For future reference re China — $4 trillion in e-commerce?

November 28th, 2017

In 2016, the value of merchandise and services traded on e-commerce platforms reached 26.1 trillion yuan ($3.92 trillion), up 19.8% from a year ago, according to data from the Ministry of Commerce. The e-commerce industry and related sectors are employing 37 million people, the ministry said.


November 27th, 2017

Economic Times:

Despite China’s economy being far superior to India’s, its neighbour has a clear edge: a thriving democracy and an open economy. Yet, China is producing more and bigger entrepreneurs than India. The rise of Tencent, Alibaba, Baidu and Xiaomi from zero to billions of revenue in just a few years has no parallel in India. How could an authoritarian state have bigger private enterprise than a democracy?

Low wages, subsidies, institutional reforms, foreign investment and a favourable demographic have no doubt fuelled the Chinese growth in the past decade, but the recent explosion of private enterprise can be best explained by its crazy internet boom that has pulled a big majority of its people into formal economy.

In his 2015 book ‘China’s Disruptors’ Edward Tse coined an acronym to identify factors that triggered the entrepreneurial explosion — SOOT, which stands for scale, openness, official support and technology. These factors can be best seen operating together in China’s growing digital economy marked by huge people participation, transparency, supportive government policies and, well, technology.

Related: BATS with FANGS.

Following the HNA drama

November 26th, 2017

Hilton. Goldman and BofA. WSJ. Also: “lessors with exposure to HNA affiliates include AerCap, Aircastle, Aergo Capital, Air Lease, ALAFCO, Apollo Aviation , Aviation Capital, Avolon, BBAM, BOC Aviation, Bocom Leasing, Bohai Leasing, CCB Leasing, CDB Leasing, CALC, China West Air, DAE Capital, ECC Leasing, Everbright Financial Leasing, GECAS, Goshawk, Hong Kong International Aviation Leasing, ICBC Leasing, Jackson Square Aviation, KKR DVB Aviation Capital, Macquarie AirFinance, Magnetar Capital, Merx Aviation, Minsheng Financial Leasing, Orix Aviation, Skyco Leasing, SKY Leasing, SMBC Aviation Capital and Sojitz Aircraft Leasing.” Quite a drama. Stay tuned.

Getting a little hard to keep up with all these changes

November 25th, 2017

China Daily:

50% of the global gross domestic product will derive from the digital economy, with the percentage in China to potentially hit 55%, predicted Wu Lianfeng, vice-president of the market research company IDC China in Beijing on Monday. By 2019, global capital expenditures for digital transformation will reach $1.7 trillion, a 42% increase from 2017, and the figure will hit $310 billion in China, a 35% increase from 2017, he said on the company’s annual Futurescape event, which focuses on digital transformation.

Wu said that by 2020, over 70% of China’s top 1,000 enterprises will explore and implement cross-industry expansion and cooperation with the help of information technology platforms and technology enablers, driving toward their business transformation, innovation and growth. He cited Neusoft as an example as it started as a software company, but has tapped into the medical sector. By 2021, global enterprises will spend over $530 billion in cloud services and cloud-enabling hardware, software and services, doubling the current spending. Chinese enterprises will spend over $30 billion in this area, and the cloud-computing environment will diversify and enter the 2.0 era, which will accelerate the commercialization of 5G, according to Wu.

He also said that a blockchain is never equivalent to a bitcoin because it is more than just finance and can be used in many industries such as the manufacturing and medical sectors. He said by 2021, at least 25% of the world’s top 2,000 enterprises will adopt blockchain services at scale as the foundation for digital trust, while in China, the adoption rate might be 20%. He added that by 2020, China will see 20% of its banks, 30%of its supply chains and 10% of its health care institutes fully embrace blockchain networks in their operations.Wu said that by 2019, 40% of the world’s digital transformation initiatives will employ AI and by 2021, more than 90% of consumers will interact with customer support robots.

Forbes: “China has a rising digital economy, which is equal to 30.3% of GDP or 22.6 trillion yuan ($3.35 trillion) and is driven to a large extent by leading technology companies Baidu, Alibaba, and Tencent. They have driven the digital economy forward, providing 42% of the $31 billion venture capital investment in China in 2016.” Wow.

More numbers

November 24th, 2017


mining output declined by 1% year-on-year, thanks to Beijing’s efforts to strengthen environmental standards ahead of the winter heating season. At the same time, production of electronic equipment, computers and IT-related products has continued to grow strongly, up 13% relative to a year ago. Such a divergence is one indication that the economy is moving up the value-added chain.

