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One of the biggest trends in China is slowing down — and its a bad sign for the economy
Brenda Goh and Clare Jim


WENZHOU, China/HONG KONG (Reuters) - After two decades trying to make a life in China's entrepreneurial city of Wenzhou, Ji Shouquan and his brother Shoufang are ready to head home.

They say they have no hope of stepping onto the city's housing ladder and it is getting more difficult to earn a decent wage.

China is relying on millions of internal migrants taking up jobs in cities to boost the urban population and consumption. It hopes this will fuel more sustainable long-term economic growth and reduce the country's reliance on big industry and exports that powered the country's rise in the last three decades.

But migration is slowing down and workers are more reluctant to travel across the country to find jobs, trends that could undermine these efforts.

"It's really tough to make money," said Shouquan, who earns about 5,000 yuan ($767) a month as a sound technician in a karaoke lounge. "Of the six or seven friends who used to work at the KTV, only two of us are still holding on. Most have gone home."

His taxi-driver brother, Shoufang, said that's what they'll probably end up doing too.

Both have scrimped enough to buy property in their home town of Fuyang in the largely agricultural province of Anhui in eastern China, where home prices are about a fifth of the cost of Wenzhou, which is in the neighboring province of Zhejiang.

"It's unrealistic for migrant workers like us to buy in Wenzhou, unless you've got your own business," Shoufang said.

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Government data shows that the number of migrant workers in 2015 reached close to 169 million. But that was up just 0.4 percent from 2014 - the weakest rise since the global financial crisis in 2009. The number of migrants searching for jobs outside of their home province dropped 1.5 percent – the first decline in six years.

The government wants 60 percent of its population of almost 1.4 billion to be urban residents by 2020, up from 56.1 percent in 2015.

Analysts say China's massive stock of unsold homes is evidence that the urbanization drive is faltering as migrants struggle to build a future away from their villages or towns. Despite some signs that house prices are recovering from a downturn, official data shows that the inventory of unsold homes in China rose in the year to April by 4.5 percent to 450 million sq meters.

The National Development and Reform Commission, the state planning agency, did not immediately respond to a request for comment.

Housing built in many third-and fourth-tier cities was initially designed to absorb demand from the government's urbanization drive. But a lack of job prospects and access to social services has meant migrants continue to take their chances in China's biggest and most expensive urban centers — or head back home.

"Urbanization should be based around human beings, and not just driven by man-made cities," said Wang Jun, a senior economist at China Centre for International Economic Exchanges, a Beijing-based think-tank.

However, some industry watchers said the main impediment to migrants buying homes and settling in other cities is a lack of access to local services, such as free schooling for their children and healthcare.


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Under China's system of internal passports, or hukou, migrants in search of better jobs in urban areas leave behind the public services they are entitled to as residents of their home towns and villages. Losing such privileges discourages many from leaving in the first place.

"If China's urbanization was growing at its planned rate there would not be any (housing) oversupply. The main bottleneck for China's urbanization is the issue of hukou," said Alan Chiang, managing director of Shenzhen-based real estate consultancy DTZ.

Newcomers to a city are less likely to spend money if they do not have the social safety net that hukou brings, such as providing access to medical insurance and basic education, analysts say. On a more practical level, hukou is needed if a person wishes to marry or open a bank account.

While Beijing is encouraging cities to provide more hukou, local governments place a cap on them to avoid a drain on local resources.

Economists estimate China can meet its migration goals, but they say cities are falling behind in providing hukou to migrants. By 2020, China wants 45 percent of the people living in an urban setting to have hukou, compared with 36 percent in 2013.

"Hukou and high property prices are two overlapping issues; hukou is actually the first hurdle. You want to have a hukou, but in order to get a hukou, you have to have a substantial investment in a certain place," said Siah Hwee Ang, who covers China affairs as a professor of the School of Marketing & International Business at Victoria University of Wellington.

"But it's not as if a lot of money will solve your problems. So housing is actually the second problem, rather than the first."


(Reporting by Brenda Goh in Wenzhou and Clare Jim in Hong Kong; Additional reporting by Kevin Yao in Beijing, Pete Sweeney in Shanghai, Stella Tsang in Hong Kong, Beijing and Shanghai Newsrooms; Editing by Anne Marie Roantree and Neil Fullick)

Read the original article on Reuters. Copyright 2016.

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Earnings fall betrays shaky state of China’s economy
NIKKEI ASIAN REVIEW June 1, 2016 2:00 am
Yusho Cho, Nikkei staff writer, and Kenji Kawase, Nikkei deputy editor
©Getty


In early May, Chinese heavy machinery maker Sany Heavy Industry was on the receiving end of some pointed public criticism. A local securities newspaper implied the company was not moving quickly enough to streamline its operations, alluding to US competitor Caterpillar’s announcement of plans to close five plants in the US and cut 820 jobs.

