17th Feb, 12:11 pm
China has become increasingly important to the growth of the world’s luxury goods market. In an environment of stagnant growth in developed countries, Chinese consumers are the key source of revenue for luxury good distributors. CLSA Asia-Pacific Markets forecasts demand for luxury goods and travel from Greater Chinese to account for 44.0 percent of global sales by 2020, up from 15.0 percent today. Bain & Company released a recent report in November 2010, showing that Chinese paid RMB 68.40 billion (US$10.21 billion) for luxury goods in 2009 and are likely to have spent 23.0 percent more in 2010. CLSA predicts that China will become the world’s largest domestic market for luxury goods, accounting for EUR 74 billion or 0.6 percent of the country’s total GDP, over the next decade.
As incomes rise, China’s burgeoning middle class is adopting previously unattainable high-end lifestyles and is transitioning from a saving to a spending culture. A CLSA survey of 340 consumers and 31 luxury store managers in China’s Tier 1-3 cities found that more than half have made or are planning a luxury purchase. Those who bought luxury goods in the past 12 months spent an average 10.0 to 12.0 percent of their total household income on these items, demonstrating a high propensity to spend.
According to a survey of 1,471 luxury goods consumers in more than 10 cities in China by Bain, Chinese consumers spent the most for luxury cosmetic and perfume products, totaling RMB 16.90 billion or 24.7 percent of total luxury goods spending in 2009. the second largest sector for luxury product spending was luxury watches, recording sales of RMB 15.50 billion, with bags and suitcases ranking third.
A number of cultural and social differences contribute to the rapid growth of the luxury goods sector relative to Chinese consumers. the first of these is that mainland Chinese millionaires are on average 15 years younger than their overseas peers. the number of individuals with more than RMB 1 billion has increased at an annual rate of 50.0 percent from 24 in 2000 to 1,363 in 2010. secondly, success, wealth and social standing are highly regarded in Chinese culture and displaying this through watches, jewelry, apparel, cars and wine earns a measure of respect. Chinese consumers enjoy displaying their wealth and success and not just spending on themselves but also purchasing gifts for friends and family. Gift giving is particularly popular around important holidays such as the Chinese New Year in early February. moreover, Chinese appreciate high-quality craftsmanship. Foreign luxury brands in particular, with large logos and signature collections, are particularly desirable. Spending among female consumers in China is increasing and luxury handbags are gaining increasing popularity.
While on business in Paris and London during Chinese Spring Festival last week, I could not help but notice the ever-increasing number of Chinese buyers in Paris’ and London’s most exclusive shopping districts. as Chinese consumers become wealthier they are traveling more and more for purchases of luxury goods. according to Bain’s report, 56.0 percent of Chinese consumers purchase luxury goods overseas, while only 44.0 percent of Chinese consumers purchase them at home. This is partly due to the appreciation of the RMB, luxury goods pricing being lower overseas, and a wider range of choice available overseas. When I travel abroad, most recently in the Middle East and Europe, I see more and more Chinese traveling and buying goods as well. the Champs Elysees and all Paris luxury goods districts are filled with Chinese consumers.
More Chinese luxury brands will inevitably be established at home, but we expect this to occur in product categories where China has a perceived fundamental advantage, primarily in the use of materials such as jade, porcelain or precious woods that can be used in jewelry, home-ware and furniture. In the meantime, we expect Chinese companies to look to acquire prominent European and American brands and build up manufacturing expertise.
Luxury goods companies are expanding rapidly in China to accommodate demand that will account for half of their forecasted global growth in the next 10 years. Handbags, leather goods, watches and jewelry are expected to see the fastest growth. Louis Vuitton’s biggest customers are already Chinese buyers, while Greater China represents 28.0 percent of sales for Swatch, 22.0 percent for Richemont, 18.0 percent for Gucci, 14.0 percent for Bulgari and 11.0 percent for Hermes. Bain discovered that 30.0 percent of Bulgari’s sales in London were contributed by Chinese tourists. Gucci believed that during the first nine months of 2010, 22.0 percent of its sales in Europe were from Chinese consumers.
Clearly luxury goods are an increasingly fast growing sector in the Chinese economy and it will be imperative for foreign luxury brands across the world to devote an appropriate amount of attention to the Chinese consumer.
Adam Roseman
Founder & Managing Partner
ARC China
Western Markets Losing Appeal To Chinese Companies
Over the years, overseas listings have been favored by Chinese enterprises in raising capital. however, due to lower liquidity, higher cost, increasing mistrust, and other factors, foreign capital markets have been gradually losing their appeal. More Chinese private companies are likely to prefer fund raising in the domestic market in the coming years, a recent survey by research and analysis company Evalueserve found. the firm interviewed 150 companies on the Chinese mainland that have the intention of raising capital in the public markets over the next few years, as well as publicly listed Chinese companies that have already raised capital via share offerings, to find out their IPO preferences and the reasons behind their decisions.
About 76% of private companies surveyed indicated an interest in a domestic listing versus an overseas one, which is a higher portion than the 63% of total Chinese IPOs that were launched on a domestic exchange in the past five years. the main forces driving Chinese companies to select domestic listings include the desire for domestic brand exposure, the maturing of domestic markets, cost benefits, and the barriers of gaining trust and communicating with foreign capital markets and investors.
The maturing of China’s capital markets was exemplified by the launch of the Growth Enterprise Market in Shenzhen in late 2009, a board designed for early stage companies and intending to become China’s Nasdaq. China’s effort to transform Shanghai into the world’s leading financial center by 2020 also helps to facilitate the progress.
On the contrary, foreign capital markets are becoming less desirable for many Chinese companies. the Securities and Exchange Commission’s enforcement and corporation finance divisions have begun a wide-scale investigation into how the networks of U.S. accountants, lawyers, and bankers have helped bring scores of Chinese companies onto the U.S. stock exchanges. the SEC has pursued individual Chinese companies for accounting violations and lax auditing practices. the United States House of Representatives financial-services committee may hold hearings on Chinese-company accounting in 2011. These announcements have caused a persuasive mistrust of Chinese companies throughout the U.S. markets, resulting in lower valuations and liquidity. A number of Chinese companies have been involved, including RINO Technology (NASDAQ: RINO), Northeast Petroleum (AMEX: NEP), China Sky One Medical (NASDAQ: CSKI), China-Biotics (NASDAQ: CHBT), China Marine Food Group (AMEX: CMFO), China Education Alliance (NYSE: CEU), Orient Paper (AMEX: ONP), and others.
