Online finance: angel or devil?

 

Photo taken on April 7, 2014 shows the Boao International Conference Center in Boao,

south China’s Hainan Province. The Boao Forum for Asia Annual Conference 2014 is

scheduled to be held in Boao from April 8 to 11.   Photo by Guo Cheng

 

 

 

 

 

 Online finance: angel or devil?

 

By Liu  Xinyong, Han Miao, Li Baojie, Guo Xinfeng,

Wang Cunfu, Wang Zichen and Zhang Zhongkai

 

On Wednesday morning of April 9, online finance product Yu’ebao handed out 1.43 yuan for each 10,000 yuan (1,626 U.S. dollars) of investment to its users.

This represents an annualized interest rate 5.37 percent, much higher than the current benchmark deposit rate offered by banks of 3 percent, but it is not the highest among similar products.

Though adored by an exploding number of customers, online finance products are under scrutiny by banking regulators and commercial banks are fighting for deposits they used to own.

Experts at Boao Forum for Asia seem to believe that the likes of Yu’ebao are neither angels nor demons, and regulation will lead to development of both traditional banking and innovative “wealth management”.

Justin Yifu Lin, economist and professor with the National School of Development at Peking University, told a panel discussion on Wednesday that online finance will help both people and economic growth, to some extent. Since Alipay launched Yu’ebao in June 2013, plenty have followed suit with similar products. As more and more clients transfer deposits elsewhere, banks are also cobbling together high interests products.

Yu’ebao customers invest in a money market fund and make handsome profits from their balance while enjoying the liquidity of demand deposits. More than 81 million users had deposited 500 billion yuan by the end of February.

Alipay said last month that Yu’ebao offers a way of collecting small amounts of money from customers to raise the total funds available in the real economy when those small amounts enter the financial system.

“However, online finance will not resolve all of China’s problems,” Lin said. Online products mainly support consumption and small and medium enterprises, rather than helping technological progress and industrial upgrades, crucial for sustainable growth.

The country needs diverse financial services to meet the needs of different industries, Lin said. Chen Zhiwu, a professor of finance at Yale School of Management, said online finance is conducive to inclusive growth, but its significance is over exaggerated.

The explosive growth of Yu’ebao is not just a result of integrating the Internet with finance, but of supervision loopholes, according to Chen.Regulatory authorities had lagged behind, but moved to keep up last month.

In mid-March, the central bank stepped up supervision for online finance and suspended virtual credit cards and payments via code scanning, which involved Alipay and Tencent, another Internet company with finance products.

In response to deposit outflow, four state-owned banks have lowered their limits for transferring money to Alipay via mobile phone apps for each transaction, each day and each month.

The Industrial and Commercial Bank of China, the largest by market value, lowered the daily limit from the previous 50,000 yuan to only 5,000 yuan and the monthly limit from 200,000 yuan to 50,000 yuan at the end of February.

“We should set some basic requirements and thresholds for the development of online finance to avoid unfair competition,” Yan Qingmin, vice chairman of the China Banking Regulatory Commission said.

The government should adopt different supervision measures for different products, such as wealth management and peer-to-peer credit. It should also coordinate regulations and make innovations to suit the new reality, he said.

Ma Weihua, chairman of the Hong Kong-based Wing Lung Bank Ltd., said that before online finance products can rule out associated risks, “a more cautious attitude in supervision is no bad thing.”

“All client materials and information are put online, so there are great risks from hacker attacks and Internet failures,” Ma said.

Supervision should prioritize Internet security, especially the security of user information, he said.

“Authorities should act as if they were training children to get rid of their bad habits and allow them to grow up healthily. Nurturing and protection are needed during the process,” Ma said.

Established in 2001, the Boao Forum for Asia is a platform for government, business and academic leaders in Asia and other continents to share opinions on pressing issues in the region and the world. It runs from Tuesday to Friday under the theme of “Asia’s New Future: Identifying New Growth Drivers.”

 

 

 

 

 

 

China rising from low-cost

manufacturer to innovator

 

By Zhang Zhongkai, Guo Xinfeng, Fu Yongtao,

Liu Xinyong, Han Miao and Li Baojie

 

It might be a bad time for Chinese manufacturers as the economic slowdown and restructuring squeeze their profit margins. It could also be good for them too, if they can embrace innovation to move up the value chain.

