). Pilot programs, including 3,077 public county hospitals and 446 public city hospitals, were put in place in 2015 to try to eliminate markups of prescription drugs (The Commonwealth Fund). For perspective, as of 2013 there were 24,706 total hospitals and 915,368 primary care facilities in China. Thus, eliminating the profit maximizing behaviors  of drug companies and healthcare providers, potentially harming patient quality of care, still has a long way to go.

https://www.wsj.com/articles/china-health-authorities-say-five-patients-at-hangzhou-hospital-contracted-hiv-1486646748

Recently, quality of care in China has been under fire following an HIV outbreak in Hangzhou hospital on January 26th, 2017. The Wall Street Journal reports the outbreak was caused by a technical violating protocol and reusing a needle that had come into contact with a patient positive for HIV. Interestingly, this story was scrubbed from Chinese news stations, suggesting a lack of transparency in the Chinese public health system. This is alarming, especially considering the consequences of the delayed public announcement resulting in the SARs outbreak in 2003.

In conclusion, China continues to develop its healthcare and public health system to meet the needs of its massive population. Comprehensive coverage and quality care still remain issues, but China has come a long way in the past 20 years and continues to implement new policies and programs to provide the best healthcare for its citizens.

References:

https://www.wsj.com/articles/china-health-authorities-say-five-patients-at-hangzhou-hospital-contracted-hiv-1486646748

http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS

http://www.sciencedirect.com/science/article/pii/S0378720616300337

http://www.nejm.org/doi/full/10.1056/NEJMp1413937

http://international.commonwealthfund.org/countries/china/

http://www.sciencedirect.com/science/article/pii/S2212828X16300445

 

 

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China’s Renewable Energy Renaissance

On January 5th 2017, The Chinese National Energy Administration (NEA) announced a plan to spend more than 360 Billion dollars on solar and wind energy infrastructure through 2020. China’s involvement in renewables has been an ongoing endeavor over the past ten years; In fact, China’s production of photovoltaic cells has increased 100-fold since 2005. Because of their commitment to produce this renewable energy at such large quantities, they have achieved the Swanson Effect which says that as photovoltaic production doubles, its price drops by 20 percent.

China’s January 5th announcement is important for a few reasons. It will create more than 13 million jobs in the renewable energy sector, reduce the emissions of greenhouse gasses and clean the air in cities like Beijing which has been plagued by smog. Although China increased their efforts in renewable energy, they are still a large contributor to the global climate change crisis; China currently emits twice as many greenhouse gasses as the United States. Given the comparable sizes of the country, this is not a completely fair comparison, but it does show the magnitude of emissions produced by China. Because of this, China is now  rapidly increasing their efforts in clean energy.

To contextualize the breadth of The NEA’s efforts, Greenpeace estimates that “that China installed an average of more than one wind turbine every hour of every day in 2015, and covered the equivalent of one soccer field every hour with solar panels.” In addition, China may meet its 2020 goal by 2018 given the rapid pace they are currently moving.

There is another story behind China’s renewable investment, and that is coal. According to analysts, China’s coal consumption peaked in 2014 and many believe that it will never return to these levels. At its peak, roughly 70% of China’s energy was derived from coal, though this is now declining. Currently, it is estimated that over 15% of China’s energy now comes from renewables and this percentage should increase to as much as 25% as the 2020 plan draws to completion. There is still much room to grow for China in the renewable space, but if their previous actions are any indication, there is no intention to slow down any time soon.