Additional costs are another important reason for Chinese companies to change their preferences. Additional fees charged to U.S.-listed companies in order to comply with the Sarbanes–Oxley Act (SOX) requirements include independent audit of internal control over financial reporting under Section 404(b), labor costs of internal staff spent on Section 404 compliance, outside vendors to help comply with Section 404 that are unrelated to the audit fees, and any non-labor expenses such as software, hardware, and travel related to Section 404 compliance. according to a 2009 survey on more than 1,000 companies conducted by the SEC’s Office of Economic Analysis, the average annual compliance cost could range from $700,000 to nearly $4 million, depending on the size of public float (i.e., public owned shares).
Apart from the mistrust actions taken and the additional cost charges, illiquidity of foreign capital markets, difficulty for foreign investors to appreciate Chinese companies’ business model, lack of brand building synergy effects in the domestic market, and language barrier between senior management of the Chinese companies and foreign investors are also major reasons for foreign capital markets losing appeal to Chinese companies.
This will increase the proportion of Chinese initial public offerings in the domestic market. among those planning a local listing within the next five years, 62% are leaning towards the Shanghai Stock Exchange, rather than the Shenzhen market. both the primary and secondary markets in Shanghai are expected to have a strong year in 2011. as the government continues to impose regulations to help cool the property market, it’s likely that Chinese investors will reallocate their capital to equity markets since few alternative investment vehicles are available. That may make the primary market in Shanghai busier next year, especially if global capital markets remain weak.
The latest share issuer to pick Shanghai over Hong Kong and the US was Sinovel Wind, a leading wind turbine maker in China, which raised RMB 9.5 billion ($1.4 billion) earlier this month after pricing its shares at RMB 90 apiece — the top of the indicated range between RMB 80 and RMB 90. the company decided to list in Shanghai because its domestic rivals Goldwind and China Ming Yang Wind Power, which went public last October in Hong Kong and the US, respectively, both had a weak secondary-market performance following their listings. Sinovel’s management was quoted by Chinese media as saying that the company wanted to avoid the lukewarm market response received by its domestic rivals.
China PE Market Showed Great Enthusiasm In 2010 with 82 New Funds, 363 Investment Deals, And 167 Exits
The year 2010 can be a landmark in the development of China PE investment market to an extent, by staging a strong recovery in China market after the financial crisis in 2008 and a fundraising and investment downturn in 2009. according to the latest data of Zero2IPO Research Center, a well-known VC/PE research institution in Greater China, China PE investment market hit record highs of fundraising, investment and exit deals in 2010, when 82 PE funds available for the investment in Chinese mainland completed their fundraising with total proceeds of US$27.62 billion; in addition, 2010 triggered an investment fever by closing 363 investment deals and a total transaction amount of US$10.38B; in terms of exit, 2010 saw 167 exits including 160 IPO exits, five exits via trade sale and two via M&A, outnumbering the record high of 95 exits in 2007.
The China PE market considerably picked up its fundraising enthusiasm in 2010, when 82 PE funds available for the investment in Chinese mainland successfully raised US$27.62 billion in total, 2.73 and 2.13 times respectively as many as that in 2009. the Zero2IPO Research Center notices that the year 2010 witnessed decreasing scale in new funds, for the funds of less than US$200.00 million accounted for 74.4% in 2010 climbing from 66.7% in 2009.
In terms of the fund type, among these 82 newly raised funds, there were 68 growth funds, ten real estate funds and four buyout funds. as to the institution type, domestic emerging investment institutions staged an upsurge in raising real estate funds in 2010, when domestic PE firms boasted up to 90.0% and 80.0% respectively in terms of number of fund and amount raised.
RMB funds continued to gain steam in fundraising during 2010, further outstripping foreign currency funds in terms of number of funds. Totally 71 RMB funds had completed fundraising, with an aggregate amount of US$10.68 billion available. On the other hand, foreign currency funds raised only less than 20% of RMB funds in number of new funds in 2010, yet 1.59 times over RMB funds in terms of the aggregate amount.
In addition, 31 funds targeting US$12.21 billion were newly launched but uncompleted in 2010, among which RMB funds accounted for 80.6% and 79.3% respectively in number and target size.
China PE market closed 363 investment deals in 2010, with an investment amount of US$10.38B, representing 3.1 and 1.2 times over the levels in 2009. it is noteworthy that despite the steep increase in the number of investment deals, the year 2010 witnessed a weak improvement in the investment amount, merely achieving US$28.60M per deal on average, hitting a record low. from the perspective of the investment deals and institution type, domestic institutions generally garnered relatively small investment scale and few large-scale deals, while investment deals of over US$200.00 billion were mostly completed or participated by foreign-funded institutions.
In terms of investment strategy, institutions showed more diversification in 2010, as 363 investment deals included 325 growth capital deals, 19 PIPE deals (Private Investment in Public Equity), five M&A deals, 12 real estate investment deals and two restructuring deals. as for the number of investment deals, except for M&A investment deals slightly shrinking from the level in 2009, investment deals of other strategies all witnessed improvements.
Many industries had benefited from the national industrial revitalization plans issued in 2010, seeing marked improvements in the ranking by the number of investment deals. To be specific, 363 investment deals in 2010 were distributed in 23 grade-1 industries, among which the bio/healthcare industry took the lead with 55 investment deals, and clean-tech, machinery manufacturing, food & drinks, chain retail and agriculture/forestry/fishing industries followed with remarkable improvements in attentions and activity from investment institutions. the above-mentioned data had shown that PE investment market was greatly orientated by macro-economy policies. In terms of investment amount, in spite of more investees, the bio/healthcare industry produced relatively small transaction scale. In contrast, the machinery manufacturing and Internet industries closed many large-scale PIPE and M&A deals, topping other industries with a total investment amount of US$1.18 billion and US$1.11 billion respectively.
