A bet, a joke and China’s economic “new normal”

 

 

 

Delegates attend the closing ceremony of the World Internet Conference in Wuzhen, east China’s

Zhejiang Province. The three-day conference concluded here on Friday of November 21, 2014.

Photo by Ju Huanzong

 

 

 

A bet, a joke

and Chinas Economic

“new normal”

 

 

By Lin Jianyang, Zhang Zhongkai and Liu Jinhui

 

 

With only days left in 2014, it is fair to say that many people didn’t expect China’s economy to see such a slowdown a year ago. Most people didn’t predict China would stay in the lower range of the government-set annual growth target of around 7.5 percent for the first time in 15 years.

However, the Chinese leadership sees the slowdown as a necessary pain and a window of opportunity for more decisive reforms, and they call for the nation to “actively adapt” to the new normal.

The new normal means adjusting to growth that is slower than the average 10 percent seen during the first 30 years of economic reforms. More importantly, it also means more sustainable and efficient growth for several decades to come — at least, that is the aim.


 

Photo taken on December 12, 2013 shows Ma Yun, Dong Mingzhu, Leijun and Wang Jianlin  

(left to right) making their presentation at the China Central Television (CCTV) Bussinessperson 

of the Year Awards.    Photo  |  http://cib.shangbao.net.cn/306/2014/0225/257013.html

 

 

BET, JOKE

 

In 2014, the landscape of China’s economy changed notably as old key engines such as property and manufacturing suffered oversupply and lost momentum, while new engines such as high-tech industries and Internet-related businesses saw booming growth.

Summing up China’s new economic climate is a bet between two business tycoons and a bitter joke about the property market’s new role.

The bet, worth 1 billion yuan (163 million U.S. dollars), dated back December 2013 when Lei Jun (雷军), who founded Internet company Xiaomi Inc. in 2010, said Xiaomi would outdo air conditioner maker Gree Group led by president Dong Mingzhu (董明珠) in business volume in five years.

In 2014, Dong repeatedly said she would not lose the bet. In her speech on December 14 at a Beijing forum, she again insisted that she would win.

In her speech, Dong also slammed the alliance between Xiaomi Inc. and major home-appliance maker Midea, one of Gree’s rivals, which Dong accused of stealing her company’s patents. “Two crooks together make a team,” she said.

Neither Lei Jun nor Midea’s management responded. Instead, Xiaomi and Midea said in a statement that they aimed to introduce interactive products for smart homes, which Lei said would be “the next trillion dollar-scale market.”

In 2014, Chinese Internet companies such as Xiaomi Inc., Baidu and e-commerce giant Alibaba continued to rise rapidly, significantly outperforming traditional industrial firms including Gree, which suffered excessive capacity and falling profit margins.

This year, Lei rose to become one of the icons of China’s burgeoning Internet economy, along with Alibaba Group Chairman Jack Ma (马云). In September, Alibaba stunned everyone with a record-shattering IPO in New York, which generated an eye-popping 25 billion U.S. dollars.

Xiaomi Inc. outshined its rivals and became the world’s number five smartphone supplier. “The success of China’s Xiaomi is nothing but phenomenal,” U.S.-based magazine Forbes said, when naming Lei “Asia’s 2014 Businessman of the Year.”

With huge achievements and continued momentum, Lei may soon be able to collect on the bet.

Also in 2014, Internet financial products like Yu’ebao, introduced by Jack Ma’s financial company, continued to pound China’s traditional banks and even helped push forward the country’s financial reform. New businesses and new business models such as logistics, express delivery and e-commerce all developed extraordinarily quickly.

In contrast, this year witnessed a significant downturn in China’s property sector, a key driver for the broader economy, which had been flourishing for the previous decade.

Weak market sentiment, low buyer confidence, sluggish sales, falling prices and rising inventory have all weighed on the industry’s outlook.

The property downturn not only became the biggest drag on China’s economic growth in 2014, but also hit land-dependent local governments hard, since land sales accounted for nearly half of their revenues.

