The Chinese government aims to raise its minimum wage at least 13 percent each year from 2011 to 2015, according to a recently released national employment promotion plan. The plan issued by the State Council stipulates that the minimum wage should be lifted to at least 40 percent of the average Chinese citizen's salary by 2015.

 

In developed coastal regions and a number of other areas, many enterprises, especially small-and medium-sized ones, do not have a complete wage distribution system and still set workers' wages at a level that meets or is slightly higher than the minimum standards. The proportion of the minimum wage to the average salary varies in different places, ranging from about 20 percent to 30 percent. In Beijing, the minimum wage is RMB 1,260 (US$200) a month; in downtown Chongqing municipality, it is RMB 870 (US$137) a month.

 

According to the five-year wage plan, the country will continue and further reform its income distribution mechanism and encourage enterprises to set up scheduled salary increases. China's social security system ensures that the higher salary an employee earns, the more social security funds will be deducted from one's salary, meaning a higher pension after retirement. But there are upper limits that vary in different places. The primary task in evening out the distribution of income is to ensure that low-income workers' wages increase faster.

 

Meanwhile, a survey focused on understanding the integrated urban-rural income data is scheduled to be published in 2013. The nationwide survey, which will provide basic data for China's Gini coefficient calculation, will cover about 140,000 urban and rural households, and the gathering and use of data will conform to international standards.

 

The coefficient measures income distribution on a scale of zero to one. A reading of zero means perfect equality, with everyone earning the same amount, while a reading of one represents the greatest inequality. A reading of between 0.3 and 0.4 indicates a relatively reasonable income gap while an index between 0.4 and 0.5 signals a larger income gap. Since 2000, the National Bureau of Statistics has published a Gini coefficient that focused on rural income and that stood at 0.3897 in 2011. The World Bank estimated that China's Gini coefficient had reached 0.47 in 2009, higher than the internationally accepted threshold of 0.4, which indicates income inequality may threaten social stability. The per capita disposable income of urban households last year was RMB 21,810 (US$3,447), while the per capita net income of rural households was RMB 6,977 (US$1,103).

 

China is expecting two major political events in March, the "two sessions"- by the National Committee of the Chinese People's Political Consultative Conference, the national advisory body, and by the National People's Congress, the national legislature. A recent poll conducted by Xinhua News Agency shows that measures to narrow the income gap are seen as the top priority to be addressed at these events. More details and plans are expected to be released in the coming months.

 

Adam Roseman

Founder & Managing Partner

ARC China

 

 

CHINA GENERAL

 

Easing Inflation Fuels Policy Adjustment Predictions

 

A December decrease in China's inflation has fueled widespread guesses about policy loosening to spur the slowing economy, although analysts believe that significant easing is unlikely, as inflationary pressures remain.

 

The full-year inflation figure for 2011 was still up 5.4 percent from the previous year and well above the government's full-year control target of 4 percent, the National Bureau of Statistics (NBS) said in a statement on its website.

 

"Although the current inflation figure has eased, the country's monetary policies will not shift toward loosening, but will remain stable," said Zuo Xiaolei, chief economist at Galaxy Securities.

 

The growth of the country's consumer price index (CPI), a main gauge of inflation, eased to a 15-month low of 4.1 percent in December amid accumulative government tightening measures, the NBS said.

 

The country's inflation rate hit a 37-month high of 6.5 percent in July before dropping to 6.2 percent in August, 6.1 percent in September, 5.5 percent in October and 4.2 percent in November, according to the NBS data.

 

The NBS attributed the decline in CPI growth to falling non-food prices. Non-food prices rose 1.9 percent from a year earlier, but dropped 0.1 percent from November to December.

 

In the non-food category, the cost of living dipped 0.2 percent in December, while prices for entertainment, educational and cultural items and services dropped 0.3 percent.

 

Meanwhile, food prices, which account for nearly one-third of the basket of goods used to calculate the CPI, went up 9.1 percent year-on-year and 1.2 percent month-on-month in December.

 

The NBS said a carryover effect from last year phased out in December, meaning that February's year-on-year increase in CPI growth was created entirely by new price rises.

 

The increases in food prices were mainly caused by the upcoming Spring Festival holiday, as well as weather- and transportation-related factors, said Wang Jun, an analyst with the China Center for International Economic Exchanges.

 

The Producer Price Index, a major measure of inflation at the wholesale level, also suggested subdued inflationary pressures for the country. It rose 1.7 percent year-on-year in December, weakening from 2.7 percent a month earlier.

 

Although divided on whether consumer prices will retreat rapidly or remain at high levels, analysts agreed that the CPI growth has not yet reached a safe range.

 

"The first two months of the year will see a further retreat in the growth of consumer prices, but the volatility of international commodity prices, caused by geopolitical factors, will form new imported inflationary pressures," Wang said.

 

Meanwhile, domestic factors, including rising agricultural production, resources, land and labor costs, will push up consumer prices in the mid- to long-term, said Lian Ping, chief economist at the Bank of Communications.

 

Lian said the CPI will rise by 2.7 percent to 3.3 percent year-on-year in 2012, while Liu Ligang, director of the economic research department of ANZ Greater China, expects the full-year CPI to hit 4 percent.

 

"The fact that the government failed to meet its target indicates that the country still faces mild inflationary pressures in the mid- and long-term," said Wang.

 

China made controlling prices a top priority last year and implemented a series of measures to address the issue, including tightening its monetary policies, cracking down on speculation, increasing food supplies and reducing circulation costs.

 

The economy has been slowing as a result of government macroeconomic controls and shrinking external demand. China's GDP grew 9.1 percent year-on-year in the third quarter of 2011, down from 9.5 percent in the second quarter and 9.7 percent in the first quarter.