Sources:

https://www.nytimes.com/2017/01/05/world/asia/china-renewable-energy-investment.html

http://www.nature.com/news/economics-manufacture-renewables-to-build-energy-security-1.15847

https://cleantechnica.com/2016/09/15/latest-trends-chinas-continuing-renewable-energy-revolution/

https://qz.com/641993/the-worlds-biggest-polluter-is-now-the-world-leader-in-renewable-energy-spending/

https://www.theguardian.com/environment/2016/jul/25/china-coal-peak-hailed-turning-point-climate-change-battle

https://qzprod.files.wordpress.com/2016/03/screen-shot-2016-03-17-at-3-42-04-pm.png?w=1600

http://www.forbes.com/sites/wadeshepard/2016/07/08/if-china-is-so-committed-to-renewable-energy-why-are-so-many-new-coal-plants-being-built/#29b961c265f7

 

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The Impact of the Chinese New Year On Domestic Consumer Activity

According to data on the website of the Swiss Federal Customs Information, gold exports to China from major producer Switzerland skyrocketed in December of 2016, with more exports than any other month since January 2014. Given that China is consistently one of the world’s top gold consumers, this may not seem entirely unusual. However, it might have been preparation for the recent Chinese New Year, which brought in the Year of the Rooster, that was responsible for the spike in gold purchases.

The beginning of the Year of the Rooster, which began on January 28th, is commonly associated with gifting gold, which, along with lower prices at the tail end of 2016, led to the increased demand for the precious metal. The rooster is one of the 12 rotating animals on the Chinese zodiac.

The massive spike in gold exports to China is based upon consumers’ interpretation of the zodiac. However, the Chinese New Year brings plenty of other major rifts in Chinese consumer activity.

Travel, especially in groups or with families, rises significantly in China during the holiday season. According to ForwardKeys, a firm that predicts future travel patterns and analyzes over 16 million booking transactions a day, there was an 18% rise in bookings made by families of up to four members for travel during this holiday season compared to last year (as of December 30, 2016). While most Chinese travelers prefer Asian destinations, Europe is becoming a more popular hub for Chinese tourism in the holiday season; bookings for travel to Europe were up by 56% over the New Year.

The spike in tourism during the Chinese New Year carries a hefty price tag; According to research by the China National Tourism Administration and Ctrip (a Chinese travel company) spending projections are about 100 billion yuan (US$14.5 billion) this New Year fpr around six million Chinese traveling outside the country. Last year’s holiday period saw an economic impact of 90 billion yuan from overseas travel by 5.2 million Chinese,

The new year also carries weight for factory workers, as Chinese factories shut down for the holiday, with hundreds of millions of migrant workers heading to their hometowns. In the lead up to the holiday, factories run flat out to fill orders before shutting, but workers start setting off as much as two weeks earlier on packed trains and buses. After the holiday they may take the same amount of time to return, or not. The holiday is a prime occasion to switch jobs.

This can be unnerving for retailers and importers overseas who rely on China. Shipping companies warn customers that China’s transport networks are at capacity during the holiday and that shipments need to be ready well before the nation-wide shutdown begins.

Between the arbitrary influence of the zodiac and the actions of consumers in preparation for the holiday, the Chinese New Year has a far-reaching effect on both the Chinese and world economy.

 

Sources consulted:

https://www.bloomberg.com/news/articles/2017-01-26/china-s-gold-imports-from-hong-kong-rise-as-lunar-new-year-looms

https://www.bostonglobe.com/business/2015/02/18/chinese-new-year-and-its-effect-world-economy/0HgwjHXjCODvwNdJXZdNQI/story.html

http://www.forbes.com/sites/hamdiraini/2017/01/24/chinese-new-year-travel-trends-to-look-out-for-in-2017/2/#7a9229557695

 

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The Rise of China’s Credit-Driven Economy

China’s economy has developed rapidly since its evolution from a planned economy, but only recently have consumers built up enough trust in the system to deviate from face-to-face cash transactions that they have relied on for decades. Using credit as a means to purchase goods is a relatively new concept to the Chinese, but its quick adoption has resulted in several benefits, but also unforeseen consequences.