The good old days for China’s low-cost manufacturers are gone. They now feel the pinch due to factors including mounting excess capacity, rising labor costs and increasing international competition.

“We found that China’s industrial revolution was less technologically innovative compared with Britain and the United States,” said Nobel Prize Laureate Ronald Harry Coase at the ongoing Boao Forum for Asia (BFA) 2014 Annual Conference.

“This was disturbing and unfortunate, particular since the modern economy has become more and more knowledge-driven,” said Coase, one of ten delegates who questioned over 40 Chinese entrepreneurs on their innovation willingness and capability at the forum.

 

MOVING UP THE LADDER

 

For Chinese iPhone fans, they may lament as their smartphone screens are made by overseas manufacturers. But they may feel a little relieved if they know that the super glass walls of some Apple stores are made by a Chinese glass manufacturer.

“The market for ordinary glass is getting smaller with increasing competition and decreasing margins. The only way to survive is to move up the value chain through innovation,” said Dou Qinghe, vice president of AVIC Glass, a specialist glass maker in south China’s Hainan Province.

Like Dou, more Chinese entrepreneurs are racing to catch up with international competitors using expertise, talent and financial firepower.

“The speed of innovation is much higher than that in the west. Just think about how China looked 30 years ago, now you see first-class technical universities cooperating with Chinese industries to further innovate,” said Ernst Ulrich von Weizsacker, co-President of the Club of Rome.

According to a report released by the World Intellectual Property Organization in March, China ranked third in total international patent applications to the Patent Cooperation Treaty, with over 20,000 applications, up 15.6 percent year on year.

“China is very responsive and receptive to innovative ideas and sectors, such as e-commerce and Internet finance. The embrace for such innovations in turn facilitate further reforms by helping nurture a multi-tier and freer capital market,” said Gregory D. Gibb, Chairman and CEO of Shanghai Lujiazui International Financial Asset Exchange Co., Ltd.

“I believe some sectors may even outperform the United States and Europe in three to five years thanks to their innovation-driven growth,” Gibb added.

 

FREER, FAIRER MARKET EXPECTED

 

However, Chinese entrepreneurs have mixed feelings about innovation. Some accept the necessity to upgrade themselves through technical and operational reform to gain a steadier foothold, but some complain feeling shackled due to unfavorable conditions.

Small-and-medium sized enterprises (SMEs) have the loudest complaint. Subsidies to support R&D are unfairly distributed to state-owned enterprises (SOEs) and markets in energy, financial services and telecoms are not fully open to private firms.

According to Nobel Prize Laureate Edmund Phelps’ observation, one result of the differentiated treatment towards SMEs and SOEs is the unbalanced talent flow.

“It’s a pity that so many young people graduating from universities are going into jobs they see as more secure in the public sector instead of startups, the most energetic cradle of innovation,” Phelps said.

It takes a segmented and completely competitive market to foster innovation. If the market is not open to fair competition and resources are mainly relocated by government administrative approvals instead of personal competence of each company, then few are willing and capable to invest in new products or services, said Gao Jifan, Chairman & CEO of Trina Solar, Ltd.

The Chinese leadership vowed last year to reduce over one third of 1,700-plus administrative approval items during their stewardship. More than 300 items have been relinquished or delegated to lower governments. The country is gradually opening traditionally monopolistic sectors to all market players and is promoting mixed ownership to combine financial strength with technological advantages.

What the government should do is to invest more in basic research and development to aid enterprises, said Zhang Yaqin, vice president of Microsoft.

 

STRONGER IPR PROTECTION NEEDED

 

Another major concern is the country’s weak intellectual property rights (IPR) protection regime.

China is implementing an indigenous innovation strategy, promoting the development of technological innovation in domestic firms, eventually leading to the ownership of their own core IPR.

Entrepreneurs, especially from foreign firms and start-ups, worry that registering patents and proprietary information would open the door to theft and competition from lower-cost manufacturers.

China may not face talent shortages in its innovation drive, but lack the right environment, or to be more specific, IPR protection to encourage innovation, said Leo Melamed, Chairman Emeritus, Chicago Mercantile Exchange.

