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Chinese policymakers have always considered the agricultural sector to be central to the structural transformation of China’s unbalanced economy and to long-term goals of maintaining social harmony and achieving “all-round moderate prosperity”. China today accounts for about 19 percent of the global population, yet has just 8 percent of its arable land. And unlike other countries with growing populations, there’s no land left to till; indeed, given years of chemical abuse in the countryside and industrial pollution that sowed heavy metals through rice paddies, China’s available farmland is actually shrinking.

 

 

A large and growing metropolitan population expect greater quality of product, security of supply and to have confidence in the safety of the food they consume. This urban population demand a world-class agricultural sector with strong links to high quality global producers. These two forces are driving unprecedented public-private experimentation and innovation and a reshaping of China’s agricultural sector.

 

 

The latest No. 1 Document released by the Chinese Communist Party Central Committee and the State Council in early 2016 signaled a relentless focus on ‘accelerating the modernisation of Chinese agriculture’ by improving the supply side, efficiency and quality of the sector and by pushing forward programmes to improve food safety, reduce agricultural inputs and the loss of arable land. The document announced a range of innovations and experiments such as the introduction of a pilot plan to invest in 53 million ha of ‘high quality’ farmland. Similarly, the recently approved 13th Five Year Plan (2016-20) puts forward the goal of nurturing the creation of professional farmers and reforming rural land and land operation systems. The drive towards the modernization of Chinese food production, processing and distribution means China’s agricultural sector has entered a period of profound transformation.

 

 

What these changes mean for businesses, governments and food producers outside of China remains unclear. At one level, rationalising the food and agricultural sector in China is a task of extraordinary magnitude and one where Chinese policymakers fully acknowledge the vast challenge of moving away from small-scale, traditional farming systems. Based on previous experience and the progress to date, however, there is every likelihood that these efforts will create new forms of competition and tighter regulatory requirements for international food exporters.

 

 

At another level, the modernisation of Chinese agriculture creates opportunities for foreign companies to play a role in the development of the sector either within China or through joint partnerships at home. Of the later, the new focus on maintaining food security through access to global markets presents a shift-change in policymakers’ attitudes to security of supply issues and increases opportunities for various forms of joint investment and partnership. At the same time the rapid expansion of public and private investment in domestic capacity within China presents a medium to long-term challenge for global food producers.

 

 

Structural Change to Livestock Sector

There are signs that China’s demand for feed grains has reached a turning point as a tightening labour supply and rising feed costs force significant structural change in China’s livestock sector. Over the last 5 years, economic growth has absorbed surplus rural labour and rural wages began rising 15 to 20 percent annually. Labour scarcity, animal disease pressures, and rising living standards are prompting rural households to abandon “backyard” livestock production. More recently, livestock production has increasingly become a specialized farm enterprise, with farmers focusing on maximizing growth of animals, and substituting commercial feed for wastes and forages gathered from the countryside.

 

 

Rising feed demand has pushed up costs and motivated feed mills and livestock producers to explore new feed ingredients like distillers dried grains and sorghum—both imported from the United States. More importantly, China has switched from being a corn exporter to a consistent importer of 3-to-5 mmt annually since 2009. A few years ago Chinese officials announced a new strategic approach to food security which tacitly acknowledges a need for imported feed grains. The strategy still stresses the importance of self-sufficiency, but it allows for “appropriate imports” and focuses concern on food grains—rice and wheat—while placing a lower priority on corn self-sufficiency.

 

 

Demand for meat.

 

China’s meat consumption is expected to rise at a pace similar to the trend over the past decade. Pork plays a central role in China’s meat economy—China accounts for half of world production and consumption—but poultry is gaining in popularity, largely because it is cheaper than pork. Restaurants, fast food chains, and cafeterias play a key role in diversifying meat consumption since many feature specific kinds of meat or chicken. In particular, beef and mutton are important parts of popular hot pot, kebabs, and other types of ethnic cuisine that are becoming popular among the broader population.

 

 

Per capita pork consumption is projected to rise 6.6 kg by 2023/24, more than three times the increase in poultry (2.7 kg) and more than seven times the increase in beef (0.85 kg). However, poultry is projected to account for an increasing share of China’s meat consumption, with per capita consumption rising 2.4 percent annually during the next 10 years, compared to a 1.5-percent annual growth rate projected for per capita pork consumption.

 

China produces nearly all of its own meat. Its output of pork, poultry, and beef rose from about 20 mmt in 1986 to over 70 mmt in 2012, with the fastest growth during the 1980s into the early ‘90s. Projections suggest an increase in pork, poultry, and beef output to 90 mmt by 2023/24, an increase of about 30 percent. Since about 3 kilograms of feed are needed to produce each kilogram of meat, feeding a large and increasing population of animals will be a growing challenge. Growth in feed consumption has accelerated recently, and as China’s livestock farms transition to a more concentrated mode of operations that uses commercial feeds more intensively. China’s combined use of corn and soy meal for animal feed is expected to rise from 200 mmt to over 300 mmt over the 10-year projection period. Chinese animals also consume a variety of other grains, protein meals, bran, and hulls from grains, and growing use of these commodities is expected to support the expansion of meat output.

