A controversy

Remember that time a Chinese investment proposal toppled a Western government? Neither do I.

It really happened though — in 2013:

Talks to bring in Chinese capital to a large iron ore project weren’t even ripe for a deal when the outcry over a law facilitating the use of foreign labour led to fresh elections and a new cabinet that promises to revise that legislation.

Introduced by then PM Kuupik Kleist’s Siumut party and passed last December by the Greenlandic parliament, the so-called ‘large scale law’ (storskalalov) allows for foreign workers to be paid less than the local minimum wage of $14 per hour during the construction phase of large scale projects. Greenland’s untapped mineral resources, proponents argued, could help the country achieve economic self-sufficiency and eventually independence from Denmark, but cannot be developed without a workforce not to be found among the 58 thousand local inhabitants.

A large-scale fiasco

The law raised opposition both at home and in Denmark. Kleist’s government was accused of laying the ground for an invasion of thousands of Chinese workers that would amount to “social dumping”. Such large mining projects, some argued, would bring less benefits to the local population than traditional industries like fishing, which now accounts for 90% of the country’s exports. MP Nikku Olsen called the government’s policy towards foreign investment “very shallow and not thought through”, and led a breakaway faction of the ruling Inuit Ataqatigiit party to call for a referendum on the law. This triggered fresh elections that brought back to power the social democrats from Siumut, the dominant party since the first parlamentary elections in 1979, in a coalition with Olsen’s Parti Inuit and the centre-right Atassut. New PM Aleqa Hammond’s cabinet has stressed support for developing mining into the country’s main industry, vowing at the same time to revise the ‘large-scale law’ before next year.

Greenland (population 56,186) increasingly seems like a place to watch.

Paying for all that belt and road

Is China tying its financial stability to stuff like this?

An important article by economist Christopher Balding from back in May discusses the problems with China paying for its wildly ambitious (over-hyped?) One Belt, One Road infrastructure project:

Such doubts might seem spurious, given the numbers being tossed around. China claims nearly $900 billion worth of deals are already underway, with estimates of future spending ranging from $4 trillion to $8 trillion, depending on which Chinese government agency is doing the talking. At the conference itself, Chinese President Xi Jinping pledged another $78 billion for the effort, which envisions building infrastructure to link China to Europe through Asia, the Middle East and Africa.

From no other country in the world would such pledges be remotely plausible. Yet even for China, they’ll be difficult to fulfill without clashing with the country’s other objectives.

Comrade Balding, as he styles himself, crunches the number in a bit more detail on his blog:

  1. Let’s use the $5 trillion over 5 years number reported by Nataxis (which I would highly recommend reading their research report on financing OBOR which is a link in the BV piece) but also note that other outlets like The Economist have reported similar numbers (theirs was $4 trillion). Use simple numbers for our purposes and assume it is all equally divided into equal blocks so every year sees $800b-$1t per year in overseas lending by China. That is an enormous, enormous, enormous jump in overseas lending. For thought experiment purposes, we have even extend this to 10 years. To put this in perspective, ODI from China to the ROW in 2016 after an enormous surge was $170 billion. Then ODI is down 49% YTD from 2016.
  2. Assume that all OBOR lending is done in USD, this means that either a) China is going to tap PBOC USD or b) they are going to do tap the USD bond market to fund these lendings. If China taps PBOC FX reserves to pay for this, with the numbers reported, they will have no USD left in the reserves. None. Zero. Zilch. In fact, not only will they have nothing left, they will have to begin borrowing on international USD to fund investments in such credit worthy places as Uzbekistan. For simplicity sake, assume they plan to invest $5 trillion, they use up all $3t in PBOC FX reserves and then they have to go borrow $2t on international markets. Frankly, this is a crazy financial risk by China.
  3. However, it isn’t fundamentally any better if China opts for option B to raise all the funding on international USD bond markets. If China raises the entire amount, as Nataxis noted, this raises Chinese external debt levels by about 40% of GDP and more importantly makes China exceedingly risky to any type of devaluation. Even small devaluations of the RMB would then become important. All of a sudden China becomes a very risky borrower with high levels of external debt and an increasingly risky tie to the USD. What is so crazy about this situation is that China has tied itself and its stability to the USD to Pakistani bridge repayment. Stop and wrap your mind around that for one second.

More at the link.

Balding’s conclusion in the Bloomberg article seems exactly right: “But it’s almost certain that the amount of money that makes its way into Belt-and-Road projects will be significantly lower than advertised. Grand in ambition but short on details, Xi’s sweeping initiative may be better thought of as a “philosophy” or “party line,” rather than a fixed commitment.”

China will almost certainly spend/loan a LOT of money to build the B&R, but it won’t be $5 trillion over five years (I mean, seriously). But over the long term, it will still be a lot.