In terms of the geographic breakdown, PE investments were scattered in 30 provinces and cities in 2010, with Beijing, Shanghai and Jiangsu maintaining the lead in number of investees. China’s western regions were increasingly well-received by institutional investors in 2010, as Shanxi, Sichuan, Hunan, Hubei and Henan had experienced encouraging improvement in number of investment deals and investment amount.
As China has persistently enhanced the development of a multi-tier capital market, the year 2010 sustained stable growth in the number of exits in China PE market, ending Q4 2010 with a strong upsurge in particular. an aggregate of 167 exits were completed during 2010, including 160 IPO exits, 5 deals via trade sale and two deals by means of M&A.
In reference to the industry breakdown, these 167 exit deals were distributed in 20 industries in 2010. Unlike the poor track record in exit, the machinery manufacturing industry topped the list of exits by garnering 31 exits in 2010, and the bio/healthcare and food & drinks sectors followed with 17 and 16 exits. among industries, the real estate industry saw substantial fallback to seven exits in 2010 from 19 exits in 2009.
From the perspective of market breakdown of exits, Hong Kong remained the major IPO exit market for PE investment institutions with 54 exits in 2010. it is noteworthy that the domestic market witnessed a considerable improvement in IPO exits during 2010, as Shanghai and Shenzhen secured 37.5% of the total IPO exits completed during the full year. Furthermore, Chinese enterprises embraced an IPO wave on US market in 2010, as NYSE and NASDAQ produced record-breaking 24 and 13 exits respectively out of the aggregate of 160 exits.
Beijing, Shanghai Record Robust Economic Growth In 2010
China’s capital city Beijing and economic hub Shanghai both realized nearly double-digit growth in 2010, showing powerful economic momentum.
Beijing generated nearly RMB 1.37 trillion (US$ 208 billion) in gross domestic product (GDP) in 2010, up 10.2 percent year-on-year, according to the publicity office of the municipal government.
The growth was higher than what the city had originally expected, said Yu Xiuqin, spokeswoman of the office.
Beijing’s import and export value hit US$ 301.41 billion last year, up 40.3 percent as against the previous year.
Shanghai’s GDP grew 9.9 percent to hit nearly RMB 1.69 trillion (US$ 253.37 billion) last year, according to the city’s bureau of statistics.
The Shanghai World Expo that ran from may 1 to Oct. 31 last year has helped boost economic growth.
Hong Kong To Provide Yuan-Denominated IPOs This Year
Yuan-denominated initial public offerings (IPO) are expected to be launched in Hong Kong this year for the first time as the city attempts to boost its role as the offshore yuan settlement center.
Hong Kong’s stock exchange and the securities regulator are preparing for the launch of yuan-denominated IPOs and are hopeful that the good news will come this year, said Chan Ka-keung, Secretary for Financial Services and the Treasury Bureau of Hong Kong.
The plan to issue yuan-denominated stocks is seen as the latest move to expand the use of the currency in Hong Kong and to meet the growing demand for the equity products as the city has seen a rapid buildup of deposits in the currency.
Charles Li, chief executive officer of Hong Kong Exchanges & Clearing Ltd, said that the exchange would soon set up a liquidity pool to allow investors to buy equity products denominated in the currency.
But the issue of liquidity remains a major challenge to the development of Hong Kong’s offshore yuan market, as the amount that can be exchanged daily by individuals there is only equivalent to around $3,000.
Chan said that yuan-denominated stocks could face huge constraints because of a lack of adequate yuan liquidity in the market. however, the local authorities are seeking to widen the liquidity pool with mainland banks to facilitate yuan-denominated trading.
Hong Kong’s stock exchange was reportedly in talks with the yuan clearing bank Bank of China Hong Kong (Holdings) Ltd to set up a liquidity pool, which would enable investors without yuan holdings to buy stocks denominated in the Chinese currency.
Li Ka-shing, Hong Kong’s richest man, may issue the first yuan-denominated IPO this year in the city with the sale of more than 10 billion yuan ($1.5 billion) of shares in a real estate investment trust.
Analysts said that the launch of the stocks would make the Hong Kong market more diversified and help to maintain its competitiveness in the IPO market.
With China’s capital account largely closed, Hong Kong has acted as an offshore intermediary market for yuan trading.
The promotion of the yuan market in Hong Kong is also part of Beijing’s efforts to internationalize its currency, which has become increasingly attractive as investors bet on its continued appreciation.
The central government’s plan to encourage settlement of cross-border trades in the currency has further fueled the growth of yuan deposits in Hong Kong, which surged 12.6 percent in December to 314.9 billion yuan ($47.2 billion), according to the Hong Kong Monetary Authority.
Analysts expected the city’s total deposits in the currency to exceed 500 billion yuan ($74.96 billion) in the first half of this year.
Hong Kong has launched yuan-denominated bonds and funds in order to expand the yuan business and to widen the investment channels of the Chinese currency.
‘Important Measures’ To Boost Strategic Emerging Industries
China is mulling a slew of important measures in 2011 to raise emerging industries of strategic importance, said Zhu Hongren, chief engineer of the Ministry of Industry and Information Technology, Shanghai Securities News reported.
The measures will guide and nurture the development of emerging industries of strategic importance, including clean energy, biotech, new materials and the next generation of information technology, said Zhu.
Zhu added that China’s industrial economy was on track for steady growth in 2010, and emerging industries of strategic importance were booming.
Last year, the country’s high-tech and new-technology industries reported a 16.6 percent year-on-year increase in terms of added value, Zhu said.
The added value of large-scale industrial enterprises also saw a 15.7 percent increase last year, the report said, adding that the figure was 4.7 percent higher than in 2009.
Meanwhile, the industrial economy’s contribution to domestic demand is increasing. its export delivery value was 13.1 percent last year, down from 18.6 percent in pre-crisis 2007, the newspaper cited Zhu as saying.
