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Travel giants integrating services: Ctrip & Qunar

Travel giants integrating services: Ctrip & Qunar

The business of selling airline tickets and resort vacations to China's holiday-happy middle class is now a battleground for Internet giants, following a deal that brings Ctrip.com International Ltd. to the fore.

 

Ctrip was already the country's biggest online travel agency before announcing a share-swap agreement on October 27th that gave it virtual control of traveler services provider Qunar Cayman Islands Ltd., a subsidiary of the Internet search giant Baidu Inc.

 

 

In the deal, Baidu transferred 45 percent of its stake in Qunar to Ctrip. In turn, Baidu got a 25 percent stake in Ctrip. The swap strengthened Ctrip's grip on what market research institution iResearch says is China's 270 billion yuan online travel agency market. Ctrip already owns 37 percent of eLong Inc. and 6 percent of Tuniu Corp.

 

The tie-up of the two Nasdaq-listed companies with a combined market value of US$ 18 billion set the stage for a three-way travel market battle pitting Baidu and its new partner Ctrip against the nation's dominant social media company Tencent Holdings Ltd. as well as e-commerce leader Alibaba Group.

 

Tencent has an online travel information section on its qq.com platform, an instant messenger. The company has also invested US$ 84 million in travel service provider eLong in 2011 and US$ 78 million in LY.com in 2014.

 

Alibaba, meanwhile, has had one foot in the travel agency door since 2010 by selling ticket and hotel booking services through its Tmall and Taobao websites. It's also invested millions of U.S. dollars in several online travel sites including qyer.com and baicheng.com. And in October 2014, Alibaba formally launched its own travel service division called Alitrip.

 

But through their new partnership, Ctrip and Qunar now account for nearly 70 percent of all revenues generated through the country's online travel market.

 

 

Alitrip's is pitching it`s service as an open platform through which travelers and qualified service providers can find each other. Future plans call for offering various traveler conveniences, such as hotel room deposit waivers based on a client's credit record with Alibaba. In its first year of operations the company signed up more than 100 million members and averaged more than 10 million daily webpage views. But it's still lags behind Ctrip and Qunar.

 

And although big brands rule the market, a number of new players have recently joined the online travel services game. One is the group-buying website company Meituan.com, which for the second half of this year reported 5.3 billion yuan worth of hotel bookings as well as 1.8 billion yuan worth of other travel-related deals. Meituan established a new division in July aimed at expanding its services.

 

China is also seeing traditional, storefront-based travel agencies increasing their online exposure opportunities through a growing number of new websites.

 

Nevertheless, the country's online travel giants have fortified their market positions in ways that should keep their new rivals at bay for a long time. For several years the market had anticipated a Ctrip-Qunar merger.

 

Integrating Services

The main focus of the merger is as a way to streamline business and counteract competitive pressure since many domestic companies in this industry are running in the red.

 

For the second quarter, Qunar reported an 816 million yuan loss. Elong.com registered a 356 million yuan loss and Tuniu said it lost 292 million yuan in the same period.

 

Ctrip outperformed its rivals by posting a 143 million yuan net profit for the second quarter, a 5.9 percent increase from the same period last year.

 

Baidu, meanwhile, has been singled out by market analysts as the biggest winner in the deal between Ctrip and Qunar. The search engine had controlled Qunar since buying a 62 percent stake for US$ 306 million in July 2011, just a few months after expanding into what was then a fledgling market for online travel services.

 

Ctrip and Qunar will likely continue to operate separately yet complement one another. Ctrip will focus on the business traveler, hotel and ticketing operations, while Qunar will function mainly as a platform for a variety of travel services based on packages, search and price comparisons.

 

But the merger also presents challenges for the companies involved. Baidu, for example, must figure out how to integrate and distribute traffic and resources between Ctrip and Qunar. In the short term Ctrip and other travel booking sites are expected to continue relying on investments to keep their businesses growing whilst being forced by the competitive environment to offer services at discounted rates.

 

China’s shrinking currency reserves:...

China’s shrinking currency reserves: really economic gains

Since mid-2014 Chinese currency reserves have shrunk by about 10 percent. This reduction culminated in August 2015 when the Chinese Central Bank responded to market pressure towards a weaker CNY and let the exchange rate fall by about 4 per cent in several steps. By following market sentiments, the Central Bank underlined its announcements to give market signals larger weight in exchange rate determination rather than to defend exchange rates, in particular not to defend a fixed single currency peg against the dollar.

 

However, both the timing and the sequencing of the Central Bank’s interventions were negatively perceived by markets in a situation when sizable corrections in Chinese stock markets occurred and when doubts about the sustainability of the medium-term growth path of the Chinese GDP of around seven percent shocked both traders and investors. To contain overshooting in currency markets and stabilize expectations that the Chinese economy is not facing a hard landing, the Chinese authorities leaned against further pressure of capital outflows and CNY exchange rate weakening and sold foreign currency denominated assets.

 

What appears a balance sheet loss, however, is in fact an economic gain.