Notably, the B&R doesn’t have a timeframe, which could mean either that the project is more of a marketing gimmick than a reality — or that China is simply in this for the long haul:

The only internal instructions that have come so far, have been from Zhongnanhai [China’s top leadership], and are about banning words like “project” (because the word connotes a goal and timeline, Beijing prefers the looser term “initiative”) as well as banning the publication of official maps purporting to show the scope of OBOR [One Belt, One Road].

Billionaires in one country

Lots of new billionaires are cropping up in China – with a catch:

The Chinese mainland added an average of two new billionaires to its super-rich list every week last year, according to new report, helping Asia replace the U.S. as the world’s most fertile cradle for individual wealth.

The report released Thursday by the investment firm UBS AG and consultancy PricewaterhouseCoopers (PwC) said 101 of the 162 Asians whose personal wealth passed the $1 billion threshold for the first time in 2016 were Chinese citizens.

China’s new billionaires helped boost Asian membership of the ultrawealthy club to 637 last year, compared to 563 in the U.S., according to the firms’ annual Billionaires Insight Report. It marked the first time that Asia could be called home to more billionaires than the U.S.

The report covered 1,542 billionaires residing in 14 markets worldwide. They account for about 80% of all individual wealth held by the world’s super-rich.

The catch is pointed out by economist Christopher Balding:

Comrade Balding‏
This omits one key issue: if you are a billionaire in China, you are only a billionaire in China. You are not a global billionaire

Woke Charles Bingley‏
why is that?

Comrade Balding‏
Officially, you are allowed to move $50k per year out of China. Unofficially you can move a little more but definitely not enough

Woke Charles Bingley‏
Wow I did not know that!

Comrade Balding‏
If you really wanted to you could find ways to move more than that but no where near tens or hundreds of millions

Ian‏
Some seem to be able to buy English Football Clubs and American film studios though.

Comrade Balding‏
Those deals haven’t happened for a while

Ian‏
They have tightened up a lot recently. It’s like Greece & Russia the smart or connected ones have already got their money out

Comrade Balding‏
assets are still on the Mainland. Just because its owned by a Cayman holding corp doesn’t mean the asset is out of the country

Ian‏
Like Wolverhampton Wanderers or Birmingham City or Aston Villa all owned by Chinese “businessmen”

Graham White‏
It’s only $50k of personal wealth. If you are a Chinese billionaire your company can buy overseas assets, eg London property, and sell on.

Comrade Balding‏
2017 has really cracked down on any movement and definitely not enough to move significant portion of wealth if desired

Robert Wishart 魏罗斌‏
Because you cannot move your money abroad?

Comrade Balding‏
Exactly. Not any material amount

“Captive billionaires” might be a better term for people who are billionaires within the borders of China, but millionaires everywhere else.

What did they talk about?

Would’ve been interesting to be a fly on the wall of Zhongnanhai during this particular meeting:

Steve Bannon flew to Beijing last week for a secret meeting with the second most powerful Chinese Communist party official, less than a month after the former chief White House strategist declared that America was at “economic war with China”.

According to one person in China familiar with the situation, Mr Bannon travelled to Beijing to meet Wang Qishan, the head of the Chinese Communist party’s anti-corruption campaign.

The meeting occurred at Zhongnanhai, the Chinese leadership compound, after Mr Bannon had visited Hong Kong to give a closed-door speech at a big investor conference hosted by CLSA, a Chinese state-owned brokerage and investment group.

“The Chinese reached out to Bannon before his Hong Kong speech because they wanted to ask him about economic nationalism and populist movements which was the subject of his speech,” said a second person familiar with the situation.

Mr Wang, who is seen as the second most powerful person in China after President Xi Jinping, arranged through an intermediary for a 90-minute meeting after learning that Mr Bannon was speaking on the topic, according to the second person, who stressed there was no connection to President Donald Trump’s upcoming visit to China.

He knows what’s up

Will they say no to that hot cuppa Joe?

Peking University professor Jeffrey Towson has a few things to say about Starbucks in China:

The amazing thing about Starbucks China is not just the consumer trend. It is that plus the absence of a major China competitor.

Starbucks is a very successful Western business that, for some reason, has no clone or serious domestic competitor in China. This is really stunning.

Try to think of another China situation like this. Nike fights against Lining. Samsung fights against Huawei and Xiaomi. KFC fights against virtually everyone. And so on.

There is no “Starbucks of China”.

Can confirm.

CEO Schulz has said they will open 500 stores a year in China, for the next five years. That would take them from about 2,600 today to 5,000 China outlets by 2021. That sounds big. It’s not for China. […]

Starbucks should be thinking in terms of +10,000 China stores.

Jeez. That’s more than the number of outlets currently in the US.