He also said that in 2010, the nation finished work to eliminate outmoded industrial production capacities throughout 18 industries, which include steel, concrete and carbon coke.
Zhu also praised the operating status of small and medium-sized enterprises. their added value increased 17.5 percent in 2010, he said.
China’s Development Offers Opportunities For World Economy
Tough talk about an undervalued yuan giving Chinese goods unfair trade advantages at the cost of American jobs shows signs of easing in the United States after President Barack Obama said that half a million US jobs are created each year by exports to China.
This year, 3,000 college students in California will each receive $1,000 from Alibaba Group, China’s largest e-commerce company, to assist them in operating online shops and logistics services on Alibaba’s subsidiary websites.
According to Alibaba executives, the new initiative will help to create up to 100,000 jobs in the United States in the next two to three years.
For more than a decade, China has been touted as an economic powerhouse, yet the country’s export-led growth model proved unsustainable when outside demand slumped in the global economic crisis.
Meanwhile, China’s $2.85 trillion of foreign exchange reserves accumulated from decades of trade surpluses has contributed to worsening domestic inflation and risks contracting in value with a strengthening yuan.
Having been the world’s largest exporter, China has also looked to become a major importer, investor and creator of employment.
According to the ruling party’s proposal on formulating the country’s 12th Five-Year plan (2011-2015), the country shall attach equal importance to promoting exports and imports. both inbound investment and outbound investment are encouraged.
During Chinese President Hu Jintao’s state visit to America, China and the United States signed tens of billions US dollars worth of trade agreements. AFP cited an unnamed official with the Obama administration saying the deals would generate 235,000 US jobs.
The annual US exports to China in goods and services supported more than half a million US jobs, Obama said in talks with Hu.
Chinese Commerce Minister Chen Deming said the staggering sum of the contracts underscores the significance of the Sino-US trade ties.
He said that during Hu’s visit, the two sides also signed $5.1 billion of investment deals, including Chinese investment of $3.24 billion in the United States.
Retail Sales In China To Grow 15% In 2011
Retail sales in China this year are expected to rise 15 percent year on year to over 17 trillion yuan ($2.58 trillion), amid plans to boost domestic demand, experts said.
Li Heming, a researcher at the Distribution Productivity Promotion Center of China Commerce, made the forecast.
Demand for motor vehicles, home appliances and travel will play a key role in Chinese domestic demand this year, analysts said.
Compared with last year, though, the growth rate may be slower, as it is not clear if consumption-promoting measures — like tax cuts for automobiles and a trade-in program for home appliances — which expired at the end of 2010 will continue.
Chinese Ministry of Commerce official Wang Xuanqing said the government will take steps to support the development of the nation’s service industry.
Analysts expect online shopping to maintain its extraordinary growth rate in 2011, after China’s online shopping more than doubled in 2010.
China’s retail sales rose 18.4 percent year on year to 15.4554 trillion yuan ($2.32 trillion) in 2010, the National Bureau of Statistics (NBS) said.
Chinese Spend $4,000 per Visit On Chanel, Dior
Harrods Ltd., the London luxury department store bought by Qatar Holding LLC last year, said Chinese shoppers are spending 2,500 pounds ($4,000) on average on exclusive brands like Chanel every time they visit.
Sales to customers from China jumped 98 percent last year, the fastest growth from any group of buyers, with the shoppers indulging in brands such as Chanel, Louis Vuitton and Christian Dior and luxury watches, Managing Director Michael Ward said.
The retailer now has 41 Chinese-speaking employees compared with two or three a few years ago as customer numbers have grown.
“the Chinese shopper is very discerning and has a requirement for luxury, the limited edition,” and “we work very hard to secure these ‘exclusivities,” Ward said at the store in the central London district of Knightsbridge.
“These are very wealthy people who have a huge desire to spend,” Ward said in an interview.
Harrods started accepting Unionpay, China’s state-backed Chinese debit and credit card, at the store and its eight airport outlets today. Visit Britain, the government’s tourism-promotion agency, forecasts that the number of Chinese visitors to the U.K. will rise 89 percent in the six years through 2014, the fastest increase for any nation.
Ward declined to estimate the proportion of Harrods sales accounted for by customers from China.
Harrods is owned by the Qatar Investment Authority, the country’s Doha-based sovereign wealth fund, which paid 1.5 billion pounds ($2.4 billion) for the retailer in may. the fund is also the largest shareholder in the J Sainsbury Plc grocery chain in the U.K., and it invested $2.8 billion in Agricultural Bank of China Ltd.’s initial public offering in June.
$608b Injection For Water Projects
Efforts will be intensified to promote water conservation as well as the sustainable use of the precious resource, and the task will be a multi-trillion yuan national priority, a central policy document said.
The country will invest 4 trillion yuan ($608 billion) into projects during the next decade to improve water conservation, said Chen Xiwen, director of the office for the Communist Party of China (CPC) Central Committee’s Leading Group on Rural Work.
The country aims to double its average annual spending on water conservation over the next 10 years compared to the 200 billion yuan ($29.98 billion) investment in 2010, according to the document, also known as the no 1 document.
The government will also encourage loans to, and private investment in, the water sector to ensure funding for conservation, it said.
This is the eighth consecutive year that the no 1 document has addressed rural issues, but it is the first to focus on water conservation.
The document also said more efforts would be made to improve water quality and farmland irrigation, such as increasing areas under irrigation by 2.7 million hectares over the next five years.
Consequently, up to 10 percent of local land transaction fees should go to farmland irrigation projects, the document said.
Based on last year’s total land transaction fees, this figure is expected to be about 60 to 80 billion yuan ($8.99 billion to $11.99 billion), Chen Lei, Minister of Water Resources, told the news conference.
Other points addressed in the document include:
The country aims to build effective flood control and drought relief systems by the end of 2020.
The harnessing of major medium- and small-sized rivers will be completed during the 12th Five-Year plan (2011-2015).
The country aims to maintain annual water consumption at below 670 billion cubic meters in the next five years.