Researchers at the University of Missouri found that credit card adoption in China grew 40% between 2004 and 2009. Despite this astronomic growth, only 30% of urban Chinese households had atleast one credit card in 2012. While the Chinese are realizing the convenience of having a credit card, the government is also encouraging individuals to develop credit histories. In 2015, the government awarded eight companies consumer credit rating licenses in an attempt to develop this new segment of the economy. One such rating agency, Sesame Credit, which is run by Alibaba, offers perks to those who have high credit scores, further incentivizing the use of credit.

Access to credit has dramatically increased consumption in China, especially with the rise of online-retail. Alibaba, who has developed its own virtual credit card, sees a 50% increase in spending from consumers who spend less than 1,000 yuan ($145) online
a month after they receive the card. While these increased consumption patterns bode well for the Chinese economy, there are also unforeseen consequences.

In the first quarter of 2015, Chinese consumers’ credit card debt hit a record high of ~$411 billion, up 35.49% from the first quarter 2014. In tandem with a slowing economy, this figure represented 18.1% of China’s first quarter GDP, compared to 3.8% in the United States. As the use of credit continues to rise, and the economy continues to slow, Chinese regulatory authorities will be forced to implement measures that protect from a potentially catastrophic credit crunch.

 

Sources:

http://www.economist.com/news/finance-and-economics/21710292-chinas-consumer-credit-rating-culture-evolving-fastand-unconventionally-just

http://www.chinaeconomicreview.com/chinas-consumers-embrace-credit-cards-regulators-rebuff-new-industry-entrants

http://munews.missouri.edu/news-releases/2012/0828-chinese-credit-card-usage-growing-quickly-mu-study-finds/

https://www.ft.com/content/e1469cf0-9cf5-11e3-9360-00144feab7de

http://www.vox.com/2015/7/8/8911519/china-stock-market-charts

http://www.tradingeconomics.com/china/consumer-credit

 Here are U.S. Data for comparison by The Prof
 US Credit Card Debt to GDP
US Credit Card Debt to GDP

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Winners and Losers: US-China Trade War

Much recent literature on US-China trade relations has focused on the possibility of a trade war between the countries with the two largest GDPs in the world. New US President Donald Trump has consistently accused the Chinese of manipulating their currency, which is an outdated claim. Most conservative estimates suggest that China has spent over $1 trillion in foreign reserves to bolster the value of the renminbi. As part of his campaign rhetoric, Trump threatened a 45% tariff on all Chinese imports if the Chinese did not end this “currency manipulation.”

But what would be the Chinese response to such an imposition? Luckily, we have some insight into what such a tariff would look like. In 2009, shortly after taking office, President Barack Obama imposed a 35% tariff on Chinese tires. In response, the Chinese took a case against the US to the World Trade Organization, to no avail. Thus, China took steps to impose tariffs on several US products, leaving both countries with losses as a result. If President Trump were to impose an even higher tariff on all Chinese goods, the results could be disastrous for both countries. Chinese exports to the US have been steadily increasing, and Chinese officials see no cause for concern over the potentiality of a tariff, since the US market only accounts for about 18% of their exports. Officials say that if a trade war were to occur, US companies like Apple, which rely on inputs made more cheaply in China, would suffer much more than Chinese companies would. While the Chinese could simply replace Boeing orders with Airbus, auto and iPhone sales in the US would suffer a huge setback.

The large (and growing) trade deficit between the US and China is indicative of an unbalanced flow of goods between the two countries. Further, while Chinese exports to the US account for 18% of their total exports, Chinese goods account for 22% of all imports. A trade war would be detrimental to hundreds of US firms which rely on imports of inputs to their production processes. As we know from economic theory, increasing the cost of inputs to a production function decreases the quantity of those inputs, and thus decreases the total output a firm can produce. This would dramatically affect many companies, like Apple, which have huge fixed costs associated with the production of their product. In the long run, although the US might see some tax revenue from such high tariffs, China would likely be the winner of a trade war, as they could, with relative ease, send their exports to other countries while US companies would struggle to find alternative sources of imports.