A similar trend is evident in corporate investment. Growth in total fixed-asset investment eased in October, driven by a 2% decline in heavy-polluting industries.

However, corporate capital expenditure in hi-tech sectors has continued to climb, up 17% year-on-year. President Xi Jinping’s pledge to foster growth in innovation and cutting-edge technology should ensure that research and development, and hardware investments in these industries will continue to grow at a buoyant pace for years to come.

Finally, changing consumer shopping behaviour has driven an ongoing divergence between online and offline retail sales. The 6% growth registered in offline sales was pale in comparison to the 34% jump in online activities.

The 34% doesn’t include Singles’ Day: Alibaba set a world record for payment transactions, with its mobile wallet app Alipay processing 256,000 payment transactions per second, in 2017. A total of 1.48 billion transactions were processed by Alipay in the entire 24 hours, with delivery orders through Cainiao (Alibaba’s logistics affiliate) reaching close to 700 million, breaking 2016’s record

Turkey, dressing, and gravy

November 23rd, 2017

Dressing. Gravy. Turkey. Gobble, gobble.

China forex reserves down from 40% of money supply to 10%

November 22nd, 2017


Last week, the People’s Bank of China injected cash totaling 810 billion Chinese yuan ($122.4 billion) in five straight days of daily liquidity management operations. Those actions, which represented the largest weekly net increase since January, were in part a Beijing response to its 10-year sovereign bond yields spiking to multiyear highs, experts said. Nomura analysts said last week in a note that the bond rout was due to fears of regulatory tightening from Beijing. Bond yields, which move inversely to prices, briefly hit 4% in China for the first time in three years.

With the foreign exchange reserve being relatively fixed, foreign exchange reserves as a share of money supply have fallen from 40% just five years ago to 10% today,” Victor Shih, a professor and China expert at UC San Diego, told CNBC.

The foreign currency reserve is a primary tool for managing currency values — an important issue for China — and the increasing base of liquidity should continue to dilute its power, Shih added. Over time, as the ratio declines, it will get harder for the FX regulator to counteract capital flight: Beijing keeps money in its system (and the yuan strong) by buying up its currency in international markets with its horde of foreign cash. So if there’s more RMB to buy, then the reserves won’t go as far. Shih suggested such a situation could eventually “wipe out” the reserves entirely.

That would leave Asia’s largest economy exposed to outside shocks. “That is a great weakness of China, it’s something external, especially if we have things like multiple rate hikes in the Federal Reserve,” Shih said.

With M2 in China being 3x the US as a percent of GDP, $3 trillion in forex reserves suddenly doesn’t sound like a lot of money.

Another one bites the dust

November 21st, 2017


Lu Wei, a propaganda officer for China’s Communist Party who in recent years personified its effort to shape the global internet, on Tuesday became the first major political figure to come under corruption scrutiny since President Xi Jinping’s second term began last month. Mr. Lu, a former director of China’s top internet regulator, is being investigated for alleged “serious violations of discipline,” the party’s disciplinary agency said in a one-sentence statement, using a common party euphemism to describe corruption. Mr. Lu couldn’t be reached for comment and it wasn’t clear whether he has legal representation. The 57-year-old’s political career has been under a cloud since he was removed as director of the Cyberspace Administration of China in June 2016, though he has retained his title as a vice minister at the party’s propaganda department.

The state news agency served as a launchpad for Mr. Lu, whose first political post was as a Beijing vice mayor in charge of propaganda. In 2013, after Mr. Xi came to power, Mr. Lu was put in charge of civilian internet policy, first at the State Council and then at the new Cyberspace Administration. Much of that initial work involved promoting Mr. Xi’s leadership. Mr. Lu quickly too aim at China’s then-primary social media platform, Weibo Inc., and celebrity bloggers who often gained tens of millions of followers with biting commentaries on food safety, property prices and air pollution that couldn’t be seen in state-run media. To hammer home his seriousness, Mr. Lu sometimes met groups of the most famous bloggers for dinner, where he warned them that rumor-mongering was illegal in China.

Mr. Lu also met with editors of international media on news coverage he considered too critical. Several publications became inaccessible online in China after he came to office, including The Wall Street Journal.

TV news in China is pretty weird, sometimes blacking out and often being edited in odd ways that are sometimes funny. In other news, here’s an interesting discussion. Oops! We didn’t realize that one of the participants is a criminal, convicted of the crime of thinking clearly.

From 240% to 310% Debt/GDP in just a few years

November 20th, 2017

Nikkei Asia Review:

Allowing giants like Goldman Sachs and J.P. Morgan Chase to grab 51% of mainland securities firms radiates confidence. So does removing caps on the overseas stakes in banks. But what if Xi’s unquestioned omnipotence makes China’s economy more fragile in the long run?