The central government will subsidize the maintenance of public benefit water projects in western regions and poverty-stricken areas.
The problem of water not safe to drink in rural areas will be eradicated by the end of 2015.
Forestry Output Value To Top 2 Trillion Yuan In 2011
The commercial value of China’s forestry products is expected to hit 2.4 trillion yuan ($364.74 billion) in 2011, according to the State Forestry Administration.
The value of forestry industry output stood at 2 trillion yuan ($299.8 billion) last year.
Rosin, rattan and bamboo furniture, wooden floorboards, fried fruits and flowers contributed noticeably to the value of commercial forestry.
China will further boost its output in herbal medicines, mushrooms, vegetables and animal husbandry in forest regions, according to the administration.
China invested 297.9 billion yuan ($44.66 billion) in forestry during the 11th Five-Year period (2006-2010), up 80 percent from the previous five-year period.
In China, forests are defined as woods covering an area of more than 1 mu (0.07 hectares) with a crown density – the amount of sunlight blocked by plant materials – at or above 20 percent.
Auto Rent Business Better For Locals
Having rich management experience and a mature business model no longer provide advantages for overseas car leasing companies entering the Chinese market, industry analysts say.
“it is still a bit risky for foreign car leasing companies to widely extend their business in the China market because of differences in policies and the financial environment between China and Western countries,” said Cui Dongshu, deputy secretary-general of the National Passenger Car Information Exchange Association.
He said China will and has to develop the auto rental market speedily in coming years to meet increasing demand for car use, so the opportunities are huge and attractive.
“however, faced with incomplete nationwide regulations, limited financing options and an immature credit rating system, the difficulties for foreign players are sizable,” Cui said.
In 2010, many domestic auto rental companies received investments to enlarge their businesses. Legend Holdings Ltd, parent of Lenovo Group, invested 1 billion yuan ($152 million) in China Auto Rental Ltd, which went on to buy another 6,000 cars to add to its existing fleet of 4,000.
Hertz International, the world’s biggest car-leasing network, which entered the Chinese market in 2002, largely suspended its rental business on the Chinese mainland in 2006, ending its co-operation with Chinese partner China National Automotive Anhua (Tianjin) International Trade co Ltd (CNAA).
Analysts said the reason why foreign companies cannot make the rental process as speedy as it is in Western countries is because the government doesn’t share personal information with them, so checks have to be made before the actual rental process.
Due to its limited number of rental stores, Hertz does not permit cars to be returned to different cities from where they were hired and they don’t accept cash as payment. most domestic car-leasing companies accept both cash and credit cards.
Hao Lan, 23, an office worker in Beijing, said she would love to rent a car when she travels to other cities or has an emergency to deal with. however, she doesn’t turn first to foreign car-leasing companies because “the price is high and the renting process is more complicated”.
Jia Xinguang, an independent auto analyst in Beijing, said it is still not a good time for foreign car-leasing companies to extend their business in the Chinese market because the administrative department in China lacks appropriate regulations and supervision experience of the industry.
“it is hard for the industry players to grow really big because of tight policies on loans and the high cost of cars,” said Jia.
However, he said the demand for hire cars is huge in China because of the increasing costs of car maintenance.
“We should encourage motor corporations to cooperate with auto-leasing companies. If they can work together well, the biggest winner will be consumers who will enjoy good service and low prices,” he said.
Cui said the auto-leasing market was still developing. When the number of car owners was small, people had not developed the habit of renting cars. That was why the market was not good for companies such as Hertz. In recent years, the number of cars has increased dramatically, so the renting market will grow alongside it.
Chinese Jewelers have A Successful Spring Festival
With the clock ticking down to Spring Festival – one of the two major annual holidays in China known as a “Golden Week” – many Chinese people have been flocking to jewelry stores to snap up valuable trinkets for friends and relatives.
The consumer price index hit a 28-month high in November when it rose by 5.1 percent before easing to 4.6 percent in December.
The rise in inflation was mirrored by a peak in people’s appetite for gold.
Zhang Bingnan, secretary-general of the China Gold Association, told China Daily that the total use of gold rose almost 20 percent to 510 tons last year, largely because people wanted inflation-proof investments.
“the amount of gold used by jewelers and industry has grown steadily while gold bought for investment has grown quickly,” he said.
China has been the world’s second-largest buyer of gold after India for the past three years and top producer of the valuable metal for the past four years. In 2010, the nation produced 340 tons of gold, a rise of 8.6 percent on the year before.
“Chinese consumers’ appetite for gold has been stronger this year than in previous years,” said Wang Chunli, general manager of Beijing Caibai Ornaments Store.
“Chinese New Year is the time of year when Chinese people give gifts, usually money in red envelopes,” said Wang. “This year, gold is popular mainly because it does not depreciate.”
The strong desire for gold among Chinese consumers has triggered a drive to find more reserves to meet demand.
According to Zhang, the government invested 500 million yuan ($74.96 million) on exploration for new deposits of gold in the past five years.
Investment activity in China remains high with physical gold at the Shanghai Gold Exchange totaling 6,046 tons in 2010, up 28.48 percent on the year before.
SUSTAINABILITY
Power Demand To Grow More Slowly In 2011; Renewable Energy gets Boost
China’s power consumption is set to grow at a slower pace this year as the government steps up efforts to cool the economy and pursue greener growth, the energy bureau said. Electricity demand may grow 9 percent to 4.5 trillion kilowatt hours this year, after rising 14.6 percent in 2010, the National Energy Administration said. China will add 80 gigawatts of power plants this year, bringing the total installed capacity to 1,040GW. Demand and supply will generally be in a balance, it said. Some local governments rationed power supply to energy-intensive industries in the second half of 2010 in a bid to meet efficiency targets. Demand in these sectors could rebound this year but the degree will be curbed, the NEA said. while coal remains the main source for power generation in China, non-fossil fuels are playing an increasingly important role. China plans to launch 20GW of hydropower projects this year, nearly one tenth of total installed hydro capacity at the end last year, the NEA said. Installed nuclear capacity will rise to 11.74GW by the year-end from 10.82GW in 2010 as a new reactor at the Ling’ao nuclear power plant in Guangdong Province starts operation. Also, China, which has the world’s largest wind power capacity of 41.8GW at the end of 2010, plans to install 14GW more this year and add 500 megawatts of solar power, it said. China has targeted an 8 percent economic growth this year. the economy expanded 10.3 percent in 2010, the fastest in three years.