 

 

China’s soybean imports are expected to reach over 70 percent of global soybean imports by 2023/24, while China’s corn imports are projected to rise to 22 mmt by 2023/24. China will rely on imported soybeans for most of its soybean meal supply, but imports are expected to account for less than 10 percent of corn consumption by 2023/24.

 

 

China is expected to account for 40 percent of the rise in global corn trade over the coming decade making China the leading importer of corn by 2023/24.

 

 

Conclusions.

The growth of meat production will fall slight behind consumption growth, and the imports  are expected to consistently rise in the short term. The dairy production will grow by an average annual rate of 3.5%, the fastest amongst all products. The demand of poultry, eggs, vegetables and fruits for processing will grow rapidly, but the trade balance of these products will remain in surplus.  China will continue to provide fundamental support to China's economic development, and China will make new contributions to world food security and safety.

 

When people talk about China’s tech scene, there are the obvious giants: Baidu, Alibaba, and Tencent. Then there are the big state-linked firms (the telecoms, Huawei, and ZTE), the internet players (Sina, Qihoo), and the hot mobile startups (Xiaomi, OnePlus). But there’s a Chinese company that often doesn’t get mentioned as one of the big names: LeEco formerly LeTv.

 

 

 

Just a couple of years ago it primarily operated a streaming video site. But as its popularity grew, Letv (over 50 million daily users & over 730 million active monthly users) has rebranded into LeEco and branched its business out aggressively in numerous directions: it now operates 7 Ecosystems. The company now makes smartTV`s as well as smart phones and smart bikes. And a whole range of other smart devices and electronics. It has a cloud computing division. It offers internet finance products. It’s working on a smart electric car. It now has a music division (Le Music), a film division (LeVision Pictures), and a sports division (LeSports). What was once just an internet video company has branched out into a multi-armed technology and entertainment company.

 

 

Le Holdings and Its Seven Business Ecosystems

 

Recently, LeEco has been taking a different tack: splashing cash to acquire a wide variety of companies. In late spring, LeEco spent almost US$500 million buying two Chinese real estate companies so that it could expand into that space. Just a few weeks ago, it bought US TV maker Vizio for US$2 billion. This week, it was confirmed that the company has nabbed a bigger chunk of Chinese smartphone maker Coolpad. It was also confirmed recently that LeEco is working on some sort of deal with Netflix (at the end of last year Letv marked another milestone in its globalization - Le Super TVs started to be sold in the US). At present, Le Eco has been officially established in the US, India, and Hong Kong and the "Beijing-Los Angeles-Silicon Valley" strategy has proved hugely successful from its conception.

 

 

There are genuine questions about some of LeEco’s funding habits, and whether or not the company can sustain its breakneck pace of expansion that it has been keeping up over the past several years. But with a market cap of more than US$13 billion, LeEco is already bigger than some of China’s most storied internet and tech companies.

 

 

LeEco is both polarizing and opaque: some think the company is one of China’s most innovative and exciting tech firms, however until some of LeEco’s bigger projects – like that smart electric car come to fruition it will be difficult to judge whether their expansion has been thought out.

 

 

LeEco is now a major player in China’s tech scene, with the ability to influence industry sectors ranging from streaming video to smartphones to autonomous vehicles. LeEco certainly hasn’t overtaken any of China’s true giants – it’s not yet on the level of a Tencent or an Alibaba. But increasingly, it can be argued that LeEco deserves a spot at the table, and a place in the conversation.

 

 

LeMall is ranked among the top three B2C e-commerce websites in China

 

 

 

The U.S. Department of Commerce recently provided new stats for China’s growing e-commerce market, they make for interesting reading for any company considering marketing to China:

 

 

• China ecommerce accounted for around 15.9% of all retail sales in 2015.
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• China e-commerce is estimated to grow to 19.6% in 2016.
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• 53% of the 688 million internet users in China are online shoppers – more than the combined population of the United States, Russia, and Brazil.
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• China has over 1.28 billion mobile phone users which is the preferred method of online shopping.
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• E-Commerce sales in China totaled $672.01 billion in 2015, up 42.1% from $449.01 billion in 2014, according to the Chinese government’s National Bureau of Statistics (CNBS).
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• By 2019, it is estimated that one out of every three of China’s retail dollars will be spent online, the highest percentage in the world. The estimate for the U.S. is one out of ten.
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• 71% of shoppers are in cities; 82.3% are between 25-45; 55% are female.
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• Top purchases are: apparel, food, skin care and beauty, and baby/pregnancy care.

 

 

 

Online Market Growth:

Rising disposable incomes, the increasing popularity of ecommerce and in-app purchases, coupled with a rapidly improving internet infrastructure is accelerating China’s online revenue growth potential

 

 

Internet Challenges:

Companies are presented with many technical challenges when trying to build a web presence within Mainland China. An infrastructure flawed with inefficiencies, distance and the constant monitoring of the Great Firewall imposes negative impacts on performance of foreign hosted sites trying to reach users in China. Websites hosted in the US or Europe can expect 10+ seconds of latency versus hosting within Mainland China
 

 

Customer demand:

Chinese online shoppers are willing to spend, but at the same time demand a high level of value and service. They expect to be able to return any item purchased online, and the cash-on-delivery payment method popular in China often results in a higher-than-average return rate. In particular sectors, such as luxury, expectations are especially high. At one luxury marketplace, Chinese shoppers expect 24-hour customer service, free insured two-day shipping, and the option to pay and return at their convenience.”