For all the pageantry, muscle-flexing and bold decrees at last month’s 19th Party Congress, Xi is demurring on what should be the most important reform: scrapping China’s annual gross domestic product target, now set at 6.5%.

Even before Xi’s time, back in 2010, famed short-seller James Chanos of New York-based Kynikos Associates began describing China as the Enron of economies. Beijing, he warned, was on a “treadmill to hell” with expanding asset bubbles, a fudging of official data, double account books, weak transparency and a dot-com-like denial than things could ever end badly. “Only in China,” Chanos quipped to Bloomberg recently, “would growth in banking assets of 15%, twice the GDP last year, be considered deleveraging.”

Now it is People’s Bank of China Gov. Zhou Xiaochuan raising related concerns as he prepares to retire. Zhou has gone so far as to warn of a “Minsky moment,” when a debt-fueled boom meets a nasty end. Chinese bank assets, it’s worth noting, are at least 310% of GDP compared with 240% in 2012, when Xi was taking the reins, according to the International Monetary Fund.

By clinging to the GDP target model, Xi is keeping China on the treadmill. His emperor-like dominion makes it all the more necessary for officials to toe the line. That’s why good news on China’s economy going forward may actually be bad.

The author also has a piece about 80% of skyscraper construction in the entire universe taking place in China.

China’s annual GDP growth only 50% of that reported?

November 19th, 2017


Typically, analysts assume that changes in reported GDP reflect movements in living standards and productive capacity. In China, however, this is not the case. Local governments are expected to boost spending by whatever amount is needed to meet the country’s targets, whether or not it is productive.

GDP growth is not the same as economic growth. Consider two factories that cost the same to build and operate. If the first factory produces useful goods, and the second produces unwanted ones that pile up as inventory, only the first boosts the underlying economy. Both factories, however, will increase GDP in exactly the same way.

Most economies, however, have two mechanisms that force GDP data to conform to underlying economic performance. First, hard budget constraints, which set spending limits, drive companies that systematically waste investment out of business before they can substantially distort the economy.

Second, there is a market-pricing factor in GDP accounting that when bad debts caused by wasted investment are written down, the value-added component of GDP and the overall level of reported growth are reduced.

In China, however, neither mechanism works. Bad debt is not written down and the government is not subject to hard budget constraints. It is the government sector that is mainly responsible for the investment misallocation that characterises so much recent Chinese growth.

The implications are obvious, even if most economists have been surprisingly reluctant to acknowledge them. Anyone who believes there has been a significant amount of wasted investment in China must accept that reported GDP growth overstates the real increase in wealth by the failure to recognise the associated bad debt. Were it correctly written down, by some estimates GDP growth would fall below 3 per cent.

Historical precedents suggest the potential magnitude of this overstatement. Japan’s economy in the 1980s, for example, had distortions that resemble those of China today. Although not nearly as extreme, Japan too suffered from a very low consumption share of GDP and an overreliance on investment that, by the 1980s, had veered into substantial misallocation.

In the early 1990s, Japan’s reported GDP comprised 17 per cent of the overall global total, and few doubted that its soaring economy would become the world’s largest by the end of the century. Instead, once credit growth stabilised, Japan’s share of global GDP began to plummet, and has since fallen by nearly 60 per cent.

The same happened to the former USSR. It grew so quickly after the second world war that by the late-1960s it comprised 14 per cent of global GDP, similar to China today, and was widely expected to overtake the US. But two decades later, its share of global GDP had fallen by more than 70 per cent.

These cases may appear shocking, but, like China today, 1980s Japan and 1960s Russia lacked the mechanisms to account for wasted investment in reported GDP. At their peaks, growth for each country was seriously overstated by the failure to write down the waste, and understated once debt levels stabilised.

The implications are clear. China’s growth miracle has already run out of steam. It is only by allowing debt to surge that the country is able to meet its GDP targets. This may be why President Xi has been eager to stress more meaningful goals, such as increasing household income. Whatever the reason, analysts should not read GDP growth as an indicator of China’s underlying economic performance. Piling up unsold and unsaleable goods or building empty airports may boost GDP in an economy whose financial system does not recognize bad debt, but it does not measure its performance.

The author teaches in Beijing. We’re a little surprised that he gets away with broadcasting these dour views there.

Diversity or excellence: pick one

November 18th, 2017

Apple chose, pathetically. Question: how many Colombians are in the NBA? How many Scots are in the NFL? How many Antarcticans are there among Nobel physicists? How many non-grads from high school program at Google? We live in pathetic times where thinking is practically against the law.