China To Boost Nuclear Power Capacity
China is expected to raise its 2020 target for the nuclear power industry to 86 gigawatts (gW), or 5 percent of its power generation, representing at least 70 billion yuan ($10.6 billion) of investment annually.
The nation will approve another 10 nuclear power projects during the 12th Five-Year plan (2011-2015), according to Zhang Guobao, former director of the National Energy Administration.
In line with the country’s move to accelerate the development of the industry, China National Nuclear Corp (CNNC), the country’s largest nuclear power company, plans to invest 800 billion yuan ($121.5 billion) in nuclear projects by 2020.
CNNC said the total investment in nuclear power plants is expected to reach 500 billion yuan ($74.96 billion) by 2015, resulting in 40 gW of nuclear energy available nationwide.
The investments have created a huge market for nuclear equipment, the value of which is estimated at 500 billion yuan ($74.96 billion).
That equipment forms the largest part of investment in nuclear power stations, accounting for 50 to 60 percent of the total.
Dongfang Electric, the country’s largest nuclear equipment maker by market share, has already benefited from the investment spree. the company said in a statement that it currently has orders worth 45 billion yuan ($6.75 billlion) and it expects the figure to skyrocket this year.
Meanwhile, there are concerns that China’s equipment manufacturing industry is lagging behind the fast-developing nuclear power industry.
The localization rate stands at 50 percent for nuclear power equipment installed in China, which means half of the country’s nuclear equipment is provided by foreign manufacturers.
The localization rate of equipment using second-generation technology is 80 percent while that of the third generation is only 30 percent, said Xiao Xinjian, a researcher at the Energy Research Institute affiliated to the National Development and Reform Commission.
China’s 11 nuclear power generating units all use second-generation technology, the Xinhua News Agency has reported.
China should focus on developing reactors based on Westinghouse Electric Co’s third-generation AP1000 design, instead of older, second-generation technology, according to a commentary by the research unit of the State Council.
“the equipment manufacturing industry will have to catch up if China is to realize its target of 86 gW of nuclear power capacity,” said Xiao.
In addition to China’s nuclear industry flagship operator CNNC, all of the nation’s major power groups have established nuclear energy departments to enter the capital-intensive but lucrative market.
To enhance its competitiveness, CNNC recently began building the CNNC Beijing Nuclear Technology Park in Beijing, which will be the largest research and development center for the country’s nuclear power industry.
Meanwhile, the China Institute of Atomic Energy, the cradle of Chinese nuclear science, plans to step up research efforts to narrow the gap between China and developed nations in nuclear science.
China, the world’s second-largest economy, aims to get 15 percent of its power from renewable sources by 2020.
Nuclear power will have to account for 5 percent of power generation by then, said Xiao from the Energy Research Institute.
Currently, nuclear stations account for only 2 percent of the total power generation.
Nujiang Hydro Project back On Agenda
The country is set to resume its development plans for the Nujiang River in Southwest China due to increasing demand for energy.
The hydropower project was shelved eight years ago because of environmental concerns.
“I think it’s certain that the country will develop the Nujiang River,” Shi Lishan, deputy director of the new energy department under the National Energy Administration, told a meeting in Beijing.
“Preparations for the preliminary stages of the project, including research and design, are now under way,” Shi told China National Radio.
“Based on extensive research and canvassing of public opinion, we hope the construction of hydropower stations on the Nujiang River can start as soon as possible,” Shi said.
This is the first time central authorities have shown a clear determination to exploit the resources of the river, the report said.
Originating in the Tangula Mountains in the Tibet autonomous region, the Nujiang River, also known as the Salween River, runs through China’s Tibet and Yunnan province, then flows into Myanmar and Thailand before entering the Indian Ocean.
The drainage area of the river in Yunnan is 33,500 square kilometers, accounting for 8.7 percent of the total area of the province.
The hydroelectric capacity of the section of the river in Yunnan is estimated to be more than 42 million kilowatts, the China National Radio report said.
Hydropower projects on the Nujiang River have caused controversy since 2003, when plans for a facility were halted after Chinese environmental groups objected.
The following year, the central government urged the relevant authorities to be prudent and to conduct extensive reviews into the project’s potential impact on the local ecology and communities.
Energy Intensive Sectors’ Energy Efficiency up 20%
The energy consumption per unit of gross domestic product (GDP) for China’s major energy intensive industries decreased by more than 20 percent during the 2006-2010 period, the statistics authorities have reported.
The National Bureau of Statistics (NBS) attributed the rising energy efficiency for the industries to the government’s growing investment in energy savings, and the accelerated energy-saving technological upgrading for the sectors.
The sectors include oil processing, coking and nuclear fuel processing, chemicals and chemical product manufacturing, non-metallic mineral product manufacturing, ferrous metal smelting and rolling, nonferrous metal smelting and rolling, and electricity and heat producing and supplying.
Data from the energy department of the NBS showed that the industries had saved a total of 400 million tonnes of standard coal, contributing more than 60 percent to the entire country’s energy savings.
The performance of the energy intensive sectors is key to whether China can reach its energy efficiency goal, as the industries accounted for about 77 percent of China’s total industrial energy consumption and more than half of the country’s total energy consumption, said the NBS.
China’s National Development and Reform Commission (NDRC) said that China could basically meet its goal of reducing energy consumption per unit of GDP by about 20 percent from 2005 levels by the end of 2010.
CONSUMER
Coach Sales Exceed Forecasts Based on China Revenues
Leather goods maker Coach Inc reported a larger-than-expected quarterly profit as U.S. luxury spending rebounded and sales in China soared over the holiday season.