Efforts are stepping up to shore up IPR protection. China will try to set up a special court for IPR cases, according to the Supreme People’s Court’s work report for 2014. The practice, which is common in some developed countries, is believed to improve the efficiency and accuracy of dealing with IPR piracy cases.

In addition to economic and legal policies, experts argue it is critical to nurture an innovation-friendly culture.

High innovation requires people with the right culture, or the right values. It is critical to encourage skepticism, curiosity and exploration in society, Phelps said.

 

 

 

 

 

 

 China’s auto industry booms amid challenges

By Zhong Qun, Qi Xianghui, Li Baojie and Zhou Huimin

China’s automobile industry is booming on the back of strong domestic demand, but challenges remain due to a spate of governmental and environmental factors, experts warned.

At the ongoing Boao Forum for Asia, held this year from April 8 to April 11 in south China’s Hainan Province, industry insiders said that solid market growth might mask a host of problems in the country’s auto industry.

Big demand in China has powered the past decade of explosive growth in car sales, but the industry is grappling with a thicket of problems, including environmental woes, traffic congestion, government restrictions on car purchases and odd-even car bans, said Zhu Fushou, General Manager of Dongfeng Motor Corporation.

“It is debatable whether the sector could sustain growth in the midst of these factors,” Zhu said.

 

 

BOOMING MARKET

 

China’s car market has been credited with helping boost the world’s car sales thanks to huge domestic demand.

According to official data, car sales in China surged by 13.9 percent in 2013, reaching 21.98 million units, giving the automobile industry a much-needed boost after two years of slow growth. The headline rate also helped China secure the world’s top spot in car sales for the fifth consecutive year since 2009.

Xu Heyi, General Manager of Beijing Automotive Group Co., Ltd., said that China’s auto industry is still in the initial stages of development from an international market perspective.

“The domestic market will not peak until its annual sales and capacity reach between 30 million to 35 million units, respectively,” Xu said.

Last year’s performance has fueled high expectations, and a slew of major car manufacturers have set ambitious targets hoping to reach a double-digit growth rate. Changan Mazda Automobile Company, Ltd., for instance, expects to sell 100,000 units in China in 2014, which would be a 40 percent increase from last year.

China’s auto sales could witness growth of eight to ten percentage points this year, particularly the sales of sports utility vehicles (SUVs)and multi-purpose vehicles (MPVs), according to a forecast by the China Association of Automobile Manufacturers.

 

STUMBLING BLOCKS

 

Despite great expectations, experts are fretting over hurdles that might hold back China’s auto sales, including government restrictions, environmental pollution, and the energy crisis.

A number of major Chinese cities have taken measures to restrict car ownership and usage out of concern for environment and traffic congestion.

In February, the government of the southern metropolis of Guangzhou announced a traffic control plan that requires half of all government cars to be off the road when there is a red alert for air pollution, while the remaining government vehicles should follow alternating odd- and even-numbered license plate restrictions.

Other places in the country, including Beijing and north China’s Shanxi and Hebei provinces, have already introduced odd-even license plate road restrictions on heavily polluted days.

In March, east China’s Hangzhou City, which has been frequently hit by acrid smog, announced a restriction on the issuance of new car licenses, making it the sixth Chinese city to clamp down on car ownership in a bid to ease traffic congestion and combat air pollution.

In addition, China is still heavily reliant on the import of crude oil, meaning that oil supply will still be a challenge in the future, according to experts at an international oil trade conference held in Shanghai in November last year.

Xu Heyi said that these problems have taken a toll on the car industry and contributed to growing overcapacity.

Experts said that while the market should play an important role in tackling overcapacity, car manufacturers will have to dig into other car-related fields like auto finance, new energy cars, and niche market models, such as SUVs and MPVs.

Zhu Fushou said that new energy vehicles are a field worthy of attention, as cities such as Beijing, Shanghai, Shenzhen, and Tianjin have either implemented or are considering favorable policies to promote purchases and production of new energy cars.

China’s central government has also provided hefty subsidies since 2010to drive sales of new energy cars and has initiated a pilot program to promote the cars in 40 cities and regions.

“Carmakers should pay attention to these areas if they want to outdo each other in the market this year,” Zhu said.

