Sep 202014

Chinese e-commerce company Alibaba floated on the New York Stock Exchange and immediately rang up a 38% gain that values the company at $238 billion, behind only Microsoft, Apple and Google in tech stock valuations.

One of the major shareholders in Alibaba is Yahoo! who posted a 2.7% drop in value despite picking up a $5 billion windfall from the Chinese companies float.

For Alibaba’s founder Jack Ma, this float and the stock market’s reaction is a vindication of his business and of China’s place in the modern global economy, something we discussed with early Alibaba employee Porter Erisman last year.

Alibaba also shows that Chinese companies are now credible international businesses and companies like Haier, Lenovo and Hauwei need to be taken seriously as competitors and suppliers.

While Jack Ma and Alibaba celebrate, Marissa Mayer and Yahoo!’s management team are going to have to give some careful thought about how to use that extra five billion dollars. Time and investor patience is dwindling away for the once powerful internet giant.

It may be too soon to draw Alibaba’s success and the fall of Yahoo! as being the parallel of the rise of the Chinese economy and the decline of the US, but yesterday does give a strong signal about how the global economy is changing.

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Aug 212014

A few days ago this site covered Patrick Chovanec’s views on the changes the world faces as China moves from an export focused economy to one that relies more on domestic consumption.

Chovanec highlighted that some industries will be winners — retailers for instance — while others such as property developers and exporting manufacturers will be losers.

It seems we can add casinos to that list of losers; the big gamblers aren’t spending money as their property collateral falls and the government tightens up on corruption.

As Quartz reports, Macau’s casinos have encountered their second consecutive quarter of revenue falls and gambling stocks are falling.

That’s bad news for Macau’s economy but it’s also not good for those who’ve hitched their fortunes to Chinese gamblers — Steve Wynn and James Packer are two people immediately spring to mind.

In the case of James Packer this is also bad news for the Australian economy as Packer’s Aussie casinos are increasingly focused on attracting Chinese ‘whales’.

For Sydney and the state of New South Wales, this is particularly bad news as the government gifted a prime site of land to build a new casino that was going to be the mainstay of the city’s tourism industry.

Not that Sydney is alone in its cargo cult like hope that building a casino will attract Chinese. In Northern Queensland, the struggling city of Cairns is pinning the future of its tourism industry on a massive complex in a flood mangrove swamp.

Should that project collapse it will be another example of the folly in believing Australia could ride on the back of a booming China for decades and staking everything on that belief.

In the 21st Century, business is more than just building a shiny object and hoping rich Chinese will come.

Aug 192014

The problem facing commentators on the Chinese economy is a lack of clear narrative and the rest of the world needs to understand the story believes economist Patrick Chovanec.

Chovanec was speaking at Sydney University’s China Studies Centre last night on how the Chinese economy is shifting from being export lead to relying on domestic consumption, a process that isn’t without challenges.

“There’s a kind of schizophrenia about the Chinese economy,” says Chovanec who describes how the news swings from extremes of all good news to dire warnings. This, he believes, is because of a lack of understanding of the processes underpinning the country’s changing position.

Comparisons with Japan

China’s growth has been underpinned by export lead growth model which is a very good way for a poor country to become rich quickly but reaches limits when the exporters’ markets become saturated and the buyer countries can no longer buy.

This was the dilemma Japan hit in the 1990s and Chovanec sees similarities which happened at an earlier stage of China’s economic development because of its far greater size.

In another respect is the cost of labour which sees the country in the same position as Japan in the 1960s where where manufacturing started moving to Taiwan, South Korea and Hong Kong due to high Japanese wages.

The problem of soaring labour rates is covered by Peter Cai in today’s China Spectator which includes this chart showing how selected emerging economies wages compare.


Cai points out manufacturing is already shifting out of China with Vietnam being a favourite destination.