 

While further policy tightening is unlikely under current circumstances, analysts also ruled out the possibility of dramatic easing moves.

 

"Since inflationary pressures remain in the mid- and long-term and a 'hard landing' is unlikely to happen, there is no need for significant policy adjustments," Lian said.

 

Lian's remarks echoed the country's stance, stated at the recently concluded central economic work conference. The government said it will preset or fine-tune its monetary policy in line with economic changes, indicating its intent to stabilize growth while avoiding price rebounds.

 

The easing inflation has provided room for the government to take measures to prevent an economic plunge. Liu said the country's central bank will cut banks' reserve requirement ratio (RRR) before Spring Festival and make another two cuts in the first half of the year in an effort to ease the credit crunch among Chinese firms.

 

The People's Bank of China lowered the RRR by 50 basis points in December, its first cut in nearly three years.

 

 

China Growth Estimate for 2012 Cut to 8.25 Percent

 

The International Monetary Fund (IMF) has cut its forecast for China's 2012 economic growth to 8.25 percent from the 9 percent projected in September, and it warned that exports would be a significant drag on expansion in the coming two years.

 

The IMF has downgraded the prospects for global economic growth in 2012 to 3.25 percent from 4 percent, largely because the eurozone economy is expected to go into a recession this year.

 

"The risks to China from Europe are large and tangible," said Murtaza Syed, resident representative of the IMF's Beijing office.

 

China's economic growth, which came in at 9.2 percent last year, could fall by as much as 4 percentage points if the euro area experiences the IMF's downside scenario, which would see global growth falling by 1.75 percentage points.

 

But even in this worst-case scenario, China has room for a countervailing fiscal response, he said.

 

Given the uncertain global outlook, some modest fiscal support to the economy is warranted, Syed said. In particular, a general government deficit of about 2 percent of GDP should be targeted.

 

The IMF urged policymakers to provide fresh stimulus through the budget rather than the banking system, since the large credit stimulus in 2009 and 2010 has increased risks in the banking system.

 

"China needs some time to digest the side effects of the surge of credit unleashed in the wake of the global crisis," he said.

 

However, China is not heading for a hard landing and will remain a bright spot for global growth in the coming years. The IMF projects China's economy will grow 8.75 percent in 2013.

 

Both investment and consumption have been strong despite weakening external demand. Also, the government's efforts to calm the property market have been effective, and underlying investment remains healthy due to government efforts to expand the supply of subsidized housing.

 

Inflation is coming down to more comfortable levels, which should allow the authorities to fine-tune monetary conditions and supply the economy with modest additional credit, according to Syed.

 

Upward pressure on the Chinese currency has diminished recently and the pace of reserve accumulation has fallen, partly due to a smaller trade surplus and valuation effects associated with a stronger US dollar.

 

After talks with German Chancellor Angela Merkel, Premier Wen Jiabao said China was investigating and evaluating ways to become more involved in solving Europe's debt problem.

 

Il Houng Lee, senior resident representative of the IMF's Beijing office, didn't give a timeframe for the discussion, saying that the earlier, the better it would be to establish a strong bailout fund to counter possible risks.

 

The European Union has long been the biggest trading partner for China and a major market for China's exports.

 

The EU's ambassador to China said that China could become Europe's biggest export market this year, overtaking the United States.

 

"There are indications that in 2012, China may become Europe's biggest export market," Markus Ederer, EU Ambassador to China, told reporters in Beijing.

 

This year the EU-China interdependence will grow, he said, adding that European exports were increasing at a faster pace than European imports from China.

 

 

The Coming Crisis in Chinese Private Equity: Too Few Deals Will Achieve IPO Exit

 

The amount of capital going into private equity in China continues to surge, with over US$30 billion in new capital raised in 2011. The number of private equity deals in China is also growing quickly.

 

More money in, however, does not necessarily mean more money will come out through IPOs or other exits. In fact, on the exit side of the ledger, there is no real growth, but instead probably a slight decline, as the number of domestic IPOs in China stays constant and offshore IPOs (most notably in Hong Kong and USA) is trending down. M&A activity, the other main source of exit for PE investors, remains weak in China.

 

This poses the most important challenge to the long-term prospects for the private equity industry in China. The more capital that floods in, the larger the backlog grows of deals waiting for exit. No one has yet focused on this issue. But, it is going to become a key fact of life, and ultimately a big impediment, to the continued expansion of capital raised for investing in China.

 

There is probably now over US$50 billion in capital invested in Chinese private companies, with at least another US$50 billion in capital raised but not yet committed. That is enough to finance investment in around 6,500 Chinese companies, since average investment size remains around US$15mn.

 

At the moment, only about 250 Chinese private companies go public each year domestically. The reason is that the Chinese securities regulator, the CSRC, keeps tight control on the supply of new issues. Their goal is to keep the supply at a level that will not impact overall stock market valuations.

 

Getting CSRC approval for an IPO is becoming more and more like the camel passing through the eye of a needle. Thousands of companies are waiting for approval, and thousands more will likely join the queue each year by submitting IPO applications to the CSRC.

 

In theory, it is possible that the CSRC could increase the number of IPOs of private companies. But, there is no sign of that happening, especially with the stock markets now trading significantly below their all-time highs. The CSRC's primary role is to assure the stability of China's capital markets, not to provide a transparent and efficient mechanism for qualified firms to raise money from the stock market.

 

Coinciding now with the growing backlog of companies waiting for domestic IPOs, offshore stock markets are becoming less and less hospitable for Chinese companies. In Hong Kong, it's generally only bigger Chinese companies, with offshore shareholder structure and annual net profits of at least US$20 million, that are most welcome.