Changing consumer behavior is what Wall Street should worry about.
Chinese consumers are the most fickle group I have ever encountered. The behavioral differences between age brackets is vast. And the rate of change within each bracket is fast. Brands and products rise and fall all the time in the PRC. Take a look at the wildly swinging market shares of Samsung and Xiaomi over the past couple of years.

Starbucks is somewhat more exposed to these swings than most. [Reasons why]

Fascinating. Here’s another Towson article, from last year, about the singularity of the US coffee giant in China:

So why doesn’t Starbucks have a serious competitor in China? I’ve been asking people this for months and I still can’t get a good answer. It’s weird. […]

Explanation 3: Senior Chinese business have a blindspot for coffee. […]

What is really stopping a major company like China Resources from opening 500 stores? Why can’t Wanda take over all the coffee outlets in their +100 Wanda Plazas? They are doing exactly that in hotels and cinemas at the moment. Why aren’t the big boys of China entering this market?

Is it possible that the senior business people of China all grew up drinking tea and never really started drinking coffee? Maybe people like Wang Jianlin just don’t like coffee?

Maybe he just doesn’t like coffee

Final Explanation: It could still be a fad.

This is the explanation that worries me. There is a possibility that retail coffee in China is, to some degree, a fad. Drinking expensive coffee with friends in a nice setting is still relatively new for most of China. This has only been going on for 5 years or so for most people. It is also sort of a status thing and Chinese consumers are notoriously fickle about what is currently cool. Is this somewhat a fad? Could the retail coffee market shrink by 20%? What if millennials lose interest? Could it ultimately be limited to just a small niche of the population? I think it is definitely possible. Maybe big companies are staying out because they don’t really believe in it long-term.

The prevalence of Starbucks in major cities is one of the most visible and obvious signs of international influence in China, and the Frappuccino-sipping, iPhone-wielding yuppie in Shanghai or Beijing is a staple of dumb commentary by foreign observers like our Instant China Expert.

If coffee-drinking in China does indeed prove to be a short-lived fad, and Starbucks ultimately shrivels without being replaced by a major foreign or homegrown competitor, then that could deal a significant blow to the narrative that China is westernizing. China will seem a little more foreign and confusing to many outsiders commenting on it.

Fun fact: The average Chinese drinks about five to six cups of coffee per year, compared to about 300 in the US. (Towson says that in 2013, it was 4 cups in China vs. 441 cups in the US and, amazingly, over 1,000 cups in Norway.)

Bonus: Here’s an article I wrote about Starbucks buying out its East China joint venture.

Mingtiandi cited in the Chicago Tribune

Nice to have an article of mine cited in the Chicago Tribune (emphasis added):

A Chicago developer said construction of the 98-story Vista Tower, which will be the third-tallest building in the city once completed, is unaffected despite major changes to the Chinese company that is backing the condominium and hotel project.

Magellan Development Group’s $1 billion East Wacker Drive skyscraper is one of several commercial real estate properties caught up in a Chinese government crackdown on high-leverage investments overseas.

Billionaire Wang Jianlin’s Dalian Wanda Group, Magellan’s equity investor in the Chicago tower, is in the midst of a major company restructuring as the result of heavy pressure from the Chinese government over its investments in the U.S. and other countries.

On Wednesday, Wanda Hotel Development Co. — which is publicly traded in Hong Kong — disclosed that it is selling stakes in real estate projects including the Chicago tower to a privately held company controlled by Wang’s family. That company is called Dalian Wanda Commercial Properties Co.

While the sale simply amounts to shifting ownership stakes from one Wanda Group affiliate to another, it could signal more changes are ahead. Mingtiandi, a newsletter and website that covers the Asian commercial real estate market, said it could be a step toward Wanda eventually selling ownership stakes of properties in cities including Chicago, London and Sydney.

But Magellan President David Carlins said he’s had no discussions about a potential sale from Wanda Group.

“We have not heard anything about (a sale), and there would have to be conversations about that, because it would require our consent,” Carlins said.

Wanda Group representatives did not immediately respond to a request for comment.

Here’s the Mingtiandi article referred to above:

Dalian Wanda Group is selling stakes in nearly $4.5 billion in real estate projects across the UK, US, China and Australia to a privately held company controlled by its chairman Wang Jianlin, according to an announcement to the Hong Kong stock exchange on Thursday.

The asset sale is part of what the company says is a $1 billion restructuring after the property and entertainment conglomerate became a focal point for a Chinese government crackdown on cross-border deals and excessive leverage over the past few months.

Analysts believe that the restructuring is likely to be an intermediate step in Wanda ultimately selling off its interests in property projects in London, Chicago, Sydney and other locations, that made it into one of China’s best known players during the country’s 2012 to 2016 “go global” spree.