Although Sany is the world’s biggest producer of concrete mixers and number one in loading shovels in China, it booked a net profit of just over Rmb100m ($15m) in 2015, down sharply from Rmb2.9bn in 2013 and plunging nearly 80 per cent in each of the past two years.

During the first quarter of 2016, the company registered Rmb90.1m in net profit, comparable to the whole of 2015, but this was the result of an asset liquidation, without which the company would have fallen into the red.

Sany is not the only one suffering. Half of its local peers saw their net profit either fall or sink into the red in 2015. And for China Inc as a whole, the news was even worse.

Pain all around

Earnings data compiled by research company Dazhihui showed that the total net profit of mainland-listed Chinese companies fell 1.1 per cent to Rmb 2.47tn in 2015. This was the first contraction since 2008.

At non-financial companies, aggregate net profit in 2015 declined 15.7 per cent. The big three oil companies, all state-owned, contributed significantly to the decline. Their combined net profit tumbled 60 per cent to Rmb88bn in 2015, wiping off over Rmb130bn from 2014.


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PetroChina’s net profit dipped to Rmb35.5bn, the lowest since its listing in 2000. The company took a hit from the slump in the global oil market and worsening profitability at the Daqing oilfield, China’s largest. With earnings also reeling at Cnooc and China Petroleum & Chemical (Sinopec), the trio saw their combined net profit sink to the lowest level since 2002.

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This profit decline has forced them to cut investment. After slashing spending on pipelines, plant expansion and drilling rights by 30 per cent in 2015, PetroChina has decided on a further 10 per cent cut this year. Sinopec and Cnooc also plan to reduce capital outlays. These cutbacks will deal a blow to oil production service companies and other related businesses, such as plant engineering, steel and machinery outfits.
The country’s three largest telecoms carriers — China Mobile, China Unicom (Hong Kong) and China Telecom — are also cutting back on their capital spending this year. Their combined investment is expected to be Rmb358.2bn, down 18.3 per cent from last year. This is partly because they have made substantial progress in building up their 4G mobile networks.

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Another factor, however, is the rapid rise of popular smartphone voice messaging app WeChat by internet services company Tencent Holdings. State-owned telecoms carriers claim their profitability has suffered as more and more local mobile users communicate via WeChat instead of the carriers’ voice services.

While China Telecom’s net profit rose 13.4 per cent to Rmb20bn, market leader China Mobile’s dipped 1 per cent to Rmb108.5bn and China Unicom’s fell 12.4 per cent.

The overall profit contraction dragged on into the first quarter.


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Stricken steel

Some of the worst performances came in the steel industry. Shanghai-based industry leader Baoshan Iron & Steel saw its net profit plunge 83 per cent last year to Rmb1bn. Of the 34 listed steelmakers in mainland China, only 14 were profitable.

Wuhan Iron & Steel incurred a net loss of Rmb7.5bn. With the equity-capital ratio of Chongqing Iron and Steel falling to a little more than 10 per cent on a net loss of Rmb5.9bn, the municipal government has begun to study measures to bail it out. Dai Zhihao, Baoshan’s president, said the industry has entered an “ice age.”

The main reason Chinese steelmakers remain in the doldrums is overcapacity. According to the World Steel Association, capacity is over 1.1bn tonnes a year, while annual demand in China is less than 700m tonnes.
With a supply glut fuelling intense price cutting, steel is cheaper than Chinese cabbage. That is no overstatement — steel products for construction go for less than Rmb2,000 a tonne, while cabbage is available for a little over Rmb1 for 500 grams.

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China’s steel industry, dominated by state-owned enterprises, is a typical example of the chronic overcapacity plaguing the country.

Under Premier Li Keqiang, the central government vowed to trim capacity by between 100m and 150m tonnes, or 10 per cent, by 2020, and shut down “zombie” companies, which continue operating only thanks to injections of government cash.

According to the OECD, the world’s excess steel capacity is more than 700m tonnes, equivalent to more than 30 per cent of total global capacity in 2015. About 430m tonnes, or roughly 60 per cent, of this excess is attributable to China, according to the American Iron and Steel Institute.

“Unless China starts to take timely and concrete actions to reduce its excess production and capacity in industries including steel, and works with others to ensure that future government actions do not once again contribute to excess capacity, the fundamental structural problems in the industry will remain,” US commerce secretary Penny Pritzker and US trade representative Michael Froman said in a joint statement last month.