 

 

Mobile Commerce:

The majority of China’s 1 billion smartphone users browse for products on their mobile devices, and those with greater incomes search even more than the average on mobile devices driven by a over 60% smartphone penetration rate in China’s Tier-1 and Tier-2 cities

 

 

Social Commerce:

China’s ecommerce growth is majorly fueled by the hyper-social behaviors of it’s online shoppers. Alibaba Group Holding Ltd. owns both Taobao and its B2C online marketplace counterpart, TMall (TMall sells 70,000 Chinese and international brands from 50,000 merchants).

Chinese social network and SinaWeibo, as well as instant messaging turned ecommerce, gaming, and financial services social platform WeChat, are the top two power players bridging any gap there may have been between social media and ecommerce. To get any kind of market penetration in China, international brands must sell on social channels and keep a cyber-eye out to mine for consumer insights.

 

At the start of the year Alibaba announced that they had crossed the RMB 3 trillion mark in gross merchandise volume (in excess of $450 billion USD). Founder and CEO Jack Ma has now announced that the company's dream is to reach 2 billion people around the world with his business and hit a transactional volume of $1 trillion. That would make them the equivalent of being the fifth largest country in the world by GDP.

 

 

Overview.

China's e-commerce market is dominated by Alibaba. Though the company operates through a unique combination of business models, Alibaba's core business resembles that of eBay. Alibaba acts as a middleman between buyers and sellers online and facilitates the sale of goods between the two parties through its extensive network of websites. The largest site, Taobao, operates as a fee-free marketplace where neither sellers nor buyers are charged a fee for completing transactions. Instead, the nearly 7 million active sellers on Taobao pay to rank higher on the site's internal search engine, generating advertising revenue for the company.

 

 

While the majority of sellers utilizing the Taobao website are smaller merchants, Alibaba also has a dedicated space for larger retailers: Tmall is the e-commerce site owned and operated by Alibaba that caters to well-known commercial brands that would normally operate on the high street. Even though Tmall has a fraction of the number of active sellers listed on Taobao, Alibaba is able to generate revenue from deposits, annual user fees and sales commissions charged to retailers utilizing the site.

 

 

In addition to its e-commerce sites, Alibaba has emerged as a player in the Chinese financial system. To combat customer concerns over the security and validity of transactions completed online, Alibaba created Alipay. As a secure payment system, Alipay protects buyers in the event sellers are unable or refuse to deliver goods sold. In addition to this platform, Alibaba also generates revenue from its newly launched micro-lending business arm that caters to individual borrowers.

 

 

The Alibaba Marketplaces

Alibaba's marketplaces are obviously their core revenue streams. As such, these will be the biggest drivers of growth. As of the most recent quarter, Alibaba had 423 million annual active buyers and 410 million monthly active users and transactional volume for the quarter was $115 billion - a 24% increase over the same quarter last year.

 

 

However the Chinese market is yet to be fully penetrated, by their own estimates they currently only reach about 55% of potential consumers. Furthermore it still does not have enough traction in international markets to claim the kind of long-term growth that they would require to become a truly global household name.

 

 

The future is Aliyun.

The next growth driver for the company is a brand that many do not recognise, but is nevertheless growing at a tremendous rate that may one day outdo its rivals: the cloud and specifically Aliyun Cloud. With data centers around the world having a first quarter of 2016 growth of 175% it is definitely a growing entity which Alibaba is well positioned to grow in part due to preferential government policy, regional focus and domain expertise. Aliyun certainly has the potential to become one of the growth drivers of Alibaba's future considering it currently accounts for less than 2% of its revenue.

 

 

Outlook.

The entire global market is potentially at their doorstep, not only for marketplace services, but also cloud capabilities. Not forgetting their other web and content properties like UCWeb with 400 million users, content distribution platform Youku Tudou (newly acquired) and web payment service Alipay, which has 400 million registered users and a transaction volume of $519 billion (as of 2015).

 

 

 

 

Established in 1989, Goodbaby Group is China's largest and the world's leading provider of infant and children's products such as strollers, car seats and child safety devices. Goodbaby is a professional production, manufacturing and design company with customers located in more than 70 countries and regions worldwide. According to a survey from Frost & Sullivan, in each sale of 1000 baby carriages in North America, Europe and China, 435 come from Goodbaby Group. In 2007, Goodbaby Group was listed as one of the `Top 50 Fastest-growing Companies in the World' by Boston Consultancy. Currently, the company owns four global R&D centers, 11 subsidiaries, has 35 branch offices and more than 13,000 employees worldwide.

 

 

Today they have over 3,200 stores in China, including multi-brand children's shoe stores, Mothercare shops and baby superstores, but this number is due to grow to 7,000 to 8,000 in the next few years in the wake of the relaxation of the One-Child-Policy.

 

 

The group has another listed company: Goodbaby International Holdings Ltd, which was floated on the Hong Kong stock market in 2010. It focuses on baby-care products design, production and sales, while Goodbaby China will sell those products in its network of shops.

 

 

Analysts believe China has more than 16 million to 17 million babies born each year adding that baby-related products had in recent years triggered a billion dollar market estimated $46.5 billion in 2016, involving both Chinese and Western players who needed to understand each market's specific needs.

