China Selects Rural Area for Economic Pilot Program

In a fascinating and much-anticipated move, China has finally selected a province to begin a pilot project for financial reforms in the rural economy. Lishui in coastal Zhejiang will be the focus for the pilot program intended to help bridge the gap between the villages and the cities in terms of wealth. The People’s Bank of China (PBOC) has published guidelines for the pilot program with instructions to help the city of Lishui to build a financial infrastructure.

As the central bank said in a published statement on Thursday, "Through financial reforms and innovations, our goal is to set up a multi-layer, low-cost, wide-coverage modern rural financial service system in the pilot area."

China’s economy has a great deal of imbalance due to the financial differences in the urban and rural areas. The goal of the program is to help to create more economic stability by distributing the wealth more evenly and by helping those in rural populations to gain a better economic footing.

China Consumer Sector Booming According to DBS Group Research

According to many, the Chinese consumer sector is really the hot spot to watch at the moment. As DBS Group Research explains, the consumer sector allows for "beauty of both sides."  This means, as they explain it, that these consumer companies offer "better resilience during the harsh times as well as fruitful returns whenever skies clear again."

The Chinese government is encouraging this emphasis as well, creating policies that help with consumption. They have focused on increasing minimum wage, limiting the medical costs that individuals can accrue, building more affordable housing and increasing transportation systems.

As the yuan continues to appreciate, this also increases the potential purchasing power that mainlanders have.  There will be more interest in gold, luxury items and high-end merchandise, according to the DBS Group. In addition, the government implemented energy saving subsidies in 2011 that will help the home appliance industry.

Companies to watch, according to the DBS Group include: China Foods, China Resources, and Golden Eagle Retail Group.

Trade Between China and North Korea Dramatically Increases

In a fascinating turn of events, North Korea is taking notes from China and starting to create megamarts like Walmart.  Pyongyang will soon have a superstore like Walmart.  The new consumer approach in North Korea is part of an official campaign that they launched three years ago to build up their economy – and to change the image of their leader Kim Jong Un.

The Kwangbok area supermarket in downtown Pyongyang is the first of these examples.  Consumers there can get everything from Minnie Mouse pajamas to popcorn to frying pans.  As shopper Pak So Jong said, "It is very good to come to this shop and buy goods which I like by feeling them and looking over them myself."

The Chinese has been introducing these cheap goods to a small niche market in Northern Korea in the country’s border regions.  Time will tell if it will take off, and if this will be a brilliant economic move for China.

Trade between China and North Korea has been booming for the last few years.  In 2010, North Korea did $3.5 billion in trade with China, which was a 30% increase from the year before. That figure increased to $5.1 billion in the first 11 months of 2011, a 70% increase from 2010.

China: The “Last Untapped Market on Earth”

China consumer spending is on the rise, and it’s showing that China can be a powerhouse for companies selling a vast range of products.  At the Central Economic Work Conference in December, policymakers said that they will "increase the proportion of the middle class" in 2012 and that this will transform the country from one where products are made to one where they are purchased.

Retail sales rose 17% from January through November of 2011.  President Hu Jintao is hoping that retail sales will increase by more than 15% annually over the coming five years and that they will get to 32 trillion yuan by 2015.

In addition, by 2015, China may actually beat out Japan as the world’s center for luxury market goods, according to research that was released by McKinsey & Company.

And companies are starting to follow suit. Apple Inc. recently changed its line that says, “Designed din California, Made in China” to say “Designed in California, Made for China” for its new Shanghai store.

Tesco China, the UK-based grocery and merchandising retailer has more than 100 outlets in China.  Their corporate affairs senior vice president Lu Haiqing said, that China is the "last untapped market on Earth."

Hotel Business Booming in China

China’s hotel business appears to be booming – and getting stronger all the time.  Although it’s been a difficult time for hotels in American and Europe, Charlie Dang the general manger of Northern China for Starwood Hotels & Resorts Worldwide Inc. says that, “We haven’t felt the crisis that they are experiencing in the US and Europe."

The Crowne Plaza Hotel, for instance, reported an 80% occupancy rate during the summer, and a 60% rate during the winter.  As the hotel’s PR manager Ren Shixuan said,

"These are very good results for us.”

The demand and growth is actually coming from the domestic market, and not from outside sources.  Dang explained that for their hotels, they don’t rely on international businesses anymore, but that they focus much more on the domestic market. He says that the domestic clientele makes up 60% of their business across their 22 hotels in Northern China.

Konstanze Auernheimer, director of marketing and analysis at STR Global which has tracked hotel occupancy levels in China, said,

"The economic development of China makes it an attractive hotel development market as more hotel rooms are needed."