 

More exchange rate flexibility in general and the exchange rate depreciation in particular helps Chinese authorities to ease the so-called currency mismatch.  Unlike many other emerging markets which are indebted in foreign currency and earn profits in local currency, China earns low profits in foreign-currency denominated interest-bearing assets and at the same time must foot the bill of eventually overindebted local investors, private and para-statals alike, all in local currency. Currency depreciation raises the value of currency reserves in local currency and helps to soften local budget constraints. In this respect, China is in a similar situation as Russia where the depreciation of the ruble has also helped to achieve balancing the local budget. Declining currency reserves (albeit from a record-high level) are the companion piece of reducing current account surpluses and stabilizing the Chinese current account surplus (as percentage of GDP) at a 3 percent level, much below pre-2010 levels.

 

 

Thus, the days are gone when the question whether Chinese-US trade were fair was answered sarcastically: yes, it is fair: China exports toxic toys and the US exports toxic papers.

 

In fact, while China now has sold some of the (non)-toxic papers, the structure of US (and other Western countries’) capital imports from China undergoes an important shift from interest bearing assets to equity assets, such as portfolio investment and foreign direct investment.

 

This shift decouples China somewhat from the sovereign risk of being exposed to possible debtor country defaults. At the same time, due to massive real wage increases in China over the last decade (equivalent to a real appreciation of the CNY) which was not at all compensated by recent nominal depreciation, Chinese companies for reasons of competitiveness were forced to substitute parts of direct exports for foreign production. Alternatively, China had to upgrade its export mix and thus to export more high-technology products such as commercial drones which are far from being discredited as “toxic”.  Hence, fewer currency reserves not only improve the quality of remaining reserves (in terms of reducing the share of non-performing claims on debtor countries). They also let China participate in risk-sharing of global equity investment in foreign currencies such as US-Dollar, Euro, Pound Sterling and Yen. A further depreciation of the CNY would improve the net foreign equity position of China measured in local currency as foreign equity investment of China is denominated in foreign currencies and therefore benefits from CNY depreciation.

 

In short, on both sides of the balance, the degree of toxicity of traded products and papers decreases with decreasing size of imbalances and decreasing currency reserve accumulation.  This is an important gain for the trading partners as well as for the world economy.

 

The decline of Chinese currency reserves has another politically important side effect. A country selling some of its foreign assets does the opposite of a country pursuing a “beggar thy neighbor” strategy of exchange rate undervaluation and currency manipulation. The suspicion that China manipulates its currency in order to defend jobs in the export industry is old. It is raised in the US quasi automatically when current imbalances rise and can gain momentum once nominal depreciation is identified as a political strategy rather than as a response following the markets. Chinese authorities would be well advised to act against this suspicion by beginning to swap external monetary anchors such as currency pegs for internal monetary anchors such as inflation targets.

Source Merics 2015

 

COFCO (China National Cereals, Oils...

COFCO (China National Cereals, Oils and Foodstuffs Corp).

Overview.

 

 

COFCO Corporation is a leading supplier of agri-products, diversified foodstuffs and services in China, integrating agri-trading, logistics, processing, production and sale links, and providing grain and oil products to one quarter of global population. At present, COFCO owns over 180 processing factories domestically with 2.3 million terminal points of sale covering 952 large and medium-size cities, and more than 100 thousands counties, towns and villages.

 

 

COFCO boasts a wide range of branded products and service portfolios, including Fortune edible oil, Great Wall wine, Le Conte chocolate, Tunhe tomato products, Joycome meat products, Xiangxue flour, The Cereal Way instant noodle, Lohas fruit juice, Joy City shopping mall, Yalong Bay resorts, China Tea products and COFCO-Aviva Life Insurance, etc

 

 

A Global Challenge.

 

 

COFCO has more than 10,000 employees in more than 70 nations and regions working in various overseas markets, mainly in Asia, Latin America and Europe. It plans to further improve its capability in maritime transportation and food processing, as well as the entire supply chain services in seed, pesticide and fertilizer businesses over the next five years.

 

 

Facing increased food security issues from factors such as extreme weather and dwindling farmland resources, COFCO is increasing becoming a global giant. The company is building grain and other agricultural product supply chains, particularly with countries in the Black Sea regions and South America, the world's two biggest grain-producing areas.

 

 

Last year, COFCO invested $1.5 billion for a 51 percent stake in the agribusiness operations of Hong Kong-based Noble Group, and reached an agreement with the Netherlands-based agricultural and commodity trading group Nidera BV to acquire 51 percent of its stock, which will see a fully integrated value chain created between the firms.

 

 

The acquisitions mean COFCO now holds more than $70 billion of assets and has a storage capacity of 15 million metric tons in more than 60 nations. Its total food processing capacity has reached 84 million metric tons and it is capable of shipping 44 million tons of agricultural products via various ports around the world.

 

 

Subsidiaries

 

 

COFCO Agri-Trading & Logistics

COFCO Tunhe

JOY CITY PPT

COFCO Engineering Technology

Mengniu Dairy

China Agri-Industries

COFCO Meat

China Tuhsu

Womai.com

Nidera

China Foods

CPMC

Financial Services Dept.

Huafu Group

Noble Agri

 

 

Outlook.

 

 

COFCO has committed to deploying resources and manpower along the Belt and Road Initiative routes over the next five years to help guarantee China's food supply at home and to its key markets overseas. Though the initiative is still in its early stages of development, it has strong implications for many nations along the routes that count on agriculture and international agribusiness cooperation. Many countries along the routes are key global grain producers, and COFCO will continue to seek investment and cooperation opportunities with them over the next five years.