Interesting reading

November 18th, 2017

The Australian:

Mr Keating, who is chair of the international advisory council of the China Development Bank, said President Xi Jinping was ­determined to continue to grow China’s economy so it could become the world’s largest. He said this would involve pushing ahead with an economic growth rate of about 6.7% a year until 2021.

“They are going to head off the US at the pass at $US18 trillion,” he said. “China is the only country in the world which nominates a growth rate and then throws money at it.” He said the Chinese economy could be twice as large as that of the US by the 2030s.

The former prime minister’s speech directly contrasts with the tougher attitude the Coalition has taken towards China in the past 12 months. Yesterday Foreign Minister Julie Bishop appeared to take a swipe at China’s dealings with smaller nations over access to the South China Sea and over infrastructure projects, and said a foreign policy white paper released next week would focus on the “Indo-Pacific” or Asia.

“In a region where tensions over maritime and land disputes continue to increase or reignite, powerful countries must not selectively defy or circumvent international rules and laws for immediate gain,” Ms Bishop said while delivering the Alfred Deakin Institute Oration. Ms Bishop repeated previous criticism of China’s autocracy.

US President Donald Trump lavished praise on Mr Xi during his visit to Beijing this month, then turned on China in a speech in Vietnam in which he accused the country of “chronic trade abuses”. Mr Keating said Mr Xi had had to make tough decisions, including a crackdown on corruption and moves to strengthen the party’s role.

Mr Xi’s policy would see the growth of the Chinese economy from the current $US12 trillion to $US18 trillion by 2021. Once this was achieved, Mr Keating said, China would slow its growth policies but its economy would continue to outstrip that of the US in size and growth.

He said he strongly disagreed with former US president Barack Obama’s pivot to Asia, authored by former secretary of state Hillary Clinton, which was about the US maintaining a “strategic hegemony” in Asia.

He said this involved the assumption that the Chinese state “would be prepared to be superintended by the US Navy and that China would be happy to outsource its security to the US Seventh Fleet”.

Mr Keating said the world was set for a major “bifurcation”, with a region around the Atlantic Ocean, which had about 2% growth, and a region taking in China and India, which had much larger growth rates.

Australia needed to be ready for what would happen when the Chinese let their exchange rate float freely. “When the controls come off, there will be a flood of money out of China which will have a profound impact on this region,” Mr Keating said.

The piece meanders but is interesting. Why 2021? Here’s the answer.


November 17th, 2017

It’s the end of the work week so we’re taking it easy. Harvard nonsense and Princeton too. Speculation that in some ways is dumber than that which they’re speculating about. Sad story we barely understand one word of. We listen to the radio on our daily jog; one station we like went dark, and another may do so soon. No China economy news, whew! Have a nice day.

China M2 = 2x GDP

November 16th, 2017


Huang Qifan told a forum organised by the Chinese news organisation Caixin on Thursday that the People’s Bank of China had been releasing too much cash into the economy, leading to financial risks and asset price bubbles. Huang, a former mayor of Chongqing who survived a political storm in the city after his former boss Bo Xilai was toppled in 2012, is now a deputy director on the financial and economic committee at the National People’s Congress, a largely advisory role to the government.

The central bank’s forex management had had an impact on domestic monetary policy and led to a series of financial mess, Huang said, adding that the finance industry’s share in the economy was too large and China’s money supply volume was too big. As China’s broad money supply, M2, at $24 trillion, was twice as large as the country’s $12 trillion GDP size, it has driven property prices to rise eight-fold in the past decade and inflated the amount of large expenditure off company balance sheets.

US M2 is about $14 trillion and US GDP is around $20 trillion, so the US ratio is 70% versus 200% in China. There’s 3x as much money sloshing around in China versus the size of the economy. That doesn’t sound like a good thing, unless you’re trying to load up on debt of course.

Bonus: oddity of the day, in which we can say we’ve never seen the word emo, and we have no interest in starting now. Extra bonus, Harvard. Every day, low gets lower.

From $9 to $35 trillion in less than a decade

November 15th, 2017


This year, though, Chinese President Xi Jinping has consolidated power, becoming the most powerful leader in the country in decades. Now that his grip on the country has been secured, some say, he will go about the dirty business of deflating the debt bubble building in China’s financial system since 2009 — the bubble that exploded China’s banking system from $9 trillion to $35 trillion in less than a decade. In this scenario, instead of instructing officials to do whatever they can to stop the bleeding, Xi may wait for the pain to subside on its own — sending the global economy to destinations unknown.