 

In the US, most Chinese companies now have no possibility to go public. There is little to no investor interest. As the Wall Street Journal aptly puts it, "Investors have lost billions of dollars over the last year on Chinese reverse mergers, after some of the companies were accused of accounting fraud and exaggerating the quality and size of their assets. Shares of other Chinese companies that went public in the United States through the conventional initial public stock offering process have also been punished out of fear that the problem could be more widespread."

 

Other minor stock markets still actively beckon Chinese companies to list there, including Korea, Singapore, Australia. Their problem is very low IPO price-earnings valuations, often in single digits, as low as one-tenth the level in China. As a result, IPOs in these markets are the choice for Chinese companies that truly have no other option. That creates a negative selection bias. Bad Chinese companies go where good companies dare not tread.

 

For the time being, LPs still seem willing to pour money into funds investing in China, ignoring or downplaying the issue of how and when investments made with their money will become liquid. PE firms certainly are aware of this issue. They structure their investment deals in China with a put clause that lets them exit, in most cases, by selling their shares back to the company after a certain number of years, at a guaranteed annual IRR, usually 15-25 percent. That's fine, but if, as seems likely, more and more Chinese investments exit through this route, because the statistical likelihood of an IPO continues to decline, it will drag down PE firms' overall investment performance.

 

Until recently, the best-performing PE firms active in China could achieve annual IRRs of over 50 percent. Such returns have made it easy for the top firms like CDH, SAIF, New Horizon, and Hony to raise money. But, it may prove impossible for these firms to do as well with new money as they did with the old.

 

These good firms generally have the highest success rates in getting their deals approved for domestic IPO. That will likely continue. But, with so many more deals being done, both by these good firms as well as the hundreds of other newly-established Renminbi firms, the percentage of IPO exits for even the best PE firms seems certain to decline.

 

Partners at PE firms often expect exits through M&A to increase significantly. After all, this is now the main exit route for PE and VC deals done in the US and Europe.

 

But, there are significant obstacles to taking the M&A exit route in China, from a shortage of domestic buyers with cash or shares to use as currency, to regulatory issues, and above all the fact many of the best private companies in China are founded, run and majority-owned by a single highly-talented entrepreneur. If he or she sells out in M&A deal, the new owners will have a very hard time doing as well as the old owners did. So, even where there are willing sellers, the number of interested buyers in an M&A deal will always be few.

 

Measured by new capital raised and investment results achieved, China's private equity industry has grown a position of global leadership in less than a decade. There is still no shortage of great companies eager for capital, and willing to sell shares at prices highly appealing to PE investors.

 

However, unless something is done to increase significantly the number of PE exits every year, the PE industry in China must eventually contract. That will have very broad consequences not just for Chinese entrepreneurs eager for expansion capital and liquidity for their shares, but also for hundreds of millions of Chinese, Americans and Europeans whose pension funds have money now invested in Chinese PE. Their retirements will be a little less comfortable if, as seems likely, a diminishing number of the investments made in Chinese companies have a big IPO payday.

 

 

 

CHINA CONSUMER ECONOMY

 

2012 is "Year of Opportunities" in Chinese Consumer Sector

 

China's consumer sector is something of a defensive play, especially since it doesn't get a lot of attention in the United States. But DBS Group Research claims that the consumer sector provides "beauty of both sides." To the somewhat poetic DBS analysts, consumer companies offer "better resilience during the harsh times as well as fruitful returns whenever skies clear again."

 

More practically, the Chinese government favors rebalancing economic growth toward consumption. To that end, it is pursuing policies that increase the minimum wage, limit individual medical costs, accelerate urbanization with new transportation systems, and build millions of units of affordable housing.

 

The big trend lies in the discretionaries. DBS Group sees the yuan continuing to appreciate, increasing the purchasing power of mainland consumers. High-end merchandise retailers will continue to spread into China's provincial cities, and sustainable inflation will prompt demand for valuable assets, including gold and luxury watches. The home appliance industry will also benefit from energy savings subsidies introduced by the Chinese Government in 2011.

 

The DBS Group's top picks include China Foods, China Resources, and Golden Eagle Retail Group. These companies are not available in the United States, but they can be found in the Global X China Consumer ETF.

 

 

Euro-Area Manufacturing, Services Unexpectedly Contract

 

European services and manufacturing output unexpectedly shrank in February as the euro-area economy struggles to rebound from a contraction in the fourth quarter.

 

A euro-area composite index based on a survey of purchasing managers in both industries dropped to 49.7 from 50.4 in January, London-based Markit Economics said. Economists had forecast a reading of 50.5, according to the median of 16 estimates in a Bloomberg News survey. A reading below 50 indicates contraction.

 

Budget cuts by governments may curb the pace of Europe's recovery as countries across the region battle the sovereign- debt crisis. At the same time, China's manufacturing may shrink for a fourth month in February, indicating the world's second- biggest economy remains vulnerable to a deeper slowdown as Europe's crisis caps exports.

 

"We see some signs of stabilization but it's still too weak to conclude that we'll be able to avert a recession," said Jens Kramer, an economist at NordLB in Hanover, Germany. "Germany and France helped counter some of the slack, but tougher consolidation measures in countries like Spain or Portugal will continue, which means that it will probably have a negative impact on the economic performance into 2013."

 

A gauge of euro-region manufacturing rose to 49 in February from 48.8 in January, Markit said. A measure of services fell to 49.4 from 50.4.

 

In Germany, Europe's largest economy, the nation's services and manufacturing expansion unexpectedly slowed. The German factory gauge fell to 50.1 from 51, while the services index declined to 52.6 from 53.7, according to a separate release from Markit. The composite index of both industries in Germany fell to 52.9 from 53.9 in January.