Sources Consulted:

http://www.tradingeconomics.com/china/exports

http://www.globaltimes.cn/content/1017696.shtml

http://money.cnn.com/2017/01/03/news/economy/obama-china-tire-

tariff/http://www.worldsrichestcountries.com/top_us_imports.html

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China’s Service Economy

China’s rapid economic growth into an industrial production powerhouse is well-documented but recent developments suggest this trend could be reversing. Known as the world’s largest production/expenditure economy, China is slowly transitioning into an economy centered on consumption and service. Growth in China’s industrial sector has slowed from 7.3% to 6.0% over the past 3 years as services grew at a rate of 8.3% in 2016 compared to 7.8% the year before. In addition, consumer spending increased by 9.6% in 2016. This increase can largely be attributed to a 26.% rise in online retail sales which is quickly becoming a staple of the Chinese economy. The development of China as a consumer/service economy in recent years mirrors the slowing of overall economic growth. In 2016 China’s economy grew by 6.7% percent down slightly from 6.9% in 2015 and more significantly from 7.3% in 2014. What is the relationship between China’s service/consumer growth and the slowing of overall economic growth?

The Chinese government paints the increase in consumption and the service sector of the economy as a successful policy pivot. President Xi Jinping touts the growth of consumer spending as a result of his plan to double citizens income between 2010 and 2020. However, many independent analysts see the rise of consumption and the service sector as more reflective of a weakening industrial sector rather than a successful policy pivot to service sector growth. This is why many see the increase the proportion of service as a part of GDP, up to 64.7% last year, as merely compensating for a lagging Chinese industrial sector. Slowing markets and lack of fiscal support for new industrial projects, especially in construction, have contributed to the relative decrease in Chinese industrial power.

It remains to be seen whether this trend of slowing industrial growth in China will continue into the future. Despite growing at lower rates than the previous two years, Chinese manufacturing still grew throughout 2016 and even outperformed projections of slower growth. The same factors that allowed China to grow into a powerful production economy (massive population, low barriers of entry) could certainly continue to sustain China as an industrial power. However, the data suggests that consumption and services will continue to grow relative to production over the next few years and possibly even further into the future. How Chinese policymakers handle the transition to a service/consumption economy will be interesting to observe over the next few years.

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Shanzhai innovation

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iPhone City

It is not hard to understand how China, with its massive, young, and tech savvy population, buys more iPhones and smartphones than any other nation on earth. The Chinese also make almost all of them. There’s a clichéd animosity toward the “Made in China” phenomenon here in the states, for many reasons: The loss of American jobs to overseas labor (an inevitable result of globalization), the large trade imbalance between the U.S. and Asia, and the notion that large companies like Apple subject their Chinese workers to harsh and inhumane working conditions. Donald Trump made headlines with another characteristic threat towards Apple’s Tim Cook, not-so-subtly suggesting that Apple should start making their products in the states (or else).

However, when one looks at the dynamics of comparative advantage and industry in China, this is truly a ridiculous concept for Donald to worry himself about. It’s also borderline insane to expect Apple to simply move their entire production line to the states based on the threat of a tariff. The perception of this Trump ideology is that Apple is screwing over the American worker in search of more cash. Indeed, it is far cheaper to produce iPhones in China ($65 cheaper to be exact) than in the U.S. It’s also extremely important to consider Apple’s supply chain for the iPhone. Almost every single part is produced in Asia, with the exception of most semiconductors, which are produced in Europe. If one wanted the iPhone to be “made in America,” not only would Apple have to open a factory here, but so would every single one of its suppliers.

It’s also important to recognize that the quality of Chinese factories and production lines are far better than any in the United States. We “can’t compete” with the supply chains that are in place there. Executives say that there are literally not enough technically skilled Americans who would want to do the job.