Coach, best known for its high-end handbags and wallets, reported net income of $303.4 million, or $1 per share, for the second quarter ended January 1, up 26 percent from $240.9 million, or 75 cents per share, a year earlier.
Sales rose 18.7 percent to $1.26 billion, fueled by a 12.6 percent increase at stores open at least a year in North America, which account for the bulk of the company’s business.
On average, Wall Street analysts were expecting a profit of 97 cents per share on sales of $1.21 billion, according to Thomson Reuters I/B/E/S.
In China, where Coach is still new to the market but now operates 52 stores, sales rose by double digits on a percentage basis.
Coach has positioned itself in the “affordable luxury” segment in the past two years as shoppers have cut back on the most expensive items. it has lowered average prices on its handbags by about 10 percent by introducing new, more affordable lines and expanding its outlet stores.
Coach also got a boost from strong sales to U.S. department stores, such as Macy’s Inc.
Disney Plans Launch of Chinese Stores By Mid 2012
Walt Disney co said that it will open its first direct-sale store in China by mid-2012.
The move would see the US-based company making another stride into the Chinese market after construction of its Shanghai Disney theme park project started in November, following a decade-long negotiating marathon.
The Disney Stores, which will sell the company’s merchandise, including gifts, T-shirts and toys, will be wholly owned and operated by the company in a reversal of its former strategy in China, which was to sell its goods through authorized dealers.
The company said that the decision to open stores in China represents “an important milestone” in its business in the country.
“the kids’ branded-retail market in China is growing and we are positioned to provide a family shopping environment,” Stanley Cheung, executive vice-president of Walt Disney co Greater China, said in the statement.
The outlets will be located in premier malls, shopping centers and department stores, the company said. however, a public relations official with Walt Disney co (Shanghai) Ltd said it is “too early” to say which cities the stores will be in.
The move into China is an addition to the company’s global expansion this year. A further 25 outlets will open, raising the number of stores worldwide to more than 350.
Li Qinfan, assistant general manager of Midway Enterprises (Guangzhou) Ltd, Walt Disney Co’s first and biggest authorized dealer in China with 1,700 stores nationwide, said Disney’s move to open direct-sales stores is aimed at better building its brand in China
“Products and store decorations differ among dealers. Opening direct-sale stores will help the company to present a unified brand image in China, which is good for its long-term development in the country,” Li said.
It is estimated that Disney has more than 1,000 authorized dealers in China.
Cartier, Tiffany Close In On China
As China’s appetite for luxury labels barrels forward, fine jewelry establishments are increasingly looking beyond the country’s traditional metropolises of fashion and fortune to reach the next frontiers of luxury consumption. Cartier, which boasts a 40-year presence in Hong Kong and strongholds in Beijing and Shanghai, is just one of many high-end brands planning to aggressively expand Chinese market share in the coming months.
Nigel Luk, Cartier’s managing director of far East operations, says to not only expect new store openings in first- and second-tier cities, but also in third- and fourth-tier cities.
The growing number of well-heeled consumers is certainly staggering. China is the second-largest economy in the world and has the second-highest number of billionaires after the United States, according to the latest numbers released by Forbes.
Relative neighborhood newcomer by comparison, Tiffany & co. first opened its doors in Beijing 10 years ago, followed by Shanghai in 2004, then doubling in both cities two years later. In 2007, the publicly traded company shifted its focus to smaller, emerging cosmopolitan hubs.
Tiffany expects China to surpass the United States to become the biggest jewelery market in the world over the next five to 10 years, according to a November 2010 report. the fine jewelry powerhouse currently operates 14 stores in China and hopes to expand that number to 30 within the next 4-5 years, according to mark Aaron, Tiffany vice president of investor relations.
HEALTHCARE
Sinopharm Plans To Allocate At least 5 Billion Yuan For Acquisitions
Sinopharm Group co., China’s biggest drug distributor, plans to spend at least 5 billion yuan ($759 million) buying companies in the next two years after agreeing to its largest acquisition since going public.
Sinopharm has spent about 5 billion yuan ($759 million) acquiring more than 60 companies since its initial share sale in September 2009, said Wu Aimin, the Shanghai-based company’s deputy general manager. it plans to spend a similar amount through 2012 to expand to 300 cities in China from about 100 now, Wu said.
“In 2011, we will still continue to make many acquisitions,” Wu said in a telephone interview. “We are considering opportunities in all the mature cities in China.”
The company said it agreed to pay as much as 1.3 billion yuan ($195 million) for 60 percent of two units of Le Ren Tang Pharmaceutical Group co., or LRT, to expand in China’s northern Hebei province. the acquisition prices closely held LRT at as much as 25 times 2010 earnings, making it Sinopharm’s largest and most expensive acquisition since the IPO, said Jinsong Du, an analyst at Credit Suisse AG.
The company expects the purchase to boost revenue from the province, which borders the capital Beijing and the port city of Tianjin, to 10 billion yuan ($1.49 billion) by 2012, Wu said, without specifying what sales are now.
China’s government is implementing a plan to spend 850 billion yuan ($127 billion) to expand basic health-care services throughout the country by this year. the nation’s pharmaceutical-industry sales will expand as much as 27 percent in 2011 to more than $50 billion, making it the world’s third-biggest drug market, IMS Health Inc. said.
Chinese Firms Shine At Dubai’s Medical Fair
The four-day Arab Health Congress in Dubai attracted more than 2,800 exhibiting companies from 60 countries or regions. once again, the 36-year-old medical fair is dominated by Chinese firms.
“This year, major delegations come from China with over 400 participating companies, Germany with over 350 companies and United Arab Emirates (UAE), United States, United Kingdom and Italy, all with well over 150 companies exhibiting,” said Simon Page, divisional director of the Life Sciences Division of organizers IIR Middle East.
“Large representations also come from France, India and South Korea,” he added, while joining Sheikh Hamdan bin Rashid Al Maktoum, deputy ruler of Dubai and the UAE’s finance minister, on a tour of the show.
For Ms Zhou, founder of a biomedicine company based in central China’s Wuhan city, it was her first time to participate in the Arab Health trade show.