 

In France, an index of manufacturing rose to 50.2 from 48.5, while a services measure fell to 50.3 from 52.3. Greece reached a debt-swap deal with its private creditors aimed at averting default and ending a fiscal crisis that has dampened confidence across the continent.

 

As Europe struggles to recover, some companies are benefiting from growth in Asia and emerging markets. Pernod Ricard SA (RI), France's biggest distiller, raised its annual earnings forecast in late February as Chinese consumers increased purchases of spirits such as Martell cognac.

 

In China, an index from HSBC Holdings Plc (HSBA) and Markit Economics of the manufacturing industry showed a preliminary February reading of 49.7, compared with a final 48.8 in January. January and February economic data are distorted by a weeklong holiday.

 

Euro-area consumer confidence improved for a second month in February, with a report showing an index of sentiment rose to minus 20.2 from minus 20.7. Still, government austerity measures and unemployment at the highest in almost 14 years may restrain household spending.

 

"The prospects for euro-zone consumer spending still look far from promising in the near term at least," said Howard Archer, chief European economist at IHS Global Insight in London. "It is still more likely than not that the euro zone will see further economic contraction overall in the first quarter."

 

 

Online Luxury Market Soaring

 

For the first time, the turnover of China's online luxury goods shopping market has exceeded 10 billion yuan (US$1.59 billion) and the market is likely to continue expanding at a year-on-year increase of 30 percent over the next several years, according to a report.

 

The turnover of the nation's online high-end brands hit an unprecedented 10.73 billion yuan last year, surging sharply by 68.8 percent compared with 2010's sum of 6.36 billion yuan, according to findings released by the Internet analysis company iResearch Inc.

 

The market will continue to increase at a speed of 30 percent over the next few years, which mean the turnover is likely to hit 37.24 billion yuan by 2015, said the report.

 

Revenues generated by the luxury goods' direct-sales stores on the Internet were not included in the turnover.

 

"Current online luxury purchasing was confined to top-class brands such as Hermes, Gucci and Louis Vuitton. Many second- and third-tier brands are not yet being sold in China. When they enter the market, online selling would be the best channel for them," said Ding Jiaqi, an analyst at iResearch.

 

As of last year, the turnover of luxury goods accounted for only 1.41 percent of China's total online shopping industry. The report estimated that the proportion could exceed 8 percent by 2015.

 

"So far, China's online luxury market remains small. We are waiting for it to explode," Chen Xiao, founder of the luxury goods selling website ihaveu.com, told Chinese-language newsmagazine China News Weekly.

 

One of the factors that set back the growth of the nation's online luxury shopping market was the fact choice is limited. Bags, jewelry and watches are the most-bought items, said Ding, who added that greater choice would boost demand.

 

The nation is likely to become the world's biggest e-commerce market in terms of turnover by 2015, surpassing the United States, said the Boston Consulting Group Inc.

 

Statistics from the China Internet Network Information Center show that the nation had 173 million online shopping customers as of the first half of last year.

 

The figure is likely to reach about 350 million by 2014, more than the population of the United States.

 

The total turnover of China's online retail market was 583.5 billion yuan during the first three quarters of last year, according to data from Analysys International.

 

The US consulting firm Bain & Co said revenues from the luxury market will exceed 100 billion yuan on the Chinese mainland in 2011. The nation is set to become the world's largest luxury goods market in 2012, replacing Japan.

 

However, the report expresses concern that high tariff and consumption tax could undermine China's luxury market.

 

Yao Jian, a spokesman for the Ministry of Commerce, said that China is willing to reduce import duty, including "some medium to high grade goods." It will be better if people buy high-end goods on the Chinese mainland rather than outside the country, the ministry indicated.

 

A weak economy will also affect the industry.

 

In July, xiu.com, one of the biggest luxury goods websites in China, announced that it received financing of up to US$100 million in 2011. Its rivals, shangpin.com and vipstore.com, also announced financing plans in the second half of last year.

 

But according to China Business Journal, the luxury shopping websites are finding it difficult to lure venture capital now, most likely because of uncertain economic prospects.

 

Wan Donghui, deputy secretary-general at China Electronic Commerce Association, said China's online shopping websites should "take good care of" their credibility because reputation is a "core competitiveness" for Web-based shopping.

 

Chinese group-buying website gaopeng.com, a joint venture between Groupon Inc and Tencent Holdings Ltd, was accused of selling counterfeit Tissot watches last November. In December, gaopeng.com pledged to offer a full refund to customers who bought a fake Tissot watch.

 

Research shows men are big fans of shopping for designer goods online.

 

According to a separate iResearch report, about 65.5 percent of customers of websites that sell high-end goods were male, although across the online shopping industry as a whole they accounted for fewer than 50 percent.

 

The report also said that about 80 percent of buyers of luxury products were younger than 35 years old, indicating that well-off younger people are the major customers of Internet-based luxury shopping. About 40 percent of China's online customers were under age 24 in 2011, while about 20 percent of all Chinese shoppers were under that age.

 

 

Chinese May Take Place of Americans as Spenders

 

The Chinese consumer may not yet qualify for the description "big spender." But the traditionally thrifty Chinese may spend more than was previously thought on the things that keep households ticking on a day-to-day basis.

 

This conclusion, by Chinese economist Yiping Huang, is important because economists are banking on the second-biggest economy to drive growth. And hopes are pinned on the possibility that Chinese consumers will start to play the free-spending role that previously belonged to consumers in the US, South Africa, and many other economies.

 

Consumption drives global trade and creates wealth; but when it is funded largely by debt it becomes unsustainable. And here lies the catch.