 

 

To capture this opportunity Goodbaby launched a stroller called Pockit, able to be folded and carried onto passenger planes, which became an international best-seller. The group added two further brands it acquired in 2014: Germany's Cybex and US brand Evenflo. In particular to capture, the market for medium and high-end baby products.

 

 

Amongst Goodbaby`s leading competitors are:

Combi (Shanghai) 

Pigeon 

Procter & Gamble (China) Ltd. 

Zhejiang Beingmate Scientific Industrial Trading 

 

 

Most people have no idea what’s in an iPhone. Yttrium and praseodymium don’t exactly roll off the tongue, but they’re part of what make smartphones so small, powerful, and bright. These exotic materials are among the planet’s 17 rare-earth elements, and surprisingly, the soft, silvery metals are not at all rare. But they’re found in tiny concentrations, all mixed together, and usually embedded in hard rock, which makes them difficult — and messy — to isolate. In China, which mines 89 percent of global output, toxic wastes from rare-earth facilities have poisoned water, ruined farmlands, and made people sick.

 

 

Beyond high-tech gadgets, rare earths play a critical role in national defense, enabling radar systems and guided missiles. Ironically, they also power clean-energy technologies, such as wind turbines and electric cars. This year, global consumption is expected to be about 155,000 tons, far more than the 45,000 tons used 25 years ago. Demand will only grow — likely at an accelerated pace — as the world tries to rein in climate change.

 

 

At the moment, only China can satisfy that hunger. Yet in 2010, Beijing cut rare-earth exports by 40 percent — possibly to boost its high-tech sector — and cut off supplies to Japan over a territorial dispute. Its muscle flexing caused prices to soar, sparking new exploration for rare-earth deposits around the world. A boom in illegal mining in China has since driven prices back down, making it extremely difficult for non-Chinese mines to stay open or get off the ground. Nevertheless, the rest of the world hasn’t given up: There are currently 50 deposits at an advanced stage of development (see map below) that could someday challenge China’s dominance.

 

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Source:This article originally appeared in the July/August issue of  FP magazine.

Beijing based Hanergy is China`s largest, privately owned, producer of renewable energy. The group operates in the hydropower, wind power and the solar power fields, whilst it`s focus has now shifted towards the latter, the company has become the largest thin film solar panel producer in the world and has a presence in Europe, North America and Asia-Pacific. The company was featured in the MIT Technology Review’s “50 Smartest Companies of 2014” ranking,  due to its almost 1000 patents, mostly related to photovoltaic innovation.

 

 

Currently Hanergy’s installed capacity for hydropower exceeds 6 GW, whilst the same figure for wind power stands at 131 MW according to the company’s reports. The company also has the world’s largest, privately built, power station, Jin’anqiao. Its Wind power plants are in Jiangsu and Ningxia provinces.

 

However, today, the core business and focus of the company is the development and production of photovoltaic panels. Hanergy has made striking progress in becoming a global leader in the field, considering it only started the development of its photovoltaic arm 5 years ago. Local media in Guangdong, province where Hanergy launched its solar panel operations, coined new term – “Hanergy speed”. The company claims its annual capacity for producing PV panels is now over 3 GW, which would translate to 4 billions kWh of electricity annually. The group has signed construction agreements for solar power plants with a 4 GW total capacity in Inner Mongolia, Ningxia, Jiangsu, Hainan, Shandong, Hebei and other provinces, as well as in several European countries.

 

Hanergy focuses on thin film photovoltaic solar panels. Production line start-up costs are relatively high whilst efficiency is lower than traditional silicon panels, but the lower production costs and consistently improving transformation rate should increase thin film panels commercial attractiveness. Over supply in the solar industry forced numerous companies out of business, some of which were rescued by Hanergy Solar Group (HNS), in which Hanergy Group acquired a controlling stake in February this year.

 

Hanergy Group and Hanergy Solar Group have been aggressively expanding in both the domestic and international markets. It recently signed a partnership with IKEA, where it will furbish its retail stores with solar panels in the UK and China. Furthermore, by acquiring MiaSole and Global Solar Energy in the US and Solibro in Germany it has significantly strengthened its R&D capacity The latter has been working on improving conversion efficiency of Copper Indium Gallium and Selenium (CIGS) panels since the acquisition, with highest efficiency rate of patented panels being 15.5% conversion, while the latest lab tests are reaching 19.6% conversion: meaning about a fifth of sun’s radiation is being converted into electricity. Moreover, Hanergy has signed an agreement with Aston Martin Racing, and will explore possibilities of solar technology application in motorsports.

 

 

However, despite all positive news, Hanergy’s future plans seem to be both risky and reliant on Governmental patronage. The group’s investments into wind and solar farms are only 30% - 40% funded by the Hanergy itself, the rest of the capital usually coming from local governments. If Hanergy fulfills its expansion plans, it will have a solar panel production capacity of around 6.6 GW, while globally added capacity was just less than 40 GW last year, with a quarter of it coming from China. It believes that its markets success is dependent on it`s development and delivery to customers of its latest CIGS panels and considering Hanergy does not currently figure among the top sellers globally, all will indeed depend upon the volume of its CIGS panels shipped to end users.

 

 

Hanergy launches full-solar-power vehicles with daily range of 80km (2016 Update)

 

 

Hanergy Board chairman & CEO Li Hejun launched 4 new fully solar powered vehicles. The new series of vehicles includes the Solar O, Solar L and Solar A and sports car 'Hanergy Solar R” each targeted at different groups of users.