Sounds about right

From the weirdly-named BLARB (aka Blog of the Los Angeles Review of Books):

Class anxiety is rife [in China], since class mobility is surprisingly limited with many of the traditional routes to advancement, such as education, now shut down. Research by the University of Sydney’s David Goodman has found that around 84% of today’s elite are direct descendants of the elite from pre-1949. This suggests that six decades of Communism may not have a dramatic impact upon the elites, who have the advantage of decades of capital accumulation — including economic, cultural and social capital — which have apparently continued to benefit them under the party-state system.

A rather shocking statistic.

Or maybe not.

In the linked interview, Goodman refers to a separate study that estimates the rate of intergenerational transfer of wealth and status in most of the world is about 73%.

If the “myth of the middle class” – i.e. social mobility – is indeed a myth (and not only in China), what happens when people stop believing in it?

Where are the internet startups?

Is the age of the internet startup over?

We haven’t had a major new technology company in more than 10 years.

Silicon Valley is supposed to be a place where a couple of guys in a garage or a dorm room can start companies that change the world. It happened with Apple and Microsoft in the 1970s, AOL in the 1980s, Amazon, Yahoo, and Google in the 1990s, and Facebook in the 2000s.

But the 2010s seem to be suffering from a startup drought. People are still starting startups, of course. But the last really big tech startup success, Facebook, is 13 years old.

Until last year, Uber seemed destined to be Silicon Valley’s newest technology giant. But now Uber’s CEO has resigned in disgrace and the company’s future is in doubt. Other technology companies launched in the past 10 years don’t seem to be in the same league. Airbnb, the most valuable American tech startup after Uber, is worth $31 billion, about 7 percent of Facebook’s value. Others — like Snap, Square, and Slack — are worth much less.

So what’s going on? On a recent trip to Silicon Valley, I posed that question to several technology executives and startup investors.

“When I look at like Google and Amazon in the 1990s, I kind of feel like it’s Columbus and Vasco da Gama sailing out of Portugal the first time,” said Jay Zaveri, an investor at the Silicon Valley firm Social Capital.

The early internet pioneers grabbed the “low-hanging fruit,” Zaveri suggested, occupying lucrative niches like search, social networks, and e-commerce. By the time latecomers like Pinterest and Blue Apron came along, the pickings had gotten slimmer.

But others told me there was more to the story than that. Today’s technology giants have become a lot more savvy about anticipating and preempting threats to their dominance. They’ve done this by aggressively expanding into new markets and by acquiring potential rivals when they’re still relatively small. And, some critics say, they’ve gotten better at controlling and locking down key parts of the internet’s infrastructure, closing off paths that early internet companies used to reach a mass market.

As a result, an industry that used to be famous for its churn is starting to look like a conventional oligopoly — dominated by a handful of big companies whose perch atop the industry looks increasingly secure.

Not so much

Also worth pondering (article from last October):

At the grass roots of the economy, venture capital investment has sought social media, apps and other “soft” investments with low capital and labor requirements and avoided “hard” investments in manufacturing, telecommunications and other fields with large capital and labor requirements.

During the 1980s and 1990s, America dominated technological progress through a group of disruptive new companies—Microsoft, Google, Cisco, Intel, Oracle and others. The former technological vanguard, though, has turned into a group of stable consumer monopolies. This is clear from the trading pattern of their stocks. We see that the technology subsector of the S&P 500 equity index traded with a volatility (standard deviation of returns calculated over a rolling six-month period) roughly double that of the overall index during the late 1990s and early 2000’s. That reflects the greater risk and reward attached to innovators as opposed to established companies. By the late 2000’s, the volatility of the tech sector was the same as that of the overall index. The risk (and also the prospective reward) had shrunk to the overall level of the economy as the great wave of innovation dissipated.

Mystery boss

Ever wonder who owns HNA Group, the Fortune Global 500 conglomerate that is one of mainland China’s most aggressive overseas investors?

Well, keep wondering:

Mr Guan [HNA’s biggest shareholder] serves as co-chairman with Mr Chen’s son in a peer-to-peer financing platform owned by HNA, but he otherwise leaves few traces for a man who wields billions in assets.

He first bought into HNA subsidiaries seven years ago, through an investment vehicle that operates out of HNA’s Beijing offices. But HNA says Mr Guan is a “private investor” who does not work for the company.

Chinese corporate registries list several other business addresses for Mr Guan. One leads to the “Oriental Aphrodite Beauty Spa”, a street-side salon in a residential neighbourhood in western Beijing. The current owners say he sold the salon about five years ago. Another address led to a locked door in a shabby Beijing office building. His residence, according to Hong Kong corporate filings, is a nondescript apartment in south-west Beijing whose current occupant says she moved in a few months ago.

Reached by mobile phone, Mr Guan said: “It is inconvenient to answer any of your questions.”

Nice article and good reporting by FT.