The Future is Made in China: An Anal...

The Future is Made in China: An Analysis of Emerging Innovation Trends in China

In December 2014, the United Nations Development Programme (UNDP) in China, using the services of Futurescaper, launched a public website survey to receive more information on innovations trends in China.

 

 

This foresight exercise was meant to examine the climate of Chinese innovation, as reported by Chinese citizens and other experts from the general public residing in China or abroad. The assumption was that although many people think that China is good in copying and adapting products, a great deal of innovation might be going on in China which the world is unaware of. This Futurescaper exercise aims to reveal that products are not only “made in China” but that at the same time are part of “the future is made in China”.

 

Futurescaper’s tools help organizations uncover and map out the drivers and dynamics that their stakeholders think are most important, understand why they think this is, and explore what their implications are for the future. By combining human insight with analytics together with a great visualization tool, they make this process faster and cheaper than traditional scenario workshops, more insightful and interactive than surveys, and more participatory and empowering than traditional expert analysis.

 

To download the full report please click here.

Alibaba taking a lead on cross-border...

Alibaba taking a lead on cross-border e-commerce.

The global B2C cross-border e-commerce market will balloon in size to $1 trillion in 2020 from $230 billion in 2014, according to a report from global consulting firm Accenture and AliResearch. With this in mind it would appear to be Alibaba that is taking a lead in opening up new global markets.

 

   

 

In the report, “Cross-border B2C E-commerce Market Trends,” researchers forecast that this increasingly popular form of online shopping will see compound annual growth of 27.4 percent over the next five years. By 2020, more than 900 million people around the world will be international online shoppers, the report says, with their purchases accounting for nearly 30 percent of all global B2C transactions.

 

Cross-border online shopping is gaining popularity particularly in emerging markets, where consumers can find it hard to find affordable imported products in local shops. In many cases, the only alternative is shopping on websites in other countries or from marketplaces such as Alibaba Group's Tmall.com, a Chinese B2C website that hosts merchants from around the world.

 

While China is expected to drive much of the growth of cross-border e-commerce in coming years because of the country’s large and growing middle class AliExpress is making headway in selling goods from suppliers in China and other countries to online shoppers in Latin America.

 

Alibaba sells to consumers internationally through AliExpress.com, a site it launched in 2010, that sells goods in 40 categories directly to consumers in 200 countries, according to Alibaba. While Alibaba does not regularly disclose transaction volume on AliExpress.com, the company did report in advance of going public last September that the value of goods purchased on AliExpress.com exceeded $4.5 billion in the year ended June 30, 2014.

 

AliExpress has caught on in Russia, where Alibaba claims it’s the top e-retail site, and in Latin America. The company is now taking several steps to localize the site to better appeal to Latin American shoppers where is see good growth over the next few years.

 

Whilst Alibaba does not disclose its sales in Latin America web analytics company SimilarWeb estimates monthly visits from Brazil to AliExpress.com averaged 110 million during the first five months of 2015. 

 

Delivery remains the biggest challenge for e-commerce companies in Latin America, consumers must wait anywhere from 30-40 days to receive the products after he or she placed order. While it might take one to two weeks for a parcel to arrive from China to Brazil, the time for passing through Brazilian customs and delivery inside of country could easily double this delivery time.

 

Why do so many Brazilians shop on AliExpress if they have to wait a month to get their orders?  Providing a large product selection at much lower prices is the main draw.

 

To speed up delivery, Alibaba has collaborated since last year with the Brazilian postal service Correios to share parcel data. AliExpress also accepts many local payment options in the region, including OXXO in Mexico and Boleto in Brazil.    

  

Aliexpress.com launched a Spanish-language version of its site in 2014 to boost sales and also rolled out its first country-specific site, a Portuguese-language site targeting Brazilian consumers, at pt.aliexpress.com. The site enables merchants that sell on the web shopping mall to create customized promotions, such as deals based on local holidays.

 

The Spanish-language AliExpress.com also has sections that highlight suppliers Alibaba has authenticated, such as those from Chile and Peru, to increase consumer confidence in shopping on AliExpress.com. Those sections also enable local merchants to sign up to become authenticated on Alibaba’s sites. Besides Chile and Peru, there are similar sections of AliExpress.com highlighting merchants from Mexico, Colombia, Brazil and Argentina.

 

Investing in the Chinese Stock Market

Investing in the Chinese Stock Market

Foreigners can indeed buy stocks and shares in both the Chinese mainland and Hong Kong, although it’s not always as straightforward as it might be for them back home. 

 

Playing the Chinese stock market

 

 

The Chinese stock market is divided into three kinds of shares: A Shares, which are restricted to Chinese citizens and Qualified Foreign Institutional Investors; B Shares, which are open to all foreigners, and H Shares, which are Hong-Kong-based shares and also open to foreign investment.

 

In order to trade in A Shares, which are bought and sold in RMB, foreign companies must first get a bank to submit a Qualified Foreign Institutional Investor application form to the China Securities Regulatory Commission (in order to get a permit allowing them to invest in RMB) and also submit an Investment Quota Application to the State Administration of Foreign Exchange.

 

Once these have both been done, the company can then approach a Chinese securities company to make the investment. However, there is a high threshold for entry: the company must own at least $500 million (for insurance companies, asset management companies etc) or $5 billion (for foreign securities firms and banks). 