 

One of the problems with the pre-crisis global economy was that consumers in the US spent too much, while those in China spent too little. This created imbalances with the US and other countries like South Africa running big deficits on their trade accounts with the rest of the world, while China ran a very big surplus.

 

The situation became unsustainable when the US Federal Reserve started hiking interest rates in 2006, and deeply indebted US consumers had to abandon the spending habits of a lifetime. The situation was worsened by the recession, starting in the US at the end of 2007, which put large numbers of people out of work.

 

US interest rates have since fallen close to zero and the country has started to show signs of sustainable growth. But there has been a shift in the way US consumers behave. Recent history, including the demise of banks which had been household names, has made them cautious.

 

Consumers in Europe were caught up in the financial slipstream, following the US into recession. The region is not yet emerging from recession; some countries are even showing signs of contraction. And in Japan, which has been a low growth zone for more than two decades, saving is a greater priority than in the West.

 

This has consequences for China. The country's long run of double-digit economic growth was fueled by its exports. With export markets shrinking, the Chinese authorities had to look elsewhere. And they suddenly perceived the value of domestic consumption to sustain economic growth.

 

They have started to encourage people to spend. But the markets have already been at work. Huang, the chief economist for emerging Asia at Barclays Capital, believes "changes in both the labor and capital markets are positively impacting consumption." The changes he refers to include rising wages and interest income.

 

In the US, consumption grew from about 62 percent of gross domestic product (GDP) in the 1960s to over 70 percent now, according to the Pacific Investment Management Company website. In South Africa it is normally over 60 percent – 61 percent in 2007 – but in the third quarter of last year it had fallen to about 57 percent.

 

In China, official figures have consumption declining from 62 percent of GDP in 2000 to 47 percent in 2010. But Huang believes the figures are understated. He says the consumption share of GDP has been consistently understated by an average of 3.1 percentage points over the past decade.

 

He argues that household consumption data, derived from household surveys, do not tie up with growth in retail sales as the latter grew much faster. This points to an under-reporting of household income – in which case consumption and consumption growth rates could have been under-reported, says Huang.

 

 

Wal-Mart Aims to Increase Holding in Online Retailer

 

In a statement, Wal-Mart said it plans to increase its holding in online retailer Yihaodian to 51 percent. The US retailer said the move is awaiting approval from the Chinese regulatory authorities.

 

The move is aimed at boosting Wal-Mart's online sales in the Chinese market and maintaining its competitiveness in the country's e-commerce sector.

 

In a telephone interview with China Daily, Yu Gang, chairman and founder of Yihaodian, said the increase in Wal-Mart's stake will not result in significant changes in personnel. Neither company revealed any financial details about the move.

 

Yu also denied that Ping An Insurance (Group) Co of China, one of Yihaodian's major shareholders, will sell its entire stake to Wal-Mart. It has long been rumored that the insurer was seeking to sell its 60 percent stake in Yihaodian to Wal-Mart.

 

Yu said the Yihaodian brand will remain a separate unit and independent in China.

 

Yihaodian is one of the fastest-growing e-commerce business operators in China. Its sales revenue reached 2.7 billion yuan (US$429 million) in 2011, increasing from 4.17 million yuan in 2008. In 2010, Ping An acquired an 80 percent share of Yihaodian, valued at 80 million yuan.

 

Wal-Mart acquired a minority holding of approximately 20 percent, valued at US$65 million, from Ping An in 2011.

 

Peng Jianzhen, deputy secretary-general of the China Chain Store and Franchise Association, said the development of online trading platforms has become a must for large retailers in recent years, because it is the shopping model preferred by the younger generation.

 

Retail giants including Carrefour SA and Groupe Auchan SA have developed online shopping systems to compete in the Chinese market.

 

Peng said Wal-Mart's increased investment in Yihaodian will help to maintain the profitability of traditional stores that have higher operating costs than online stores.

 

"Generally, price differences will exist for the same products when sold online and in traditional brick-and-mortar stores, and that has a negative impact on the sales performance of traditional stores," said Peng. "However, the dual-brand development strategy will help Wal-Mart to maintain profitability in traditional brick-and-mortar stores and help it to better develop in the e-commerce sector."

 

Wal-Mart is investing heavily in developing its presence in the Chinese e-commerce sector. The retailer has reached an agreement with the Shanghai municipal government to establish an e-commerce office in the city to oversee its online retail operations in China.

 

Neil Ashe, president and chief executive officer of Wal-Mart Global eCommerce, said, "This investment further enables Wal-Mart to deliver a superb customer experience to Chinese consumers that are already connected to the world through smartphones and social media. We are on track to create the next generation of e-commerce, offering the latest in online innovations to give our customers a unique shopping experience."

 

 

Consumer Confidence up on Festival Spending

 

Chinese consumers' confidence rebounded in January as the holiday period boosted consumption, according to an index released recently.

 

The Bankcard Consumer Confidence Index (BCCI), compiled by Xinhua News Agency and China UnionPay, a national bank card association, stood at 86.78 in January, up 1.25 points year-on-year and 0.06 of a point from December.

 

The report attributed the rebound in consumer confidence to festival spending sprees, as both the three-day New Year holiday and the weeklong Spring Festival holiday fell in January.

 

The effects of the holidays have led to noticeable increases in consumer spending on non-essential items, such as festival-related items and tourism, the report said.

 

The income growth of urban residents also provided a solid foundation for the consumer confidence, according to the report.

 

Data from the National Bureau of Statistics showed the per-capita disposable income of urbanites was 21,810 yuan (US$3,164), up 14.1 percent from a year earlier in nominal terms and 8.4 percent after being adjusted for inflation.

 

Xinhua News Agency and China UnionPay started compiling the BCCI index in April 2009 based on bank card transaction data and analysis of structural changes in urban consumption.