“We want to enter all regions worldwide. the Arab Health Congress provides a good opportunity to attract clients in the Middle East,” said Ms Zhou.
Demonstrating her products in a space about 15 square meters, Ms Zhou was confident to convince doctors and clinics of her products “because we produce high quality at a reasonable price.”
Dubai and its 2.5 million people struggles with typical “wealth symptoms” such as obesity, diabetes or heart diseases.
According to Dr Ashraf Kamel, founder and managing director of the German Medical Center, there are some 400,000 diabetic patients in the UAE at risk of nerve pain.
China Moves toward Healthcare Reform Goals
About 15 percent of residents in China say at least one member of their household had to travel for medical care in the past year, a survey indicates.
China’s state-run news agency Xinhua reports the government allocated $2.9 billion — out of the $129 billion it was expected to spend on healthcare reform from 2009 to 2011 — for the construction of more than 5,000 hospitals in 2009. More than 10,000 health institutions and about 70,000 village clinics reportedly were built, Xinhua says.
One goal of China’s healthcare reform is residents not needing to travel far for care.
Gallup survey data show rural Chinese — 16 percent — are no more likely to say they traveled for medical care than urban Chinese — 14 percent — but there are regional differences. eight percent of the Chinese living in the southwest and 10 percent in the urban eastern coastal regions are least likely to travel outside their communities for medical care, while 23 percent of those living in the northwest and 20 percent living in the northeast are the most likely.
The survey data was collected via face-to-face and land-line telephone interviews of 4,151 residents in China, age 15 and older, conducted June and July 2010. For results based on the total sample of national adults, the margin of error is 2.2 percentage points.
RECENT CHINA TRANSACTIONS
Lenovo Can Take Control Of NEC Venture
Aluminum Corporation of China Ltd, the country’s largest producer of the light weight metal, said it plans to raise up to 9 billion yuan ($1.37 billion) from a private placement of new shares to be listed in Shanghai.
Chalco said in a filing that the proceeds from new A-shares will be used to fund the Xing Xian alumina project and other purposes.
The company said it will apply to the China Securities Regulatory Commission for the issue of the new shares, which will represent about 6.88 percent of the total issued share capital as enlarged by the A share issue.
The share sale is also subject to shareholder approvals, it added.
The company said it’s proposing that shares will be issued to no more than ten investors, mainly institutional investors.
Chalco said earlier this month that it expected to turn a net profit for 2010 after recording a net loss of 4.646 billion yuan ($690 million) in 2009 on an increase of sales volume and prices of aluminum.
China-Based BCD Semiconductor Opens Flat Post-IPO
China-based BCD Semiconductor Manufacturing Ltd. opened flat with its IPO price on its first day of trading, then declined.
The company’s stock opened at $10.50 a share on the Nasdaq, at the same level as its initial public offering price. A total of 6 million American Depositary Shares were sold at the low end of the expected $10.50 to $12.50 range. Shares recently traded at $10.38, down 1.1%.
Shanghai-headquartered BCD designs and manufactures analog integrated-circuit semiconductors for Asian makers of consumer electronics, ranging from computers to mobile-phone chargers. its specialty is power-management integrated circuits, which reduce power consumption, extend battery life, and maintain system stability in the products they are designed for.
Its designs are more complex than those used in digital semiconductors and aren’t easily created with standard design tools, and manufacturing processes are also specialized, the company said in its prospectus.
The company’s location in China is seen as a strong point due to lower costs and its proximity to the Asian semiconductor market, the largest in the world. BCD, which began production in 2002, plans to expand its current portfolio of 300 designs and its manufacturing capacity by building a second wafer fabrication facility.
Like most semiconductor makers, BCD operates in a cyclical industry where average selling prices are always under pressure. its net revenue declined in 2008 during the global economic downturn but has recovered since then; in the first nine months of 2010, net revenue rose 38% to $101 million on increased sales volume and new-product introductions; net income quadrupled to $16.7 million compared to the same period of 2009.
Of the total shares sold, nearly a third –1.7 million–were sold by prior owners, including venture capital firm Venrock, so those proceeds won’t benefit the company.
Lenovo Can Take Control Of NEC Venture
Lenovo Group Ltd. has a right to buy a full stake in a planned PC joint venture with NEC Corp. as early as 2016, a filing with the Hong Kong Stock Exchange showed.
If the Chinese firm exercised such an option, it would signify NEC’s withdrawal from the Japanese PC market, where it remains the biggest player with an 18% market share in 2009.
According to the filing, Lenovo can exercise its right to buy all shares in the joint venture through a written notice at any time after the fifth anniversary of the joint company, which is expected to be launched on June 30.
The transfer of shares would require NEC’s consent and approval from government entities.
Lenovo said it will invest $175 million in the joint venture with NEC, in which the Chinese firm will hold a 51% stake. At the time of the announcement, NEC President Nobuhiro Endo rejected the view that NEC was letting Lenovo take over its PC business, calling the deal an “equal partnership.”
Lenovo can acquire a full stake for up to $275 million, according to the filing.
OVERSEAS TRANSACTIONS
Prada Plans Hong Kong IPO
Italian fashion house Prada SpA said it plans to list its shares in Hong Kong, the company’s latest attempt to break a decade-long cycle of ditched stock-market listings.
The initial public offering would help bankroll the Milan trendsetter’s international expansion. Prada, famous for its black nylon bags and cutting-edge fabrics, has been rapidly opening stores, notably in Asia, where millions of newly wealthy consumers are snapping up luxury goods. Funds from the listing also could help pay down debt, people familiar with the matter said.
Prada has canceled several market listings in recent years because of lackluster market conditions. as a result, the company is cautious in revealing its resuscitated IPO Register here to be notified of future China Weekly Bulletin articles.
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A workman surveys the damage as he starts repairs on a large clothes drier that caught fire in the Goodyear Ballpark where the Indians and Cincinnati Reds play spring games. (Lenny Ignelzi/Associated Press)
ALEXANDRA CAIN – BusinessDay.com.au
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