 

 

With a solar energy conversion rate of 31.6%, Hanergy's gallium arsenide (GaAs) dual-junction solar cell was awarded with a World Record Certificate by the World Record Association at the launch event. Previously, on 5 January, the technology had been recognized by the US National Renewable Energy Laboratory (NREL) for its record efficiency.

 

 

The four new full-solar-power vehicles are integrated with flexible, highly efficient GaAs solar cells, maximizing the area covered (3.5-7.5m2). Through a series of precise control and managing systems (including a photoelectric conversion system, an energy storage system and an intelligent control system), the zero-emission vehicles use solar energy as the main driving force. With 5-6 hours of sunlight, the thin-film solar cells can generate 8-10kW-hr of power per day, allowing the vehicle to travel about 80km (equivalent to over 20,000km annually), and hence satisfying the requirements for city driving under normal circumstances.

 

 

Users can manage different travelling and weather modes in a real-time, mobile, networked and smart way, selecting charging modes in accordance with varied weather conditions through Apps on their mobiles. In everyday-use mode, the vehicles can charge themselves with solar energy while traveling, making 'zero charging' possible for medium- and short-distance journeys. So, unlike traditional electric vehicles, the full-solar-power vehicles hence no longer need to rely on charging posts, eliminating the concept of 'distance per charge'. For weak sunlight or long-distance travel, the lithium batteries in the vehicle can get power from charging posts, enabling them to travel a maximum of 350km per charge.  

 

 

Hanergy claims that the four new vehicles are the first full thin-film solar power vehicles that can be commercialized, breaking the bottleneck of poor practicality of previous solar-powered vehicles. The firm has also signed a framework agreement with Foton Motor to cooperate on developing clean energy buses.

 

By Luke Deer

 

Entrusted lending became the second largest source of financing in China in 2013 after bank loans and the largest shadow lending channel. This article explains the entrusted lending channel, looks at why it grew and at how recent changes to inter-enterprise lending rules may impact on entrusted loans.

 

 

Entrusted lending is a unique feature of shadow banking in China.  The ‘entrusted loan’ (委托贷款) channel was set up after a 1996 People’s Central Bank regulation which prohibited direct lending between non-bank entities, primarily between enterprises but also by government entities.

 

 

The first decade and a half of reform and opening after 1979 opened up informal non-bank financing activity on a large scale.

 

 

Together with widespread capital and goods shortages, the effect of these reforms by the late 1980s was a stop-start inflationary growth cycle at the macro-level, a crisis in profitability in the state-owned enterprise system and a major non-performing loan problem in the bank system.

 

 

China’s authorities’ were therefore seeking to bring non-bank financing channels under control. But legally choking off direct all forms of non-bank lending posed a problem for ‘legitimate’ financing and liquidity management, particularly among corporate affiliates and from local government financing entities.

 

 

Thus the ‘entrusted loan’ channel was set up as an official work-around to allow non-bank institutions to lend to each other indirectly via the official banking system.

 

 

Moreover, until very recently, China’s central bank, the Peoples’ Bank of China (PBOC) had sought to conduct monetary policy by directly controlling monetary aggregates through lending targets–and the ‘entrusted loan’ channel allowed the the PBOC to account for non-bank lending activity via the banking system.

 

 

Under the ‘entrusted loan’ facility banks conduct an agency businesses to facilitate loans between corporate and other non-bank entities for a fee.

 

 

Formally, the non-bank enterprise lender retains the risk on the principal and interest of its loan to its designated borrower and the banks get the right to fee income from the ‘entrusted loan’. But banks and non-banks entities could also use the entrusted loan channel to circumvent regulatory restrictions.

 

 

Until September 2015 regulators had sought to manage bank balance sheet risk by enforcing a 75 percent loan to deposit ratio, which stipulated that banks could not loan more than 75 percent of their deposit base. Because ‘entrusted loans’ do not appear as loans on bank balance sheets’ and are treated as an ‘other investment asset’ banks could use ‘entrusted loans’ to circumvent the 75% loan to deposit ratio by using the ‘entrusted loan’ channel.

 

 

The attempt by China’s monetary authorities to reign in bank lending between 2010 and 2013 led to a sharp growth in alternative balance sheet lending strategies by the banks, primarily through entrusted lending but also through issuing bankers’ acceptances.

 

 

As Chen et.al (2016) explain in a recent paper, monetary tightening between 2010 and 2013 led to a worsening LDR ratio for banks, especially for smaller second banks who were more easily squeezed by falling deposits.

 

 

It was these banks who turned aggressively to alternative lending strategies, such as ‘entrusted lending’ to mitigate regulatory risk of their worsening LDR ratio.

 

 

Banks could also trade ‘entrusted loan’ assets on the inter-bank market, and this provided further incentives for enterprising banks to build ‘entrusted loan’ businesses.

 

 

The result, according to Chen et.al (2016), was that “the share of entrusted loans in the sum of entrusted lending and bank lending tripled during the monetary tightening period [from 2011 to 2013].”

 

 

While entrusted lending could provide corporate and other non-bank affiliates with a liquidity and investment facility, entrusted loans could be used to lend to non-affiliates at interest rates above the prime lending rate to restricted industries as well for purely speculative financial investments.