 

The B Shares use US dollars or HK dollars as denominations and are issued by Chinese companies listed in the Chinese mainland – although ironically they cannot be bought by Chinese citizens. If you want to trade in these shares, take your passport and residence permit to a securities firm to open a B Share account. You will need to deposit at least $1,000.

 

H Shares are bought in HK dollars, and are issued by Chinese companies listed in Hong Kong. In order to invest in these shares, you must go to Hong Kong and open an investment account in a HK bank, putting in at least 10,000 HK dollars. The account can be opened with your HK visa, your passport and your Chinese mainland residence permit. You must go to Hong Kong in person to open the account, but then you can return to the mainland to make deals online. It is open to anyone, foreign or Chinese.

 

Foreigners can also buy funds and bonds in China from commercial banks, securities firms and other sales agencies, by opening a fund or bond account at said agencies. 

 

Security tips for investing in stock market

 

  • If you are signing up to a securities firm online, make sure that the website is legitimate and not a clone or fake. Genuine securities firms do not promise profits or returns, and they will sign printed consulting contracts with you if you use their services. In addition, they are only allowed to receive money via company or business accounts, not personal accounts.

 

 

  • Do not trust anyone who claims to have insider information on stock market trading.

 

  • Do not trust anyone – even a so-called expert – who claims to be able to give precise predictions of the stock market. Likewise, don’t trust trading software that claims to be able to predict the stock market’s movements.

 

Employing Chinese staff: Tax & welfare...

As an employer in China, you have obligations regarding tax and welfare contributions for your Chinese staff – the following sets out the various taxes you are obliged to pay on their behalf.

 

Tax

Employees pay Individual Income Tax on their earnings. It is the employer’s responsibility to calculate and deduct each employee’s contribution from their wages or salaries every month. The company then submits the tax deduction to the tax authority. The company’s role in this is purely administrative. The company itself does not need to make a separate contribution on behalf of Chinese employees.

 

Different kinds of welfare contributions

Welfare contributions are a different matter. Employers must make contributions on behalf of each Chinese employee to China’s social insurance system, known as the “Five Insurances,” plus a housing fund. The Five Insurances comprise a pension fund, medical insurance, industrial injury insurance, unemployment insurance and maternity insurance.

Below is an outline of what the employer and employee respectively contribute to each fund.

 

Pensions

What employer contributes: Varies from region to region, but usually equivalent to around 20 percent of employee’s salary.

How employer benefits: No direct benefits for employer.

What employee contributes: ​Eight percent of salary.

How employee benefits: Upon retirement, employees who have contributed to their personal pension fund for at least 15 years can receive a pension based on the total amount they have contributed personally in their working life. If personal fund runs dry, the employee can receive a pension drawn from the public fund (which employer contributions are directed into).

 

Medical insurance

What employer contributes: There are regional variations, but it’s usually equivalent to between seven and 12 percent of the employee’s salary.

How employer benefits: No direct benefits for employer.

What employee contributes: ​Regional variations, but usually two percent of the employee’s salary.

How employee benefits: If the employee is sick or injured, a percentage of their treatment costs is covered by medical insurance (how much depends on what they are being treated for). Employees also carry a health insurance card; its value is equivalent to the total contributions they have made to their personal medical insurance fund to date. The money on the card can be used to pay for medicines and hospital out-patient costs. 

 

Industrial injury insurance

What employer contributes: Ranges between 0.4 and three percent of employee’s salary (varies based on type of work).

How employer benefits: If an employee is injured at work, their medical care is covered by this fund. However, the employer must continue to pay the employee’s salary for as long as they are unable to work (up to a maximum of 12 months).

What employee contributes: No contribution required.

How employee benefits: If the employee is injured at work, their medical care will be covered by the industrial injury insurance fund (as well as the medical insurance fund).

 

Unemployment insurance

What employer contributes: Usually two percent of employee’s salary.

How employer benefits: No direct benefits for employer.

What employee contributes: ​Usually one percent of salary.

How employee benefits: Employee will receive unemployment benefits for up to 24 months if they are made redundant (but not if they quit their job). Employee must have been making contributions to Unemployment Insurance fund for at least one year continuously to qualify for benefits.

 

Maternity insurance

What employer contributes: Usually equivalent to between 0.5 and one percent of employee’s salary.

How employer benefits: Employer does not need to pay employee’s salary during employee’s maternity leave (usually three months).

What employee contributes: ​No contribution required.

How employee benefits: Employee receives a fixed sum for each month (paid for by maternity insurance fund) during their maternity leave. Alternatively, they can receive a lump sum to help cover cost of birth. Fathers may also apply for compensation during paternity leave (up to 15 days, but allowance depends on region).

 

Housing fund

What employer contributes: Usually equivalent to between seven and 13 percent of employee’s salary.

How employer benefits: No direct benefit for employer.

What employee contributes: ​Usually equivalent to employer’s contribution (though there are regional variations).

How employee benefits: Fund contributes to employee’s house purchase.

 

Mobile commerce: The App`s China uses

Mobile commerce: The App`s China uses

5G is coming and with it means the ability to use mobile devices in ways not possible today. While there are already more mobile devices than people on the planet, they will continue to have increased capacity and capability. Announcements and advertisements must now be appealing on the small screen.