“In the past, the Internet-based new economy was the ‘concubine’ of local governments, and we (developers) were their ‘wife.’ We used to sit and eat at the main table,” joked Feng Lun, a Beijing-based investor and chairman of Vantone Holdings Co., on Dec. 14 at a forum in the southern Chinese resort city of Sanya.

“But now the seats have changed, and they (Internet companies) have replaced us. The only face-saving thing is that we are allowed to sit at a nearby table and watch them eat,” Feng said.

 

NEW NORMAL

 

The Chinese economy slowed in 2014, no doubt about it. In the third quarter, it grew 7.3 percent year on year, the slowest quarterly growth since the first quarter of 2009.

The property downturn, industrial overcapacity, worrying local debt, and money-strapped small enterprises have all dragged on growth as China enters a new era, said Zhu Baoliang, an economist with the State Information Center, a government think tank.

The People’s Bank of China (PBOC), the central bank, expects the economy to expand 7.4 percent in 2014, which would be the slowest pace since 1990 and below the government’s target of about 7.5 percent. Many Chinese and global financial institutions have made the same bet.

In the 35 years between 1978 and 2013, annual growth of the Chinese economy averaged close to 10 percent and, between 2003 and 2007, it was over 11.5 percent.

However, the “good old days” had to end. Growth decelerated to 7.7 percent in 2012 and 2013, and in the first three quarters of 2014, growth was 7.4 percent.

Even if double-digit growth could continue, it is undesirable, as the three decades of almost uninterrupted runaway growth came at the high price of air pollution and exploitation of natural resources.

The “new normal” is nothing new. The phrase was first popularized by the California-based bond fund giant Pacific Investment Management Co. to describe below-average growth after the global crisis.

The term gained ground in China in May, when President Xi Jinping, during an inspection tour in central China’s Henan Province, described the need to adapt to a “new normal” and remain cool-headed as growth slows.

The idea was expanded upon by Xi at November’s APEC Beijing meetings and in a long statement following the three-day Central Economic Work Conference, which closed on December 11.

The statement said the nation must understand the new normal, adjust to the new normal, and develop under the new normal. Coming to terms with the new normal will be the “main logic” for economic growth for some time, it said.

“The economy is evolving into a more advanced growth mode, a more complex division of labor, and a more reasonable structure,” it said.

Ma Weihua, a noted banker, said the consensus is that “new normal” means not only slower growth but also, more importantly, an improved economic structure and growth quality.

 

REFORM

 

“A competitive economy with quality growth should be innovation-driven. More resources should be pooled to help hundreds of thousands of small enterprises and startups, since they are the main force in innovation,” Ma Weihua said.

Small firms and startups are faced with many difficulties, including financing, and more decisive reforms are needed to help them resolve those issues, Ma said.

This year was the first for implementing a grand reform blueprint, which was adopted last November at a key meeting of the Communist Party of China.

The Chinese government intends to promote reforms and readjust the economic structure to shift from an economy led by exports and investment to a more sustainable model driven by consumption and innovation.

Progress was made on a range of reforms, covering such areas as the administrative approval system, financial liberalization, taxation and land markets, service sector deregulation, and State-owned enterprises.

Gu Shengzu, a Beijing-based senior economist, said reform measures, especially those lowering the threshold for starting businesses and removing restrictions on businesses, and the rise of the Internet economy have fueled a new wave of entrepreneurship in China.

Entrepreneurship is unleashing the innovative power of the Chinese people and becoming an important engine for stable growth and a smooth transition to the new normal, Gu said.

According to Gu, the number of newly registered businesses grew by 61 percent from March to August over the previous year, thanks to business registration reform.

In high-tech hubs such as Zhongguancun, Zhangjiang and Donghu, numerous startups have been established by young people with the help of angel funds, he said.

And it was in Beijing’s Zhongguancun, which has been called “China’s Silicon Valley,” where Lei Jun and his friends founded Xiaomi Inc. in April 2010.

On his bet with Dong, Lei was confident. “She will lose it. But she won’t lose to me. She will lose to the times,” Lei said.

 

 

 

 

 

 

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