 

 

From 2005 to 2010 the China Banking Regulatory Commission and the State Council passed a series of increasingly stringent restrictions on bank lending to overcapacity, polluting and ‘risky’ industries – especially real estate related sectors.

 

 

However, ‘entrusted loans’ did not count as bank loans so they could be used to circumvent lending to restricted industries.

 

 

The entrusted loan channel could also be used by companies with good access to official credit channels, such as large publicly listed enterprises and local State Owned Enterprises, to borrow at low cost from the banks and to lend at high interest rates to non-affiliates in restricted sectors.

 

 

For mature firms facing slowing growth, increased credit during the stimulus failed to offset the declining returns on investment in their core businesses, and instead they turned to speculative investment through high interest rate lending, including financing positions in the stock market.

 

 

A recent paper by Yan et.al. (2015) found that speculative lending through the entrusted loan channel was more common among publicly listed mature firms with lower growth opportunities, particularly where their earning capacity was below the prime lending rate.

 

 

While the growth of entrusted lending has attracted scrutiny, there has been little firm evidence about the the extent of speculative lending through the entrusted loan channel.

 

 

However new data reported by Chen et.al (2016) concludes that: “more than 60% of the total amount of entrusted loans was channelled to the risky industry between 2007 and 2013; out of these risky entrusted loans, 77% was facilitated by commercial banks.”

 

 

Recent policy moves may reduce ‘entrusted lending’

The entrusted loan channel was continued to grow in 2014 before eventually provoking a response from the authorities.

 

 

In January 2015, the CBRC brought in 5 restrictions on ‘entrusted loans’ designed to mitigate speculative investment though this channel by requiring that ‘entrusted loans’ only be used for lending to the ‘real economy’ purposes–and not for investing in stocks, bonds and other purely financial instruments.

 

 

Two further decisions in by the authorities in China may see a declining role for the entrusted loan channel.

 

 

First, as part of a wider shift in China’s monetary policy framework away from controlling credit aggregates, the loan-to-deposit restriction was removed by an amendment to the Law on Commercial Banks passed by the National People’s Congress Standing Committee in August 2015.

 

 

According to the CBRC spokesperson, the LDR ratio had been set up “to control liquidity risk” but it now longer fitted the reality of more diversified bank balance sheets and would instead be used as a ‘a liquidity monitoring indicator’.

 

 

The LDR ratio became a reason for banks to engage in regulatory arbitrage — and by removing the LDR ratio, banks would no longer be as constrained by the composition of the assets they could hold on their balance sheets.

 

 

Then, in October 2015, the Supreme People’s Court (SPC), ruled that direct inter-enterprise lending for ‘real-economy’ purposes would also be allowed between non-bank entities–removing the restriction on direct lending between non-banks which had been in place for nearly 20 years.

 

 

The SPC ruling on inter-enterprise lending was also subject the same 5 restrictions as had previously been applied to entrusted loans in January 2015, including the stipulation that loans must be for ‘real economy’ production and business activities.

 

 

The move towards an increased role for direct lending also fits the authorities desire for a more asset-based growth strategy.

 

 

Opening direct lending channels between enterprises will allow corporate affiliates to circulate working capital more easily, but it is not clear how the restrictions on types of allowed lending will be enforced by the courts.

 

 

Non-bank entities can go to the courts if their loan contract is breached, but they are unlikely to do so if the loan was used for investment in restricted industries or for purely speculative financial investments, which are explicitly prohibited loan use purposes under the SPC ruling.

 

 

The ‘entrusted lending’ channel will remain, but the incentives for using it are reduced because because corporate affiliates can now legally lend to each other directly and bank lending is not subject to the 75% loan-to-deposit restriction.

 

 

However, the extent to which the the ‘entrusted loan’ channel will be by-passed remains to be seen.

 

 

While enterprises can now legally engage in direct lending, finding partners and enforcing contracts can be costly and banks and other other financial institutions have an incentive to engage in the match-making inter-enterprise loans for fee income.

 

 

The opening of legal direct lending between enterprises also means we can expect more complex structured financing deals to be a growing feature of China’s financial system.

 

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This article was originally published in Frontiers of Finance in China

Luke Deer is a post-doctoral researcher at the University of Sydney and a Research Associate with the University of Cambridge Centre for Alternative Finance and with the Cambridge Judge Business School. Luke researches alternative finance in China and the Asia Pacific--with a focus on peer-to-peer lending and crowdfunding, and on financial innovation and central banking in China.

Investment in green energy is on the rise, and a world powered entirely by renewables is no longer a distant dream. It is the developing countries however, and China in particular, that is driving this green revolution. And these charts, from the REN21 Renewables 2016 Global Status report and the United Nations Global Trends in Renewable Energy Investment 2016 report, show how China is paving the way to a clean energy future.

 

 

 

 

1. China has the highest capacity for renewable power production

This chart shows the leading role China is already playing in the green revolution. It currently makes up about a quarter of the global capacity for renewable power, predominantly through wind power.

 

 

2. China takes the lead in wind power production

China is also the country with the most wind power capacity, and its lead over the US, in second place, increased by over 30 gigawatts in 2015.

 

 

3. Solar power is booming in China

The year 2015 saw huge growth in China’s solar power production. It moved into first place, ahead of previous solar leader Germany.