This has already had an impact on companies’ decisions to manufacture items in China. In 2000, China made 40 per cent of all Nike shoes, while Vietnam made 13 per cent. Fast-forward to 2013, and China’s production share was 30 per cent, Vietnam’s increased to 42 per cent.

Vietnam however has its own problems and Cai sees China having advantages in having superior infrastructure, integrated supply chains, and a better educated workforce that will slow relocations.

Building productivity

Chovanec is more optimistic about the Chinese economy seeing bringing sectors like agriculture and medicine up to Western standards of productivity as potential growth areas for China.

“Having worked in China for many years, I see a lot of productivity gains across the Chinese economy.”

Many of the earlier productivity gains were low hanging fruit – labour was cheap making it easy to improve productivity. As workers become higher paid, that low hanging fruit is gone with reforms harder to implement along with many more affluent interests who would be losers in a rebalanced economy.

Among the losers in the transition from today’s economy would be property developers and export focused manufacturers while winners would be retailers and service industries.

The switch to consumption

In his view, China is capable of making the transition: “The most precious global commodity is domestic demand,” Chovanec says. “China has that cushion to invest in the face of fall in consumption, that doesn’t have to mean a fall in Chinese living standards.”

For the rest of the world the question Chovanec believes has to be asked is what will that consumption led Chinese economy look like and what does it mean for those with a stake in China?

“Other countries are going to be winners and losers from China’s rebalancing. You have to think about what you want to be.”

Australia has a particularly difficult problem in the face of a rebalanced China, Chovanec believes.

“The problem for Australia is that the country has been the supplier to China’s investment boom. If China’s investment boom comes to an end then Australia no longer has no market.”

Optimistism and the future

Despite the challenges Chovanec is optimistic about China. “My experience in going to China in 1986 is that the Chinese government and Communist Party deserve a lot of credit for getting out of the way.”

The success of China’s economy over the last thirty years has been driven from the grass roots; “this was a bottom up process, not a top down model.” Chovanec says.

Unlike many of the populist writers on China, not to mention more hysterical politicians and commentators, Chovanec provides a nuanced view on the underlying dynamics and the evolution of the Chineses economy.

That we need to consider a world where the Chinese economy is very different is an important message and one that policy makers and business people need to think very carefully about.

Mar 172014

One of the questions in the online business world for the last year was were would Chinese Internet giant Alibaba decide to list – the US or Hong Kong?

Listing in Hong Kong would have been a coup for the Chinese territory and possibly marked a shift in Asian web properties away from listing in the United States.

As it turned out, Hong Kong’s listing rules were too stringent for Alibaba’s Jack Ma who wanted to retain a controlling stake in the business in a way that isn’t allowed on the HK stock market so the company is going to the US for its IPO.

Jack Ma and Ailbaba’s rise is a fascinating story partly told by Porter Erisman in his Crocodile on Yangtse who was interviewed for Decoding the New Economy last year.

Alibaba’s listing on a US exchange, the announcement isn’t clear if its the NASDAQ or NYSE, will also be a test for the valuation of Asian internet properties in Western stockmarkets.

With revenue of around a billion dollars this year, a Google like P/E of 30 would see the company  valued at around $30billion, although there could be arguments that a Facebook like valuation of 100 times earnings might be more appropriate.

Regardless of how much it is valued, Alibaba is going to be blazing a trail for Asian and, specifically, Chinese companies over the next few years.

Jan 302014

The first Decoding the New Economy for 2014 is an interview with Carl Grivner, CEO of Asian data center and communication company Pacnet.

Pacnet is unique in having an extensive Asian network of fibre links and data centres as well as having head offices in both Singapore and Hong Kong.

Having two head offices in cities as different as Singapore and Hong Kong presents a number of challenges along with some advantages as Carl explains.

The company’s combination of data centres and data links gives Pacnet an opportunity to offer some unique services in software defined networks, which Grivner describes as “the Pacnet Enabled Network”, that allows customers to create their own virtual networks.