 

 

Goodbaby Grows Up with Nike

 

Goodbaby Group, China's top manufacturer and retailer of baby care products, has announced an online retail partnership with the US sportswear giant Nike Inc. as part of its efforts to win more brand recognition.

 

Under the agreement, Goodbaby will have exclusive authorization to sell Nike's children's wear through its website, haohaizi.com.

 

The move will help the Chinese company realize its revenue target of 10 billion yuan (US$1.6 billion) in the domestic market by 2015, said its President Song Zhenghuan.

 

"The collaboration with Nike has been fruitful in the past decade, where we own and operate about 900 franchised Nike Young Athletes stores nationwide. I hope the cooperation in the virtual world will usher in a new chapter," said Song.

 

The company's fledging online business got off to a good start in 2011 when it recorded revenue of 60 million yuan. Song said he aims to hit 3 billion yuan in four years' time.

 

"We at Nike are very excited about the opportunities that lie in e-commerce," said Craig Cheek, vice-president of Nike Sports China Co Ltd.

 

"We believe that the digital space will be a key factor in our growth in the coming years, one that opens up an entirely new channel through which we can connect with our consumers."

 

Goodbaby, a Jiangsu-based enterprise best known for mass-producing baby strollers, is now the largest supplier of strollers in North America, Europe and China. After more than 20 years of global business, Goodbaby has a 40 percent share of the baby carriage market in the United States and an 80 percent share in China.

 

The corporation serves as a manufacturer, retailer and distributor for mother- and baby-care products, including strollers, baby clothes and healthcare products. Goodbaby International Holdings Ltd, a subsidiary of Goodbaby Group, went public on the Hong Kong stock exchange in November 2010 to gain a slice of the international market.

 

Goodbaby has worked extensively with international players. In addition to Nike, it has operated with the British children's retailer Mothercare UK Ltd through a joint venture. It has also worked with foreign brands such as Quinny and Maxi-Cosi.

 

Buoyed by increased consumption, manufacturers are leaving no stone unturned to cash in on the so-called "fourth baby boom" that is expected to last until 2015. Last year, Goodbaby registered revenue of more than 2 billion yuan in the Chinese market, up 30 percent year-on-year.

 

Song said the company aims to combine international and domestic high-quality maternity and child brands to promote the standardized development of the industry, and the goal won't be achieved "without properly integrating online and offline resources."

 

Data from the consultancy Euromonitor showed the market value of children's wear in China reached 84.6 billion yuan in 2010. According to the National Bureau of Statistics, nearly 30 percent of the total expenditure of urban families is made on infants or children.

 

A separate study from Boston Consulting Group suggested the market value of China's baby industry - including food, garments, toys and related products - will enjoy an annual growth rate of 17 percent in 2012.

 

International players have joined the fray to cash in on the booming market. The luxury brand Gucci SA opened its first children's clothing shop in Shanghai last year, and other casual wear retailers including Hennes & Mauritz AB, better known as H&M, and ZARA International SA have set up kids' divisions.

 

But the children's wear market in China is greatly fragmented, as it faces a brand vacuum and lacks dominant brands, said Tian Tao, vice-president of CTR Market Research Co Ltd.

 

Tian's view was supported by a Euromonitor study, which suggested that the top 10 brands in this niche market accounted for less than 5 percent of the overall market value, with the remainder being shared by "thousands of minority players."

 

 

Lenovo Narrows Market Gap with HP

 

The gap in market share between the computer manufacturers Hewlett-Packard Corp and Lenovo Group Ltd has narrowed to 2 percent, according to the Chinese company.

 

Lenovo reported record sales of US$8.4 billion for the company's fiscal third quarter of 2011. It also won a global market share of 14 percent, making the company the second-largest PC maker by market share, after reducing the gap with HP to 2 percent from 9 percent in 2010, according to the IT research company International Data Corp.

 

The company attributed its performance to a dramatic surge in sales of Internet mobile devices and growth in mature markets. The company said sales revenue for its Internet mobile devices, including tablet PCs and smartphones, grew 159 percent year-on-year to US$565 million between October and December.

 

Liu Jun, Lenovo's senior vice-president and president of the company's Mobile Internet and Digital Home Business Group, said the company's share of the smartphone market increased from about 2 percent at the beginning of 2011 to 10 percent in December, largely because of a promotion campaign by China Telecom Corp Ltd.

 

"We saw strong progress in our Mobile Internet business. During the (third) quarter, Lenovo sold more than 6.5 million phones, and almost half of those were smartphones. Lenovo's share of the Chinese smartphone market reached double-digits in December," said Yang Yuanqing, Lenovo chairman and CEO.

 

Yang said that although the Internet mobile devices division only accounts for about 5 percent of total sales revenue at present, the figure will increase to 10 percent in the near future.

 

The increase in profit was also driven by the company's growth in mature markets, including the US, Japan and Europe.

 

Lenovo bought the US PC division of IBM Corp in 2005 and last year it announced a US$175-million joint venture with Japan's NEC Corp and the acquisition of Medion AG, a German multimedia and consumer electronics maker.

 

"For the first time, Lenovo has become the global number one vendor of commercial PCs and consumer desktops, despite the worldwide shortage of hard drives in the past quarter," Yang said. Lenovo generated pre-tax income of US$192 million worldwide during the quarter.

 

"Because Lenovo maintains a high volume of PC shipments, it has stronger bargaining power with hard-drive providers than other companies," said Wang Jiping, a senior analyst at IDC Asia-Pacific.

 

After entering markets through mergers, Lenovo has cooperated with its local partners to introduce tablet PCs to Japan and Germany, and the company said it will introduce smartphones to those markets soon.