One of the main criticisms lobbed against Apple is their hiring practices overseas and working conditions in the factories. Very low pay and long hours are the main complaints, and Apple has spent ample resources to try and shake this perception with little success. However, there are many positives when an Apple plant comes to town. Not only does a factory hire tens of thousands of workers (an absolutely massive injection into the local economy, low wages aside), but it improves the relations between locals and their governments. Officials actively seek to make their town the home of the next hardware factory, and offer millions of dollars in money upfront to build them. In Zhengzhou, affectionately known as “iPhone City,” they produce 500,000 iPhones every single day. The local government is reported to give significant tax breaks and subsidies to Foxconn, one of Apple’s manufacturers, to keep the jobs there.

I don’t think Apple wants to go anywhere soon. It seems that Chinese workers, the Chinese government, and the American consumer, all agree.

 

References

Barboza, David. “How China Built ‘Iphone City’ With Billions In Perks For Apple’S Partner”. Nytimes.com. N.p., 2017. Web. 1 Feb. 2017.

Bradsher, Charles. “Apple, America And A Squeezed Middle Class”. Nytimes.com. N.p., 2017. Web. 1 Feb. 2017.

“Donald Trump Says He’ll Stop Apple From Making Iphones In China”. Fortune.com. N.p., 2017. Web. 1 Feb. 2017.

Oster, Shai. “Behind The Scenes At Apple’s Controversial China Iphone Factory”. chicagotribune.com. N.p., 2017. Web. 1 Feb. 2017.

 

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Chinese Investment in Foreign Real Estate: Motivations and New Regulations

Data released in the first week of January indicate that Chinese investments in global real estate continued to grow rapidly in 2016, hitting a record $33 billion. The United States is the most popular venue for Chinese investment, followed by Hong Kong, Malaysia, and Australia. As the Chinese upper class continues to expand, global real estate has gained prominence over other forms of investment because it is easily managed and even easier to understand. The majority of investment in foreign real estate comes through insurance companies, conglomerates, and property developers.

Fig 1: Chinese investment in foreign real estate, by market  (https://www.ft.com/content/d8d80b6e-e381-11e6-8405-9e5580d6e5fb)

Klaus E. Meyer, of Forbes, identifies three major factors which may be motivating Chinese investment in foreign real estate. Firstly, investors may simply be seeking assets which are expected to yield a good return, as real estate in metropolises like London and New York typically do. Secondly, as Chinese companies begin to go global, they might look for new real estate development opportunities by building commercial and residential buildings across the globe. Lastly, investing in foreign markets provides an opportunity for Chinese businesses to diversify their assets, especially amid growing concerns about the slowdown of the domestic economy.

As we discussed in class, however, the Chinese government is growing concerned about the ever-increasing rate of capital outflows. A domestic economic slump has resulted in further concerns about the government’s ability to keep exchange rates stable, as Chinese foreign currency reserves fell to a six-year low of $3.052 trillion in November. On Jan. 2nd, 2017, the Chinese government announced that banks would have to submit reports on overseas cash transactions of more than 50,000 yuan (around $7,000), down from 200.000 yuan prior to new regulations. In addition, banks will have to report any overseas transfers by individuals of more than $10,000. Rueters reports that Chinese citizens were restricted from purchasing “overseas property, securities, life insurance or other investment-style insurance products.” While it is unclear to what effect new regulations will have on corporate overseas investments, they will certainly restrict the ability of individual investors to engage in foreign real estate markets. It may be that the glory days of Chinese investment in foreign real estate as we know them are be over.

Fig 2. Chinese owned properties in London (http://www.forbes.com/sites/ceibs/2016/05/05/whats-behind-chinas-worldwide-real-estate-shopping-spree/#d409cd1ce29d)

Sources Consulted

https://www.ft.com/content/d8d80b6e-e381-11e6-8405-9e5580d6e5fb

http://www.reuters.com/article/us-china-yuan-idUSKBN14M032

http://fortune.com/2016/08/18/china-overseas-property-investment/

http://www.forbes.com/sites/ceibs/2016/05/05/whats-behind-chinas-worldwide-real-estate-shopping-spree/#d409cd1ce29d

 

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