What differentiates Pacnet in Grivner’s view are the company’s people – an asset essential in diverse Asian markets.

“What differentiates us are the people that we have in those locations,” says Grivner. “when you do business in Asia; doing business in Singapore versus Sydney versus Hong Kong everything is a little bit different, or a lot different for that matter.

“The physical assets are the physical assets but the people that get know how to get things done in each of those markets is what makes us unique.”

Grivner also explores the differences between Singapore and Hong Kong’s business cultures along with the diversity of the Chinese economy.

Dec 302013

After yesterday’s post on the motor industry’s relevance in the 21st Century, a related article about Chinese construction equipment appeared in The Economist.

According to CLSA – formerly Credit Lyonnais Securities Asia and itself now fully owned by Chinese investment house CITIC – the quality of Chinese construction plant is rapidly approaching that of the Japanese and US industry leaders.

The Chinese have achieved this in a short period through a combination of joint ventures and strategic takeovers and that should worry its more established competitors.

How the Chinese have moved up the value chain in construction plant is a small, but important example, of how the country is positioning itself as a higher level producer as its economy and workforce matures.

For trading partners and competitors it’s worthwhile thinking how a more affluent and higher tech China is going to affect their businesses, thinking of China as just a cheap source of low quality labour isn’t going to cut it for much longer.

Oct 052013

The Chinese government’s declaration of a Shanghai Free Trade Zone recently made headlines with speculation the region might be exempt from the nation’s internet blocks.

For Hong Kong, the Chinese government’s move is another blow to the territory’s already declining position as the main gateway to the People’s Republic.

As part of the Decoding The New Economy series of interviews, I spoke to Brian Wong of Hong Kong’s Seacliffe Partners about the challenges facing the territory and the role the former British colony will play over the next few decades.

“Hong Kong, I think, is the perfect bridge between East and West, ” says Brian. “But I think Hong Kong has been in search since the change over in 1997 as to where it really wants to focus itself.

The territory is squeezed between Singapore that has established itself Asia’s leading financial hub and now is positioning itself as a creative centre and Shanghai which has become the new ‘Gateway to China’ with its domestic financial centre and deep water port.

Despite the challenges facing the Territory, Brian sees opportunities in the city’s cultural and business environments.

“One of the great things about Hong Kong still is its international community and its accessibility for creative types,” Brian says. “I think Hong Kong is starting to recognise this advantage.”

“You have a large base of Chinese based manufacturers looking to beyond just low cost OEM manufacturing, what they need is creative design and innovation. If Hong Kong can be one of the big suppliers of that then they have a really good opportunity.”

One area Brian sees Hong Kong has an advantage is in its developing a hardware hackers culture that fits in with the massive manufacturing hubs surrounding the territory along the southern Chinese coast.

“I went to a talk where there was a fellow from Mountain View, California who does a lot of product invention,” Brian tells. “He’s set up a lab in Hong Kong to do product innovation because although he recognises China has a low cost manufacturing base, he doesn’t want to live in Shenzhen.”

The challenge for Hong Kong is to encourage a more entrepreneurial mindset, Brian believes. He also sees Hong Kong having an opportunity in being a conduit for the Chinese diaspora looking at investing into the PRC.

Probably the biggest advantage Brian sees Hong Kong having are in its mature legal and capital markets that Shanghai and other Chinese centres lack – “these are world class,” he asserts.

Ultimately though it may be that Shanghai, Beijing, Taipei or Singapore aren’t threats to Hong Kong at all as each city becomes the centre of certain aspects of a diverse Chinese and East Asian economy.

“I think much like in the United States there is not just one financial centre – you’ve got Chicago, New York and you’ve got different roles for different cities, LA for media and San Francisco as the gateway into the United States.”

“There’s room for more than just one. The question is what does Hong Kong want to be and how does it want to be most valuable to the China story.”