 

"Europe is one of our major battlefields this year, however, previously our business there only focused on the commercial sector," said Yang. "Lenovo will place greater emphasis on the European consumer market from April, with the help of Acer Inc's former CEO Gianfranco Lanci." Lanci will begin working for Lenovo in April.

 

Acer said that it has filed a lawsuit in a court in Milan, Italy, against Lanci, its former CEO and president, for breaking a non-competition clause, but declined to release further details.

 

 

 

RECENT CHINA TRANSACTIONS

 

Alibaba.com Investors Cheer Privatization Offer

 

Alibaba.com shares are surging in Hong Kong as investors expect the company's privatization plan to be given a green light to proceed.

 

Alibaba's offer to make private its Hong Kong-listed arm Alibaba.com for 13.5 Hong Kong dollars per share, which is on par with the price when the business-to-business (B2B) portal went public in late 2007, represents a 60.4-percent premium over the company's latest 60-day average closing price.

 

Analysts expect the privatization to go ahead because of the high premium, fragmented minority shareholders, and the prospect of continuing earnings and share price weakness. Alibaba Group holds 73 percent of the unit's shares, and among the largest independent shareholders are Morgan Stanley, Vanguard Group and Capital International.

 

Hong Kong regulations stipulate that takeovers require more than 75 percent of minority shareholder approval, and less than 10 percent of minority shareholders voting against it.

 

The deal is a bit of a no-brainer for shareholders, says JP Morgan. It could give them the chance to cash out at an attractive premium "instead of assuming a different risk profile brought about by the new business strategy." However, JP Morgan also notes that there have been many cases in Hong Kong in the past where minority shareholders have banded together to block a privatization for a better offer.

 

One of the reasons for the privatization, according to Alibaba.com, is that it will give it more room to restructure its business without the pressures of being a public company, and its fourth-quarter results showed some weak spots that need to be addressed. For example, the number of paid members joining Alibaba.com continues to decline as the company increases fees and steps up its vetting of new members after a scandal last year involving employees colluding with sellers to create fraudulent listings.

 

Another concern is that its business model is highly reliant on China's small and medium exporters, who are struggling in a tougher export and credit environment. Alibaba.com is feeling the heat as it generates more than half of its sales from Chinese exporters, says Morgan Stanley.

 

Thus going private and shielding itself from public scrutiny will allow it better flexibility to focus on more profitable businesses, mostly its wildly popular online shopping unit Taobao. According to Morgan Stanley, Taobao's transaction value accounted for up to 3 percent of China's overall retail sales last year.

 

The company said the deal will not be contingent on any completion of a deal with Yahoo, which has a 40 percent stake in Alibaba Group.

 

 

 

OVERSEAS TRANSACTIONS

 

France Confirms that GM and Peugeot Citroen Negotiating a Possible Alliance

 

PSA Peugeot Citroen is in talks over a possible alliance with Detroit-based General Motors in a deal that could dwarf France's leading car maker's existing partnerships with BMW, Mitsubishi Motors and Toyota.

 

Peugeot Citroen shares surged on news of the talks, which were confirmed by France's labor minister.

 

The Paris-based maker of the Peugeot 207 hatchback and Citroen C4 Picasso minivan lost US$578 million on its car business last year amid falling sales and concerns over management's strategy among industry analysts. The family-controlled company, whose roots stretch back over 200 years, has been hard hit by the economic downturn in Europe, where purchases account for more than 50 percent of the 3.5 million cars it sells annually.

 

Peugeot released scant details about the talks. Its statement said only that it was examining "projects for cooperation and alliances" related to its strategy of "globalization and performance improvement."

 

Labor minister Xavier Bertrand said Peugeot Chief Executive Philippe Varin had informed him of the talks about a "strategic partnership" with GM.

 

"He told me that it's good news for the group because it will allow us to cut costs on each vehicle," Bertrand said in a radio interview. Bertrand said the proposed deal would give Peugeot Citroen the size it lacks to compete on a global scale. Peugeot "is above all a European champion, a national champion. If you have access to a global dimension, it's not a handicap," Bertrand said.

 

Peugeot shares rose more than 20 percent to a four-month high on the Paris stock exchange as investors applauded the possible tie-up.

 

News of the talks came just ahead of the March Geneva Motor Show, and will undoubtedly be one of the main topics of discussion at Europe's biggest annual car industry gathering.

 

For GM, the talks raise the possibility that it might find a solution for its loss-making Opel and Vauxhall brands in Europe. GM Europe lost US$700 million last year. In mid-Feburary the head of General Motors Europe announced that the company was in talks with unions and employee representatives on ways to cut costs and return Opel and Vauxhall to profitability.

 

An Opel spokesman declined to comment.

 

Peugeot is second in sales only to Wolfsburg, Germany's Volkswagen AG among Europe's carmakers. It already has a partnership with BMW AG to jointly develop a lower-emission engine for some of their most popular models.

 

Peugeot Citroen has also worked with Mitsubishi Motors on product development with a cooperation on SUVs, clean technologies with electric vehicles and a joint venture in Russia.

 

Two years ago Peugeot and Mitsubishi abandoned talks of a "strategic partnership," saying that circumstances were not right.

 

Peugeot Citroen forecasted a 10 percent drop in car sales in its core French market this year after booking a loss in 2011, in addition to a 5 percent drop in the European car market as a whole, following a 0.5 percent drop in 2011.

 

Last year Peugeot Citroen sold 3.5 million cars, 1.5 percent fewer than in 2010. In the hard-hit European market, Peugeot Citroen car sales slumped 6.1 percent, worse than French rival Renault.

 

The company is stepping up a cost-cutting plan announced last October, and now aims to achieve EUR1 billion in savings this year. Last October the company announced plans to cut 6,000 jobs to save EUR800 million in 2012.