 

Chinas Mobile advertising market is currently the fastest growing sector for companies involved in retail. Now exceeding PC users, the mobile internet market represents the forefront of technology and dynamism in China. In Q1 2015, the total transaction value of China e-commerce market is estimated to have exceeded RMB 3.48 trillion (USD$567.49 billion). With these sorts of numbers no company can afford to ignore the apps where potential clients spend a large proportion of their time. Mobile devices have become the customer's primary means of interaction with companies. 

 

WeChat is leading the field in app`s and is unique in both being a native mobile application and including integrated e-commerce and mobile payments: A quick referral of a product from a friend and a purchase can be made in a matter of moments while the user may never have to leave the WeChat application on their mobile phone.

 

Brands can use WeChat in a few ways to support sales growth, including setting up their own brand shops (as service accounts), working with malls (WeChat operates a couple of their own), using direct sales platforms for user-generated sales (like Weidian that has payments linked to WeChat), and using loyalty cards for location-based promotions and member offers (managed by WeChat inside the app under "QQ iCard").


 

Chinas Most populat Mobile Apps

 

 

Sohu News

Type: News

No of active users: 78,59 million

 

 

Sogo Input

Type: Chinese Pinyin input method

No of active users: 80.08 million

 

 

360 Mobile Assistant

Type: App store

No of active users: 85.91 million

 

 

Taobao

Type: Online shopping

No of active users: 98.01 million

 

 

UCWeb

Type: Mobile browser

No of active users: 98.14 million

 

 

QQ Browser

Type: Mobile browser

No of active users: 106.08 million

 

 

360 Phone Guardian

Type: Anti-virus security

No of active users: 110.33 million

 

 

QQ Music

Type: Music

No of active users: 129 million

 

 

QQ

Type: Instant messaging

No of active users: 307.33 million

Having lost ground in terms of users to Wechat, qq is now the 2nd most popular messaging app in mainland China, it allows users to write and maintain their own blog/diary, as well as photo album.

 

 

WeChat

Type: Instant messaging

No of active users: 359.87 million

Most of us are familiar with WeChat, which is now the most popular messaging app in Mainland China. In addition to messaging functions, the app allows you to search for people in your area and also allows users to maintain a blog along with some photos

 

Data source: compiled by EnfoDesk, an online research institute, Rankings are based on the number of active users as of May 2015.

The Branding Dichotomy: Trust & Pricing...

The Branding Dichotomy: Trust & Pricing point.

Chinese consumers are both brand conscious and price sensitive: the key to understanding this dichotomy is to appreciate Chinese culture, where face and social status are crucial as well as the prevailing attitude of a lack of trust in product quality. This skepticism leads Chinese shoppers do significantly more research, across many more channels, than their counterparts in the West. If a brand can signal a higher social and/or economic status, Chinese consumers are happy to pay a premium. If it doesn’t, they become very price sensitive as well as skeptical about quality.

 

 

eBay requires buyers to pay first and then wait for an item to be delivered. This model works in societies where the trust level is high. However, there is a serious lack of trust in China between consumers and manufactures, so asking buyers to pay first without seeing the product is a hard sell. That’s why eBay failed in China. Conversely Taobao came up with a different model: It introduced a third-party payment system, namely AliPay, where buyers pay to a third-party account owned by Alibaba (Taobao’s holding company), and only after they have confirmed receiving the products in good order, Alipay will transfer the money to the seller. This model effectively solved the trust issue in e-commerce.

 

Throughout China`s history companies of all sizes have consistently lied to their consumers, and this is why, even today, the Chinese are so cynical and suspicious about purchasing products, especially online. Facts that might be taken for granted by western consumers will be questioned vigorously in China, and it is necessary to cultivate trust from a low starting point. The challenge for companies is to prove to consumers that their products are rigorously inspected and tested.

 

Whilst having a natural advantage in the trust area, foreign brands now have to compete move vigorously with domestic brands, especially in budget/mass consumer products. There is also a growing sense of pride in “buying Chinese” which is being utilized to the max by a growing force of domestic brands such as Xiaomi and Anta. A spate of investigations into foreign big name brands a few years ago has eroded the unquestioning faith in western brands, who must now concentrate on the core values of integrity and honesty.

 

The Chinese may be relatively new to the consumer world, but they are far from naive. They look much deeper than colorful billboards and TV commercials. Increased foreign travel, burgeoning Social media and increased awareness of consumer rights have helped the Chinese consumer become ever more sophisticated.

 

One area in which foreign companies still outdo their Chinese counterparts is in customer service: with rising expectations amongst the growing middle classes there is still a stark difference between a walk trough an Apple store compared to a domestic computer shop with a traditional sell and forget attitude. However this is also fast changing with Private Banks and Airlines taking the lead. Consumers are becoming savvier, and insistent on, good service, and domestic producers are taking notice. In the high growth regions of 2nd and 3rd tier cities the personal touch is an incredibly effective marketing tool where the standards of customer care remain low.

 

The days of “Made in China” are now progressively being replaced by “Made for China” foreign companies have to truly understand the needs and changing characteristics of Chinese consumers, and build quality products and services to meet these needs. Crucial to the message is their utilization of social media and brining the latest in consumer services to China.