4x in 10 years. Wow. Perhaps they’ll need to create a restructuring industry after all.

Output down, interest rates up

November 14th, 2017

We’re not going to quote the story, but the charts are interesting.

Bonus: why don’t the bureaucrats who permit this ask a simple question: what country would you prefer to live in? The answers should be interesting, and we’d support a government program that subsidized their moving to their chosen country. It’s an excellent idea, and the follow-up is a widely-broadcast interview with the enlightened snowflakes a year after their moves to Cuba or wherever.

Grey rhinos?

November 13th, 2017


A series of official economic indicators – from industrial output to consumer spending – released in the next few days is expected to show the world’s second-biggest economy is on a safe growth track, just months after Beijing warned of “grey rhinos” and “black swans” stalking the country. Among the figures to be released will be growth in fixed-asset investment, measuring Chinese spending on infrastructure and property. Fixed-asset investment rose 7.5 per cent in the first nine months and a Bloomberg survey of economists forecasts that rate to slow to 7.3 per cent for October. It’s a long way from the 20.6 per cent growth reported in 2012, the 23.6 per cent posted in 2011 and the 23.8 per cent recorded in 2010, when the investment was a major driver of gross domestic product. Zhang Yiping, an analyst with China Merchants Securities in Shenzhen, said a growth model relying more on consumption instead of investment meant China’s expansion down the track would be stabler. “China’s investment growth has already dropped to single digits from more than 20 per cent a few years ago, but there have been no big declines in GDP growth,” Zhang said, suggesting that consumption was taking up the slack. Consumption contributed 64.5 per cent of the GDP growth in the first three quarters, while the share generated through investment fell to 32.8 per cent, according to the National Bureau of Statistics. Investment-driven growth is one of the main forces behind China’s rapid build-up in debt which economists point to as a big source of danger for the country’s economy. That debt has been described as a “grey rhino” risk, one that is obvious to all but on which no action is taken.

Oh, it’s debt. And we thought it was some reference to GOPers following the Alabama senate race.

39% increase to $25 billion for a single day’s retail sales: not bad

November 12th, 2017


Alibaba (BABA.N), the Chinese e-commerce giant, said on Saturday its Singles’ Day sales extravaganza hit $25.4 billion, smashing its own record from last year and cementing it as the world’s biggest shopping event. As tills shut midnight on Saturday, Alibaba’s live sales ticker registered 168.3 billion yuan, up 39% from 120.7 billion yuan last year. Last year, the sales number rose by nearly a third at the eighth iteration of the event – though that was slower than the 60% increase logged in 2015. “A lot of the lower hanging fruit has been picked and there’s increased competition for a share of consumer spending,” said Matthew Crabbe, Asia Pacific research director at Mintel. The sale did though beat his forecast of 20% growth.

Bonus fun: this is amusing, and two thoughtful guys comment on human frailty (here and here).

Happy Armistice Day

November 11th, 2017

You probably figured that the Christmas perennial It’s a Wonderful Life won a few Oscars. It didn’t, though it was nominated for several (the RKO technical team did win an award for a new technique for making fake snow). All the awards in the major categories for which the film was nominated went to another film, The Best Years of Our Lives, which is airing on TCM now. It seems to get better with each viewing. Scott Johnson has an interesting piece on the movie and the remarkable team that put it together. That’s it for now. Have a happy Armistice Day.


November 11th, 2017


Goldman Sachs Chairman and CEO Lloyd Blankfein told CNBC it’s inevitable that the Chinese economy will be bigger than the U.S. economy based on the sheer population disparity alone. “These are the two biggest economies in the world,” Blankfein said in an interview from Beijing, where he is traveling with President Donald Trump as part of a delegation of business leaders. “On a constant dollar basis,” taking inflation into account, the Chinese economy is not that close to exceeding the U.S. economy in the near term, Blankfein said. U.S. gross domestic product was about $18.5 trillion in 2016 compared with Chinese GDP of $11.4 trillion. According to a PwC study, the Chinese economy will overtake the U.S. economy by 2030 by about $26.5 trillion to $23.5 trillion. But on the measure of “purchasing power” or PPP, China has already surpassed the U.S., Blankfein said. When considering China’s population of nearly 1.4 billion people last year versus the U.S. population of about 326 million, it’s not surprising the race between the world’s two largest economies tips in China’s favor, Blankfein said, “It’s just a question of timing. Eventually, it will. But you have to keep in mind their population is four times the population of the United States.”

We’ve dealt with the PPP issue a long time ago. Gee, GS has at least five offices in China. You don’t suppose that its CEO is trying to drum up business?