 

 

4. China is the biggest investor in renewable energy

In 2015, China had the biggest financial commitment to renewable energy, investing over $100 billion, an increase from $3 billion just over 10 years ago.

 

 

5. China helped push developing countries into the lead

Globally, $286 billion was invested in renewable power and fuels (not including hydro power) in 2015, and for the first time the developing world invested more than developed countries.

 

 

Source: World Economic Forum

A new set of Environmental regulations on air, water and soil pollution have recently been announced by China`s State Council: the Soil Pollution and Prevention Action Plan (also know as Soil Ten an “extension” of the Water Ten Plan). The plan outlines 10 headline actions split into 35 categories and 231 specific points aimed at making 95% of currently contaminated land fit to reuse for either agricultural purposes or urban development by 2030.

 

 

The first national survey on soil quality, released in 2014, showed the gravity of soil pollution. More than 16 percent of the samples taken nationwide were contaminated by heavy metals. Moreover, contaminants were discovered in 19.4 percent of surveyed farmland, 10 percent of forests and 10.4 percent of grassland.

 

 

Key targets:

• To curb worsening soil pollution by 2020, and control soil pollution risks by 2030, with the aim to create a virtuous cycle in the ecosystem by 2050.
• To ensure that over 90% of contaminated land can be utilised safely by 2020, and to increase this to 95% by 2030.
• Using the next 2-3 years to focus on large-scale monitoring and finalising plans & laws; reining in chemical industries & heavy metals are key.

 

 

Soil pollution is the most difficult to tackle amongst soil, water and air; plus possibly the most expensive. Also, it is not possible to tackle soil pollution without addressing water pollution. Untreated wastewater can contaminate soil and conversely pollutants in soil can be washed into surface & groundwater sources contaminating them.

 

 

From the key actions to be taken, the government is signalling that it only intends to get a handle on the total area of contaminated farmland by 2018 and to only establish soil prevention & control related laws by 2020. The Soil Ten Plan singles out 8 specific industries:

 

 

1. Non-ferrous metal extraction & processing
2. Non-ferrous metal smelting
3. Oil exploration
4. Petroleum processing
5. Chemicals
6. Coking
7. Electroplating
8. Tanning

 

 

Action timeline:

• By 2016, local governments need to finalise detailed work plans for submission to the relevant ministries;
• By 2017, to set up national-level soil environmental quality monitoring points and monitoring networks;
• By 2017, provincial soil remediation planning to be finalized and soil remediation result assessment methods to be issued;
• By 2018, to finalise investigation of total area of contaminated farmland and assessment of impacts on agricultural products;
• By 2020, soil environmental quality monitoring points to cover all the cities and counties; and
• By 2020, to establish soil pollution prevention & control related laws and regulation system.

 

 

However one glaring challenge in the plan it the relatively limited number of  domestic companies with both the experience and infrastructure to clean contaminated land. Foreign companies with the required technologies are already involved in China, albeit participating in pilot projects funded by the World Bank or other international funds.

 

 

Analysts have estimated that the soil remediation market could be worth anywhere from RMB1-5 trillion, but authorities have struggled to determine who should pay for rehabilitating contaminated land. Many of the inland provinces targeted are not as rich as coastal regions and much of the responsibility for the costs now lies with relatively impoverished local governments.

 

The China- Pakistan Economic Corridor (CPEC) is now gaining momentum with the completion of phase 1 of a 300-megawatt solar photovoltaic power plant. Financed by the Export Import Bank of China and built by Chinese energy conglomerate Zonergy Co, has been connected to the grid in the Punjab Province of Pakistan at the Quaid-e-Azam Solar Park in Bahawalpur. A major milestone in the economic cooperation between China and Pakistan: this is the first phase of the 900MW plant that is to be the world's largest single photovoltaic power station. When completed (est. late 2016) the solar power station, will save 394,000 tons of standard coal and reduce 826,000 tons of carbon dioxide emissions every year.

 

 

The CPEC, a 3,000-km network of roads, railways and pipelines linking Kashgar in northwest China's Xinjiang Uygur Autonomous Region and southwest Pakistan's Gwadar Port, is also a major project of the "Belt and Road" initiative. Pakistani officials predict that the project will result in the creation of upwards of 700,000 direct jobs between 2015–2030, and add 2 to 2.5 percentage points to the country's annual economic growth. In addition to the Zonergy project, a number of new energy projects are being currently constructed by Chinese companies. In total over 10,400MW of energy generating capacity is to be developed between 2018 and 2020 as part of the corridor's fast-tracked "Early Harvest" projects in conjunction with the Bahawalpur PV plant.

 

 

The 1.65-billion USD Karot hydropower plant, the first investment project of the Silk Road Fund, is being developed by the China Three Gorges Corporation. Construction of the 720 MW project has begun and is expected to be put into operation in 2020.

 

 

The Port Qasim coal-fired power plant, is being constructed by Powerchina Resources Limited. The 2.085-billion USD project is due to be operational by the end of 2017.

 

 

SK Hydro Consortium is constructing the 870 MW Suki Kinari Hydropower Project in the Kaghan Valley with financing by China's EXIM bank.

 

 

The Jhimpir Wind Power Plant, built by the Turkish company Zorlu Enerji has already begun to sell 56.4 MW of electricity to the government of Pakistan, though under CPEC, another 250MW of electricity are to be produced by the Chinese-Pakistan consortium United Energy Pakistan.