Urban China: Toward Efficient, Inclusive...

Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization

 
In the last 30 years, China’s record economic growth lifted half a billion people out of poverty, with rapid urbanization providing abundant labor, cheap land, and good infrastructure. While China has avoided some of the common ills of urbanization, strains are showing as inefficient land development leads to urban sprawl and ghost towns, pollution threatens people’s health, and farmland and water resources are becoming scarce. With China’s urban population projected to rise to about one billion – or close to 70 percent of the country’s population – by 2030, China’s leaders are seeking a more coordinated urbanization process. Urban China is a joint research report by a team from the World Bank and the Development Research Center of China’s State Council which was established to address the challenges and opportunities of urbanization in China and to help China forge a new model of urbanization. The report takes as its point of departure the conviction that China's urbanization can become more efficient, inclusive, and sustainable. However, it stresses that achieving this vision will require strong support from both government and the markets for policy reforms in a number of area.
 
 

The report proposes six main areas for reform:

1. Reforming land management and institutions

  • Because most of the urban expansion in recent years was on converted rural land, the report says currently the amount of farmland available is close to the “red line” of 120 million hectares, which is considered to be the minimum necessary to ensure food security.
  • More efficient use of land will require stronger property rights for farmers, higher compensation for land requisition, new mechanisms for converting rural construction land to urban uses, and market-driven pricing for urban land allocation.
  • Legal limits should be set up on rural land taken for public purposes by local governments.

2. Reforming the hukou household-registration system to provide equal access to quality services for all citizens and create a more mobile and versatile labor force

  • The system should remove barriers to labor mobility from rural to urban areas, as well as between cities, to help boost workers’ wages.

3. Placing urban finances on a more sustainable footing, while creating financial discipline for local governments

  • The report recommends moving to a revenue system that would ensure a higher portion of local expenditures is financed by local revenues, such as property taxes and higher charges for urban services. 

4. Reforming urban planning and design

  • In cities, basing the government prices for industrial land on market value can encourage land-intensive industries to move to smaller, secondary cities.
  • Cities can also make better use of existing urban land through flexible zoning, with smaller plots and more mixed land use, which would lead to denser and more efficient urban development.
  • Linking transport infrastructure with urban centers and promoting coordination among cities would encourage better management of congestion and pollution. 

5. Managing environmental pressures

  • China already has tough environmental laws, regulations and standards, so the most important task for achieving greener urbanization is enforcement.
  • Market-based tools, such as taxes and trading systems for carbon, air and water pollution, and energy, can also be used more to meet environmental targets. 

6. Improving local governance

  • The performance evaluation system of local officials could be adjusted to give greater incentives for a more efficient, inclusive and sustainable urbanization process.
Click here to download the full World Bank report English PDF (20.66Mb)
 
Source: World Bank Group

China`s Agricultural Sector: changing...

China`s Agricultural Sector: changing realities.

As China’s agricultural sector struggles to keep up with the country’s growth in demand, its ability to meet the agricultural demands of its population will usher in a new era off opportunities for agricultural companies.

 

 

China’s struggle to consistently secure adequate food supplies of a sufficient quality has resulted in its agricultural sector being placed under increasing pressure. Since February 2014 the State Council has suggested that the country will no longer aim to match demand for grain through domestic production alone. These are the first public signs that Beijing is coming to terms with the realities facing China’s agricultural sector.

 

 

The situation

If China were self-sufficient with regard to agricultural products, it would have to feed 20% of the world’s population with only 10% of the world’s arable land and 6% of global water resources. In the past, this situation was manageable due to the fact that Chinese citizens generally depended on vegetables and grains for energy with only small portions of meat for flavour. Arguably, these dietary preferences arose as a consequence of many not possessing the wealth to buy more expensive food products, as many can today.

 

 

However, China’s meat and calorie intakes have kept pace with the country’s GDP. In 1980, for example, China’s average level of protein consumption was a mere 12% of most developed countries. By 2009, China’s protein consumption had risen to 56% of the above sample’s average. China’s large population and the apparent remaining growth in China’s appetite illustrate how much food will be needed to meet future demand.

 

 

One of Beijing’s responses to China’s lack of food security was to set a 95% ‘self-sufficiency’ target on key grain products—corn, rice and wheat—to shape the way land and water resources were prioritised and insulate the country from fluctuations in global grain prices. However the production of meat is more land and water intensive - putting extra pressure on already strained resources. A pound of beef requires a staggering 6,810 litres of water, pork 2,180 litres, soybeans 818 litres, potatoes 450 litres, corn 409 litres and apples 70 litres.

 

 

The Organisation for Economic Cooperation and Development (OECD) estimates that 70% of China’s arable land is low-yielding, and erosion, salinization and acidification are leading to a further reduction in the quality of China’s soil. Further, these estimates do not take into account the effect of pollution on China’s arable soil. Some analysts say between 8-20% of China’s arable land is contaminated by heavy metals.

 

 

Interestingly though, this ‘self-sufficiency’ target has been abandoned for a more open policy according to guidelines released by the State Council. Analysts have proposed that land and water-intensive products, like beef, offer higher profit margins than vegetables, fruits and grains. Beijing may be attempting to ameliorate China’s high inequality by allowing farmers to choose to farm more profitable produce. However, this policy alone will be insufficient to overhaul China’s agricultural sector.