New Introduction to the Chinese Finance Market

 

China may be launching an exciting new plan for the finance market – junk-bonds.  The China Securities Regulatory Commission (CSRC) has been in meetings with executives from the various brokerage houses and discussed having a market for high-yield bonds.

Zhou Ruanfan, a senior vice president from the Pengyuan Credit Rating Co. Ltd. Was quoted by the China Business News as saying that CSRC has already drafted rules for the bonds. These bonds would offer higher yields and more risk than the typical investment-grade corporate bonds that are already offered.

Those in the know agree that a high-yield bond market will help to support China’s economic growth by offering financing to smaller firms, as Yin Jianfegn explained.  As Yin said,

"Rating agencies will gain, underwriters will gain, companies will gain, and investors may gain as well.”

However, Yin warned that the junk-bond market won’t transform the financial market overnight.  As Yin said, "It would be unrealistic to expect the junk-bond market to make a fundamental change in China's bond market structure.”

 

New Year Spending Up With Year of the Dragon

China’s week-long Lunar New Year is always good for the financial sector – and this year was no exception.  The retail sector saw a 16.2% surge year on year to 470 billion yuan ($67.87 billion) during the New Year holiday recently. Consumers were seen to enjoy purchases on food, wine and clothes.

The commerce minister reported that sales on clothes was 18.7%, jewelry rose 16.4% and food rose 16.2%, according to a statement that was posted on the ministry website on Saturday.

The peak travel period, from January 8th, 2012 to February 16th was also supposed to be very good for business.  Chinese people typically travel to be with family and friends during the holiday period. Trips on trains, planes and boats were expected to reach 3.2 billion during the height of the travel period, creating a 9.1% increase from last year.

Private Equity Firm Invests in China Outfitters

Many eyes are on men’s casual wear companies at the moment in China. The global private equity firm KKR & Co L.P. has announced that it plans to invest US$60 million in the Hong Kong initial public offering of China Outfitters Holdings Ltd 1146.HK.

As David Liu, CEO of KKR Greater China, said,

“The menswear market in China has enormous growth potential. Market leaders such as China Outfitters have significant room to increase market share.”

Private equity firms have been moving more into the field of offering pre-IPO financing. This field, prior to the 2008 financial crisis, was almost exclusively filled with hedge funds.

China Outfitters has menswear manufacturing and sales locations in China, but also have a long list of foreign brands. Their foreign brands include JEEP, Santa Barbara, Polo & Racquet Club and London Fog. In China, they make and sell menswear.

Baby Business Booming in China

Those in the baby business should definitely take note of China’s family planning. According to the National Bureau of Statistics predictions, China will experience a massive population boom from 2005 through 2020, with the country’s birth rate peaking in 2016.

Even more significantly, many Chinese families will target 2012 as the year to have a child, as it’s the year of the dragon. This icon symbolizes power and wealth, and 5% more babies are born under the dragon than are born with any other symbol.

As Jessie Guo, Jefferies Group Inc.’s Hong Kong-based head for consumer research in Asia, recently said, “The baby boom is a good investment idea in the near term. The growth is likely to sustain for the next two to three years.”

Michele Mak, a consumer-sector analyst at BNP Paribas chimed in and said, “The dragon year baby boom is almost a sure thing, which will boost the demand for infant products such as baby formula, diapers and clothes.”

Many people still believe that China has a strict one-child policy; that policy from 1979 has been modified to accommodate for China’s aging labor force. Couples who are both only children are now being allowed to have two kids of their own; and rural couples whose first child is a girl older than four are also allowed to have another child.

With the rise in income, this is set to create a niche market for baby-food and baby-care products that many would be smart to be part of.

Chinese Study on Branding Shows Important Changes

Agency Millward Brown and media company WPP have recently looked into Chinese branding and consumer opinions. Looking at the 50 most valuable Chinese brands, they found that 83% of consumers outside of China couldn’t name a single Chinese brand or company.

China, of course, wants to create a global present, as Adrian Gonzalez, the head of Greater China at Millward Brown, explained. Chinese brands clearly need to do much more work to become distinguishable in the competitive marketplace internationally.

In China, however, the brand study found that, of the 35,000 consumers, Chinese brand value has grown to US$325 billion in the last year. This is a 16% increase from the previous year.

Gonzalez said that today, “We’re seeing in many cases now that foreign companies feel the best way to succeed in China now is through acquiring a Chinese company.” He pointed out that this was not the case previously.

The study also showed a significant change in the use of state-owned enterprises, as the study showed that “Government protectionism is starting to wear thin.” This is a dramatic contrast to the findings in the 2010 study. Half of the brands that were on the list that were less favorable with consumers were state-owned.