 

 

Back to Coal

Despite several renewable energy projects, the bulk of new energy generation capacity under CPEC will be coal-based plants, with $5.8 billion worth of coal power projects expected to be completed by early 2019 as part of the CPEC's "Early Harvest" projects.

 

Mongolia’s economic potential is significant, with vast deposits of copper and coking coal situated close to its main market in China: according to World Bank estimates, Mongolia's economy in the coming decade will grow on average at 15 per cent. However, this potential is vulnerable as the country is increasingly reliant on two main commodities being exported to one country, making Mongolia susceptible to external shocks such as changes in commodity prices and demand in China. According to 2015 data from Trading Economics, China accounts for 89 percent of Mongolia’s exports and 26 percent of its imports and so the slowdown of the Chinese economy is of critical significance to Mongolia. Charting a course for the country from mineral wealth to long- term sustainable and diversified growth is a key task facing Mongolia.

 

 

Despite 70 years of Soviet domination, the majority of Mongolians today consider China a greater threat than Russia to its national identity and sovereignty. Although China is by far the bigger trade partner, Russia remains the more popular of its neighbors, however this might be changing.

 

 

The “Third Neighbor Policy” of building economic, political, social and military relations with outside countries, the United States foremost among them, speaks directly to Mongolian concerns about the influence of its neighbors. In the past the government has tried quietly to maintain as pragmatic an approach toward China as possible (despite strong public opinion to keep its distance). On Xi Jing Ping`s last visit in 2014, bi-lateral relations were upgraded to a “comprehensive strategic partnership”, and this has seen a distinct ramp up in Governmental relations.

 

 

Speaking of Xi JingPing`s visit, President Ts.Elbegdorj confirmed his satisfaction with the steady development of relations regarding the economy, culture, education, and humanitarian work and expressed the hope that the visit would serve as a “push to deepen the full strategic partnership between Mongolia and China.” Communications between Mongolia and China immediately dramatically increased, not only between citizens of both countries in the context of cultural exchanges, but also at the highest levels: President Ts Elbegdorj was in contact with Xi Jinping 5 times in 2014, and 3 times in 2015.
 

 

Infrastructure development.

Mongolia is keen to use China's rail network to deliver coal and other minerals to other markets as well as turning Mongolia into a "transit corridor" linking the Chinese and Russian economies. Integration of the Mongolian Steppe Route infrastructure project into the Chinese One Belt, One Road project in order to enhance cooperation in the field of agriculture and the creation of conditions required for increasing the export of Mongolian meat and meat products to China are well under way.

 

 

2014 saw a MOU for a high speed rail line project linking Beijing and Moscow through Mongolia signed by Russia and China during a visit to Moscow by the Premier of the PRC State Council Li Keqiang. This new passenger train project would reduce the 7000 km journey from 6 days to 2.

 

 

Growing debt crisis.

 

 

When a new Mongolian coalition government took office in 2012 facing extremely favorable economic conditions, including high mineral prices and strong demand from China. Gross domestic product had grown by 17.3% in 2011 and by another 12.3% in 2012. The mineral-rich country’s prospects were bright, however due to irresponsible borrowing (rapidly expanded spending on housing, government salaries, social welfare and pensions) over the last four years Mongolia now faces a debt crisis.

 

 

Mongolia became a significant global issuer of commercial paper. Between 2012 and June 2016, the government raised $3.6 billion, roughly one-third of GDP, on global bond markets, paying high interest rates. Adding in the swap arrangements with the Chinese central bank and other loan guarantees, Mongolia’s external debt position by 2015 became highly precarious, with total debt of more than 70% of GDP.

 

 

Coinciding with a continued collapse in foreign investment and a steady decline in global mineral prices due to China’s slowdown Mongolia’s growth has slowed sharply to 2.3% in 2015 and is likely to be zero or negative in 2016.

 

 

Looking to the future, three distinct possibilities arise:

 

Regional Renaissance: North-East Asia becomes more politically integrated, with strong economic growth. This
 gives Mongolia the opportunity to sell
 its main minerals and achieve economic diversification, and the challenge of managing export revenues in a way that prevents economic overheating and social unrest. The sector already accounts for
nearly 90% of the country’s exports and the foreign direct investment (FDI) it attracts amounted to nearly 50% of government revenues

 

 

China Greening: A revolution in environmental attitudes sees China lead the way in the “circular economy” and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into green products and services. Being next door to the world’s largest market presents a tactical advantage and tremendous opportunities, but also means the country’s economic performance is tightly coupled with that of China. This makes it important for Mongolia to understand emerging developments in China and what trade and investment opportunities they raise.

 

 

Resource Tensions: Geopolitical tensions ravage the region; natural resources are used for political leverage, making trade difficult. Mongolia struggles to access finance and markets for its minerals and to pursue diversification opportunities, but this scenario presents opportunities to carve out a role as a neutral and respected neighbour.

 

 

Mongolia’s newly implemented ‘third neighbor policy’ is one of the more innovative foreign affairs approaches in the country’s history. As the global political sphere changes rapidly, Mongolia’s political stability, economic developments, non-traditional national security environment, and far-sighted foreign policy strategies are crucial for continuing its democratic transition and keeping up with new developments in the Asia-Pacific