 

 

Unsurprisingly, China’s growing middle class is demanding the quality and safety assurances associated with imported food and beverages. The apprehension around the quality of domestically-produced powdered baby milk, in particular, has had profound effects around the world. Supermarket stores in Hong Kong, Australia, New Zealand and even as far as the UK have implemented policies aimed at rationing baby formula due to a surge in demand from China.

 

 

Regardless of whether Beijing abandons its ‘self-sufficiency’ targets, opportunities for investors lie in the Middle Kingdom’s future nutritional needs. The Chinese market’s sustained growth will result in an increase in demand for a wide range of food commodities – foreign intervention and innovation will help meet this demand.

 

 

Outlook

If President Xi Jinping follows through on his commitment to double China’s GDP per capita by 2020, demand for the more expensive categories of food, such as animal protein, will rise the fastest and will be met via an increase in imports.

 

 

The OECD and Food and Agriculture Organisation (FAO) have estimated that by 2022, China’s consumption of food commodities will increase considerably across all food classes. Possibly as a result of China’s struggle with tainted milk, the dairy category holds one of the largest gaps between domestic production and consumption.

 

 

The solutions

There is little doubt that Beijing faces a challenge in solving the country’s dramatic mismatch between supply and demand of food products. While many propose that it is inconceivable for China to achieve food security due to its scarcity of water and land resources, Beijing can reduce its dependence on imports in the long term through the implementation of strategic policies.

 

 

Remnants of Maoist collectivism, for example, remain present in China’s rural land policies and reduce motivation to increase agricultural production. Providing farmers the opportunity to own, sell and borrow against land to expand business opportunities and profits may solve some of China’s food woes. Allowing for consolidation could create an environment that makes unprofitable enterprises financially unsustainable and reward those that are profitable. The economy of scale achieved through the consolidation of farms will likely achieve higher production volume at a lower unit cost (as per developed nations in the 50`s and 60`s).

 

 

Since 1997, an estimated 8.2 million hectares of arable land, roughly the area of Austria, has been lost to property developers catering to a growing urban population. While increasing the size of China’s urban population is an important step towards shifting China to a consumption-driven economy, this process has been administered in a haphazard fashion, which has jeopardised the country’s limited fertile land. A policy that preserves the most fertile land while using infertile land for infrastructure could provide for greater efficiency and productivity in the agricultural sector. China’s urbanisation and property development also presents an opportunity to increase productivity in the agricultural sector.

 

 

Urbanisation has resulted in roughly 25 million Chinese farmers becoming defacto urban residents every year. According to a report by the Ministry of Agriculture, only 33% of China’s corn and 69% of its rice are mechanically harvested every year. The report also stated that China performs 72% of its post-harvest processing tasks, such as sorting and packaging, by hand. The opportunity for the mechanisation of the agricultural sector is evident. Mechanisation may, however, result in unforeseen consequences related to unemployment in China’s labour market, so policymakers and the business community would benefit from a coordinated approach to solving challenges in the agricultural sector.

 

 

Even if new policies could maximise the amount of arable land, China will continue to suffer from its unproductive use of land. Advanced agricultural techniques and technologies for fertilisation and irrigation, for example, could help with increasing productivity. Gradually opening up the agricultural sector to foreign investment, which the central government currently forbids, is a potentially effective strategy to transfer such techniques and technologies. Unfortunately, Beijing may not have the luxury of time if it wants to reduce its reliance on imports.

 

 

Beijing’s ‘Going Out’ policy, through which the central government aids firms, private and state-owned, to make acquisitions and investments abroad with the intention of securing physical assets and the associated intellectual property, could complement the reform of the agricultural sector. From 2010 to 2013, Chinese food and beverage companies made over USD 9 billion worth of deals overseas according to the National Australia Bank. Deals such as Shuanghui’s acquisition of Smithfield, the world’s largest pork producer and processor, in May 2013 and COFCO’s March 2014 acquisition of majority stakes in Noble Group’s agribusiness unit and Nidera stand out, but there are countless examples from around the world. With China already having established good relationships in Africa, Australasia and South America, where some of the most fertile farmlands in the world exist, the opportunity for increased OFDI in agriculture is certainly available.

 

 

Genetically modified (GM) food may also provide a partial solution to China’s food supply woes. GM crops have the potential to overcome many of the challenges of agriculture in China, such as low-yielding arable land and decreasing soil quality. Furthermore, the benefits of lower costs will also aid in keeping inflation in check. However, GM food is a sensitive topic in China—the public remains cautious as to whether the government has fully addressed the potential risks. Nevertheless, the Ministry of Agriculture has taken the lead in publicly declaring the safety of GM food and is slowly pushing domestic production ahead. Currently 17 GM products from five plant species are sold on the domestic market: soya beans, corn, oilseed rape, cotton and tomatoes. The only GM crops approved for domestic commercial production are cotton and papaya.

 

 

Lastly, firms can mollify China’s food safety fears by exporting from their home country or by producing strategically within China. Tyson Foods, one of the world’s largest processors and marketers of chicken, has shifted from its conventional business model of sourcing from independent chicken farmers and has built its own network of farms in China, providing direct oversight over the production process. In 2010, Tyson did not have any farms in China; today, they have 20, and they plan to own and operate 90 by 2015.