 

 

 

 

 

 

 

 China plans world’s largest duty-free shop

By Hu Tao, Li Jinhong and Zheng Weina

South China’s tourist island province of Hainan is to build the world’s largest duty free shop (DFS), said provincial authorities Wednesday.

Hainan plans to relocate an existing DFS downtown in the resort city of Sanya, in a 60,000-square-meter complex at Haitang Bay, said the vice governor Tan Li at a Boao Forum for Asia press conference in Hainan. Sanya’s current DFS is only about 10,000 square meters.

The Sanya Haitang Bay International Shopping Mall will attract international brands and fashion labels and combine duty-free shopping with hotels, restaurants and entertainment.

Hainan also plans to expand and transform another DFS in the provincial capital of Haikou from 3,650 to 4,880 square meters.

The State Council, China’s cabinet, gave Hainan permission to run a duty-free program on a trial basis in April 2011 to promote the province as an international tourist destination.

Offshore duty-free shopping in Hainan’s two DFS stores in 2013, hit 3.29 billion yuan (530.6 million U.S. dollars), up 40 percent year on year.

 

 

 

 

 

 

•  China can achieve 7.5-pct growth target: economist

By Guo Xinfeng, Zhang Zhongkai and Cheng Jing

Former chief economist of the World Bank Justin Yifu Lin on Wednesday reiterated his confidence in China’s economy, saying the country will be able to meet its 7.5-percent growth target despite short-term worries.

A long-time optimist on China’s growth, Lin said there is still huge potential in China’s industrial transformation and infrastructure construction to yield high returns.

China’s low debt rate of around 40 percent allows room for proactive fiscal policies, and massive private savings and foreign reserves are all favorable conditions to deliver growth, said Lin, now a professor at Peking University, during a session at the ongoing Boao Forum for Asia in south China’s Hainan Province.

“As I’ve said last year, China has the potential to maintain an 8-percent annual growth for some 20 more years,” Lin said.

China set its growth target for 2014 unchanged at around 7.5 percent to give more prominence to its reform agenda, but a string of economic indicators so far suggest China’s first quarter growth may have slipped below the target.

China is due to release GDP data for the first quarter on April 16.

 

 

 

 

 

 

 Asia markets seek reform in testing times

By Zhang Zhongkai, Li Baojie, Guo Xinfeng, Liu Xinyong, Zhang Yujie, Wang Huiyu and Wang Zichen

Senior economists have been proposing adjustments to the export-reliant economic models of developing countries after an address on the subject at the ongoing Boao Forum for Asia (BFA) 2014 Annual Conference.

U.S. stimulus tapering has made life difficult for economies that have long been driven by exporting activity. There is agreement that many must now look elsewhere for growth, with the experts even suggesting that the withdrawal of global liquidity may help in pushing them along a path to country-specific reform agendas and regional partnerships.

Emerging markets (EMs) have been reeling since the beginning of 2014. The currencies and stock markets of countries including Argentina, South Africa and Turkey have fallen substantially, prompting their central banks to raise interest rates to stem capital outflows.

“The winding-down of QE may spell trouble for emerging countries with over-reliance on foreign capital and exports,” said Li Xiangyang, head of the National Institute of International Strategy with the Chinese Academy of Social Sciences, on Wednesday at the BFA conference. “It should ring alarm bells for them to seek a way out through reform and cooperation.”

Li’s speech echoed a report released recently by the Boao Forum for Asia Institute, which pointed to EMs facing economic slowdown while developed countries such as the United States and Europe regain momentum.

 

MOMENTUM FROM WITHIN

 

The impact of the withdrawal of quantitative easing (QE) varies from country to country, but those with external imbalances or a reliance on external funding have been most vulnerable.

“The good old days of cheap labor, massive infrastructure investment and booming exports for Asian countries are gone amid the global economic downturn and financial fluctuation. They need to seek new growth engines,” said Shan Weijian, chairman and CEO of the Pacific Alliance Group.

QE tapering is most likely to have a negative impact on countries that lack buffers such as hard currency reserves or policy tools such as a floating exchange rate, according to a Moody’s report.

The World Bank predicted average GDP growth among Asian developing economies this year would drop from last year’ s 7.1 percent.