 

The company also aims to raise EUR1.5 billion through asset sales, including property and a stake in its Gefco logistics subsidiary.

 

 

Johnson & Johnson Offers EU Concessions for Synthes Buy

 

US-based healthcare company Johnson & Johnson has offered concessions in a bid to ease EU regulatory concerns over its US$21.3 billion purchase of Swiss medical device maker Synthes Inc, the European Commission said.

 

The Commission, the competition regulator for the 27-country European Union, said it would decide on the deal by April 26 as it extended its deadline by 10 working days to assess the concessions.

 

Johnson & Johnson, which is buying Synthes to boost its orthopedics franchise in its largest-ever acquisition, submitted its concessions.

 

Some analysts have said Johnson & Johnson may have to divest some trauma assets to win regulatory approval. Medical devices and diagnostics made up 40 percent of its 2010 sales. Rivals in the sector include Stryker and Zimmer.

 

Companies can either offer to sell off assets or agree to licensing deals to offset possible anti-competitive effects from mergers or acquisitions.

 

 

What to Expect When You're Expecting a Facebook IPO

 

While Facebook left a lot of mysterious blanks in its S-1 filing with the SEC, we can prepare for the blessed event by taking stock of Facebook's financial performance, the state of the general economy, and recent tech IPOs on a similar scale.

 

The timing of the IPO, Dun & Bradstreet analyst and tech IPO specialist Lee Simmons says, is now "entirely up to Facebook," but he said the social network will likely be pricing its shares and making its public debut sometime over the summer. "Some analysts are saying May; I would say it won't be after August, barring any unforeseen economic catastrophes."

 

And like last August when a record number of IPOs were delayed, Simmons said that kind of activity is well within Facebook's purview as well. "You saw a couple companies last year pull in the reins and delay the IPO," the analyst said. "Facebook can do the same thing."

 

Simmons said we can expect to see amended S-1s, changed to reflect the number of shares and starting price, within the next few months. And Facebook's road show should be happening soon, as well.

 

Mainly, Simmons said curious onlookers can keep their fingers on the pulse of the general economy to get a sense of when Facebook might go public. Stating that public markets will act as a bellwether for Facebook's actions, Simmons noted that any market turbulence could make potential investors skittish.

 

"Thinking back to last May when LinkedIn priced, it seemed like the public markets were going to be really robust for the rest of the year," Simmons recalled. "Then everything tanked."

 

Last August's market dive and subsequent IPO delays and disturbances are a model for what might happen if the spring brings any unexpected dips to public markets. Facebook and the cadre of banks underwriting Facebook's IPO will be keeping an eye on the New York Stock Exchange and the NASDAQ as one factor for determining the best time to price. So according to Simmons and depending on the general market, we can expect a summer IPO for Facebook.

 

In regards to share prices, Simmons says that, "Facebook is being compared most often to Google." Google went public in August 2004, starting shares at US$85 each. The company offered just over 19 million shares, and Google closed the day with a market capitalization in excess of US$23 billion. Google shares now trade at upwards of US$600 each.

 

"Analysts see a lot of similarities between both companies," said Simmons. "Their revenue growth is very similar." But Simmons continued, "The Facebook IPO will most likely dwarf Google's."

 

While Google's shares rose to a high of US$104 on the company's first day of public trading, Facebook's stock is more likely to mimic LinkedIn's first day of trading, said Simmons. LinkedIn, which priced at US$45 per share to open the day, quickly rose by more than 100 percent and stayed at around US$103 for the majority of the first day of trading.

 

In short, said Simmons, "If the company wants to raise US$5 billion on its opening day, that's what it's going to do. There is a lot of investor enthusiasm."

 

Most analysts have no doubt that Facebook will have an extremely hefty first day of trading. "This is the one stock that tech investors have been waiting for for at least two years," said Simmons. "It will garner towards the high end of its potential valuation, between US$75 and US$100 billion, and I wouldn't be surprised if it reached the US$100 billion mark."

 

However, whether Facebook stock will have a shelf life longer than a couple of years is something Simmons said only time will be able to tell. He noted that LinkedIn, which was ostensibly the first American social media firm to go public, has seen "very volatile" trading activity since its debut (LNKD is currently trading at around US$90 per share).

 

"These stocks are not invulnerable to economic conditions," Simmons concluded. "A lot of the hype around these web 2.0 companies tends to forget that one key factor - that the economy can make a dent in share price. Two years down the line, it could go either way."

 

 

Qatar Holding Buys Credit Suisse's London Headquarters

 

Qatar Holding, the overseas investment arm of the country's wealth fund, has bought the London headquarters of Credit Suisse in Canary Wharf and will lease it back to the bank in a long term deal until 2034, the company said.

 

Talks over the sale of the building between Qatar and the Swiss investment bank were in their final stages and a deal was imminent, according to media reports in late January.

 

The 546,114 square feet building at One Cabot Square in Canary Wharf will be rented back to Credit Suisse in a long-term agreement that would "yield stable long-term income with attractive contractual rental uplifts," Qatar Holding said in a statement posted on its website.

 

Qatar Holding, which invests on behalf of the government-controlled Qatar Investment Authority, owns 8.9 percent of Credit Suisse and has a 28 percent stake in Songbird Estates, the majority owner of the Canary Wharf Group.

 

The acquisition marks yet another foray into prime London real estate by the Qataris after they bought the former US embassy building in the U.K. capital in late 2009 and the Chelsea Barracks in 2007 for just under GBP1 billion.

 

A weaker pound and depressed real-estate prices have made London an attractive foreign investment location for Gulf Arabs whose domestic currencies are mostly pegged to the US dollar.