 

 

Business potential

Not unique to China, numerous countries face the prospect of having to rely increasingly on importing food to meet domestic demand. What magnifies China’s challenges is the size of its population, which has the potential to create shocks on global markets. If China cannot meet demand with domestic supply, global prices of certain food commodities will undoubtedly continue to rise. Should prices rise too much, affordability will become a crucial issue around the world. While farmers may benefit the most from this situation, worldwide consumers will be on the receiving end. China’s challenge, to a certain extent, will become the world’s challenge.

 

 

China’s growth in domestic food production in the last thirty years is an astonishing feat, yet the country’s deteriorating quality and dwindling availability of natural resources mean that this growth is still not adequate. Pollution must be minimised. Arable land must not be sacrificed for urban sprawl. Land policies should reward profitable agricultural enterprises. Together, these actions could alleviate pressure on China’s agricultural sector.

 

 

Companies able to navigate China’s shifting agricultural landscape will be primed to benefit from this key market. China’s agricultural players desire advanced labour-saving technology and will undertake joint ventures to attain it. Agricultural exporters around the global will benefit from increasing levels of demand for agricultural commodities and increasing flows of capital from China.

 

 

Choppy waters for the property sector...

Choppy waters for the property sector.

The slump in China's property market looks to be accelerating with new home prices last month falling at the fastest pace on record. The sector is emblematic of problems such as rapid credit expansion and policies that promote short term growth over a more balanced economy.

 

 

House prices in the major cities surveyed by the National Bureau of Statistics, fell on average by 5.7 per cent compared to February last year. It's the sixth consecutive month house prices have fallen, including drops of 5.1 per cent in the year to January and 4.3 per cent in December. Only one city of the 70 surveyed saw any increase in house prices. Representing between 20-25% of the economy, the government however, still believes that the increased pace of urbanization will stabablize the declines this year: however, perhaps, China has simply built too much? Provincial governments meanwhile, will have to be persuaded to reduce their dependency  on their sales of state owned lands to the developers: which will be no easy task since some estimates put this at around 40% of their annual revenue. 

 

 

A further concern is the effect on property developers (still supplying over 15m housing units a year), who will be caught in a situation of tight cash flow, which is bound to churn up the shadow banking sector in China: the sector is largely built on implicit guarantees and any meaningful defaults there may jeopardize the stability of the financial system. When developers are limited access to credit, they have to reduce prices to unload their unsold housing units (and pay back their debts), which gives investors second thoughts about whether to continue plowing their money into property, starting a deflationary spiral. Falling asset prices undercut the basis for both past and future lending.

 

 

However a saving grace is that Chinese households continue to have a relatively low level of household debt, due to large mortgage down payments (China buys in cash, in full). 

 


2015 is likely to be a choppy period for China, as we see the realities of President Xi Jinping's "New Normal".

 

NPC roundup March 2015.

NPC roundup March 2015.

As one of the most important annual political gatherings in China, the NPC lays out the leadership’s plans and priorities for the coming year. Outcomes from the legislature are closely scrutinised by global businesses keen to anticipate the future direction of the Chinese economy and plan accordingly. 

Chinese Premier Li Keqiang’s annual government work report, delivered to the NPC earlier this month, featured a number of important announcements related to the following areas:

 

 

  • Lowered expectations for economic growth: China’s GDP growth target was lowered from 7.5% in 2014 to 7% this year, with Premier Li characterising the lowered expectations for economic growth as the “new normal”. Last year, the Chinese economy grew at its slowest pace since 1990, and the government is clearly accepting this lower rate of expansion as it continues to focus on restructuring the economy. Following Premier Li’s speech, the head of the National Development and Reform Commission (NDRC) emphasised that China will not introduce strong stimulus measures to boost economic growth this year.

 

  • Supporting employment and job creation: Premier Li said that over 10 million jobs would be created in urban areas in the coming year. With the number of college graduates expected to reach nearly 7.5 million this year, job creation is a top priority for the government. Premier Li also pledged to help people who have lost their jobs due to structural adjustments or steps taken to reduce overcapacity to secure new employment.

 

  • Improving environmental protection: As the government continues to focus on reducing pollution and improving environmental protection, energy intensity will be reduced by a target of 3.1% this year to cut emissions from major polluters.  

 

  • Fighting corruption: Premier Li reiterated the government’s commitment to continue fighting corruption and pledged to tighten supervision over public funds and state-owned assets.

 

  • Opening up China’s stock exchanges: Premier Li announced plans to link up the Shenzhen and Hong Kong stock exchanges on a trial basis, similar to the scheme launched between the Shanghai and Hong Kong bourses last November.

 

  • New plans for infrastructure investment: China plans to invest more than RMB 800 billion in railway construction and another RMB 800 billion in major water conservation projects in 2015.

 

  • Encouraging greater foreign investment: Premier Li vowed to further open up the service and manufacturing sectors by reducing the number of industries in which foreign investment is still restricted by half.

 

  • Supporting economic growth through Internet applications: Premier Li announced an Internet-plus action plan, which aims to further accelerate the contribution of new Internet applications to the Chinese economy. McKinsey forecasts that Internet applications could fuel between 7-22% of China’s incremental GDP growth until 2025.  

 

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