It’s time for them to instigate structural reforms to rely more on productivity and efficiency improvements, said Zhou Wenzhong, secretary general of the BFA.

“They should give the market more say in allocating resources to encourage new growth engines,” Zhou added.

Merrill Lynch noted earlier this year that China, which is itself undergoing sweeping reforms, had generally remained immune to the stepped-up QE tapering, thanks to its sustained current-account surplus, low foreign debt, huge exchange reserves, high savings and capital controls.

Other Asian economies should follow China’s lead and promote expansive reforms on the financial, education, medical and environmental protection fronts to avoid the middle-income trap, advised Stephen P. Groff, vice-president of the Asian Development Bank.

 

COMPETITIVENESS FROM OUTSIDE

 

If they are to achieve sustainable growth, emerging economies need to develop a bigger market. Closer trade and investment partnerships among Asian countries may better buffer against global economic jitters and also create momentum for the global market.

Asian economies should expand their cooperation from goods trading to service trading, investment and infrastructure connectivity and set more open rules to facilitate resource flows within the region, Zhou said.

Building the new Silk Road and Regional Comprehensive Economic Partnership (RCEP) can pave the way for a stronger Asia market, he added.

The fourth round of RCEP talks ended in south China’s Guangxi early this month with little concrete progress compared with the past three sessions, an impasse attributable to the different economic development and trade liberalization stages and varying stances of its 16 members.

Economic and trade relations within Asia are mainly based on the trade web of intermediate goods — in other words, a value chain, which means the RCEP can best represent their members’ interests, according to a report released by a think tank with the BFA last month.

“Asian countries should work for further regional integration to strengthen economic and trade bonds. It is also key to remove barriers checking the free flow of goods and service,” said Peter Mandelson, chairman of Global Counsel LLP.

In addition to trade integration, experts have pointed to the importance of more partnerships in the financial sector in protecting against volatility in global capital.

Asian economies’ exchange rate risks and transaction costs can be reduced if they sign bilateral currency swap treaties and use regional currencies for pricing and settlement, Zhou said.

 

 

 

 

 

 

•  Climate change worries Chinese businesses

By Han Miao, Guo Xinfeng, Zhang Yujie, Liu Xinyong and Li Baojie

When Zhang Yue decided to ground his two private jets for good to reduce carbon emission a couple of years ago, his family and friends thought he must be out of his mind.

Zhang, chairman of air conditioner producer Broad Group, said it is a pity that those worrying over climate change are still seen as offbeat, when attending a panel on climate change at the ongoing Boao Forum for Asia which will end on Friday.

“Climate change seems to be an alternative ideology,” Zhang said, “some people think there’s nothing to say about climate change, let alone to do anything about it.”

Zhang is not alone. The panel discussion underlined the dilemma that crippled the global campaign on climate change: all talk, no action.

Rui Chenggang, moderator of the panel and popular news anchor, was “troubled” by the fact that Chinese tycoons are buying aircraft, heedless of greenhouse gases. Private jet ownership in China is expected to reach 800 by 2020, according to Wealth-X, a wealth research and consultancy firm.

The public indifference to climate change is not confined to China. Only 24 percent of Americans say they worry a great deal about the issue, which puts climate change near the bottom of a list of 15 social concerns in a recent survey by Gallup.

Although mainstream academia believe in climate change, half of the public still do not buy it, Qin Dahe, a member of Intergovernmental Panel on Climate Change, said at the panel.

Zhang said a lot of things can be done to cut carbon emissions. For example, more thermal insulation in buildings will make people less inclined to use air conditioners. Better urban planning will help reduce traffic flow and congestion. Both will cut energy consumption.

“We know so much but we do so little, economic development always tops the agenda,” he added.

Addressing climate change is not necessarily at the sacrifice of economic growth. If China’s energy productivity reaches the level of the United States, the size of the economy will have tripled, with carbon emission being significantly lowered in the meantime, according to Qin.

To really mitigate and adapt to climate change requires the synergy of all parties, from scientists, to government and the public, said the climate scientist.

“Findings of research on climate change should be included in the textbooks of middle schools. Students should be exposed to related theories in geology class,” he added.

 

 

 

 

 

 

 

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