With steelmakers’ earnings and employment taking a hit around the world, affected governments “will have no alternatives other than trade action”.

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Home appliance makers have also become mired in price wars, the result of their failure to produce innovative, recognisable brands.

Chinese home appliance makers have grown on the back of rapid urbanisation and government subsidies to promote their products in rural villages. But the so-called population bonus is running dry as the nation’s working-age population begins to peak and the pace of migration to cities slows. TV maker TCL, air-conditioner maker Gree Electric Appliances and white goods producer Qingdao Haier booked double-digit falls in net profit in 2015.

“Chinese companies, ours included, still face a considerable innovation gap when compared with those in advanced economies,” Li Dongsheng, TCL’s chairman and chief executive, told The Nikkei in March.
Other consumer goods markets are also becoming increasingly saturated and diverse. Tingyi Holding, the biggest maker of instant noodles in China, logged a 36 per cent fall in net profit to $256m in 2015. While the company’s beef-flavoured noodles have been a bestseller in China for more than a decade, urban consumers have become less loyal recently because the ingredients and flavour have changed little.

Another Hong Kong-listed, Taiwan-based food company in China, Want Want China Holdings, reported its earnings fell for the second consecutive year, declining 12.6 per cent to $542m in 2015. Revenue declined more than 9 per cent on the year to $3.43bn, as sales of dairy products, which make up more than half of its total revenue, fell 13.6 per cent.

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Yee Man Chin, director at Fitch Ratings, said changing consumer tastes in the much more competitive food market in China, along with a sharp increase in food imports, are posing immense challenges to traditional local players such as Want Want. “Chinese consumers, especially the middle class, tend to upgrade their spending and look for alternatives,” Mr Chin said.

Other local players are in the same boat. China Mengniu Dairy, the largest dairy manufacturer by market share, is suffering as domestic formula milk loses out to imports. The company saw its net profit last year grow only 0.7 per cent to Rmb23.6bn, while revenue slipped 2 per cent to Rmb490bn.

“Of the existing 4,000 milk formula brands in China, I’m afraid 75 per cent will eventually go out of business,” Lu Minfang, chief executive of Yashili International, told reporters in Hong Kong. Mr Lu put this down to price wars as well as the changing preferences of Chinese consumers.

The sluggish economy and intense competition have hurt beer sales as well. China Resources Beer, the leader by market share, is counting on the premium segment to boost margins as its revenue growth slowed to 1 per cent at HK$34.8bn (US$4.5bn) last year, and sales volume contracted 1.3 per cent.

Hengan International, the number one diaper and sanitary napkin maker, is also aiming upmarket. The company’s full-year net profit rose 3.4 per cent to HK$4.05bn, on revenue growth of 2.6 per cent to HK$24.5bn.

Xu Shui Shen, chief operating officer and deputy CEO, said the group will focus more on mid to high-end diaper sales, which rose 22 per cent despite the slowing domestic economy. Meanwhile, sales of low-end diapers fell 23 per cent due to fierce competition.

“China’s living standards have improved. It is now time to turn around and go upmarket,” said Mr Xu, adding that the end of China’s one-child policy, announced last October, will boost demand for quality child care products.


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Currency concerns

Another drag on growth is the weaker renminbi. Hengan nearly tripled its foreign exchange loss to HK$429m, but it is airlines in particular, which hold substantial dollar-denominated debt to cover aircraft purchases and other expenses, that took a hit from the Chinese currency’s depreciation.

China’s big three state-owned airlines logged a combined foreign exchange loss of nearly $3bn last year.

Flag carrier Air China, which booked an 83 per cent rise in net profit to Rmb7.1bn, hopes to lower its dollar debt ratio to about 60 per cent this year. Guangzhou-based China Southern Airlines, whose net profit almost doubled to Rmb3.7bn, intends to lower its ratio to half. Shanghai-based China Eastern Airlines cut its ratio of dollar debt to 50 per cent as of the end of March, down from 81 per cent in 2014.

With the weaker renminbi eating into gains from plunging oil prices, all three see an urgent need to change their liability structure. Unlike overseas rivals such as Singapore Airlines and Hong Kong’s Cathay Pacific, China’s carriers do not typically hedge against fluctuations in fuel prices.

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  • avatar_2343_1427652107 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle East
  • Posts: 89820
  • medal1 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal2 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal3 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal4 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal5 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal6 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal7 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal8 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle Eastmedal9 - The beginning of the end: One of the biggest trends in China is slowing down - Asia | Middle East
  • "Better to remain silent and be thought a fool...
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