China Daily commentary

The silver lining in high-priced urban land — China Daily commentary

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For those of us living in prosperous first- and second-tier cities in China, the land beneath our feet is exploding in value. Every week seems to set a new price record, as real estate developers buy up land to build on in Beijing, Shanghai, Shenzhen, Guangzhou, Hangzhou, Nanjing and elsewhere.

This has two ill effects. First, it adds more upward pressure on already high housing prices. Second, since the land buyers have mainly been large State-owned enterprises, they will need to sell the apartments they plan to build at one of highest prices per square meter in the world to make profits. It’s another matter that the SOEs are meant to help solve, rather than exacerbate, the serious lack of affordable housing for China’s ordinary urban population.

But there is one hidden and perhaps surprising benefit. The high and rising land prices are confirmation that land sales are becoming more transparent, less prone to potential favoritism and insider dealing. That is ultimately good for just about everyone in China. In the recent record-high land sales, the seller is the local government. In some cases, the price paid was more than double of what the government itself estimated the land would fetch. So it is up to the government now to spend the windfall wisely, in ways that will improve living standards for everyone in the city.

Too often in the past, urban land for residential development was sold for less than its true market price. The unfortunate result was that a comparatively few lucky real estate developers were able to buy land at artificially low prices and then make unconscionably high profits. Not for nothing was it said over the past 20 years that the easiest way in the world to make big money was to become a realty developer in one of China’s major cities.

When a local government sells land at artificially low prices to developers, it can amount to a transfer of wealth from China’s ordinary folks, the laobaixing, to those favored real estate companies. That’s because the developers take the cheap land and then build and sell expensive apartments on it. And the government itself gets less revenue than it should have. This means less money to spend on services that benefit everyone: urban transport, affordable housing, schools, parks, hospitals and the like.

Few Chinese developers have mastered the art and business of building and marketing high-quality apartments on time and within a set budget. Apartment prices have almost always risen during the three years it takes to go from an undeveloped plot to a finished building. If a developer got a good deal on land, he/she was able to sell the new apartments during construction, use the cash to pay off the bank loans and lock in a very high profit.

Going forward all this will become far more challenging. When a developer goes bankrupt, the real victims are usually the ordinary folks who have bought apartments during the construction phase. Time and again, it has proven difficult, nerve-wracking and time-consuming for these buyers to get their money back or make sure the apartments they bought are completed.

As the risk of bankruptcies rise with land prices, I’d like to see rules requiring residential developers to buy insurance to automatically reimburse buyers in case they go bust. The insurance will also put additional and useful pressure on developers to complete work on time and maintain an acceptable quality. If the developer isn’t making progress, or there are other signs of trouble, the insurance company would either withdraw coverage and reimburse buyers or require a new and more reliable developer to take over. Either way, the goal must be to protect, in a transparent and predictable way, the investment of ordinary homebuyers.

Up to now, too much pressure and risk has landed on the shoulders of buyers rather than builders, with cities also short-changing themselves. A fairer and better balance may now be emerging.

The author is chairman and CEO, China First Capital.

http://www.chinadaily.com.cn/opinion/2016-06/22/content_25798648.htm

Reworking a formula for economic success — China Daily Commentary

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Reworking a formula for economic success

By PETER FUHRMAN (China Daily) Updated: 2016-04-08

Reworking a formula for economic success
An assembly line of a Daimler AG venture in Minhou, Fujian province.

My on-the-ground experience in China stretches back to the beginnings of the reform era in 1981. Yet I cannot recall a time when so much pessimism, especially in English-language media, has surrounded the Chinese economy. Yes, it is a time of large, perhaps unprecedented transition and challenge.

But the negative outlook is overdone, and starts from a false premise. China does not need to search for a new economic model to generate further prosperity. Instead, what is happening now is a return to a simple formula that has previously worked extraordinarily well: applying pressure on China’s State-owned enterprises to improve their efficiency and profitability, while also doing more to tap China’s most abundant and valuable “natural resource”-the entrepreneurial spirit of the Chinese people, the talent to start a company, provide new jobs and build a successful new business.

These two together provided the impetus for the economic growth since the 1990s. In the 1990s, SOEs accounted for perhaps as much as 90 percent of China’s total economic output. Today, the SOEs’ share has fallen to below 40 percent by most counts. Once the main engine of growth, SOEs are now more like an anchor. Profits across the SOEs have been sinking, while their debt has risen sharply.

Arresting that slide of SOEs is now vital. SOE reform has long been on the agenda of the Chinese government. But such a reform has become more urgent than ever, as well as more difficult. There are fewer SOEs today than in 1991 when serious SOE reform was first undertaken. Among those that remain, many are now extremely big and rank among the biggest companies in the world. The restructuring of any such large company is always difficult.

China, however, has taken some key first steps in that direction. The Chinese government has divided SOEs into those that will operate entirely based on market principles and those that perform a social function. It is downsizing the coal and steel industries, two of the largest red-ink sectors. Senior managers of some large SOEs have been dismissed or are under investigation for corruption, and experiments linking SOEs’ salaries more directly with profitability are underway.

Less noticed, but in my opinion, as important is a strong push now at some SOEs and SOE-affiliated companies to become not better but among the best in the world at what they do. Tsinghua Unigroup in semiconductors, China National Nuclear Corporation and China General Nuclear Power in building and operating nuclear power plants, and CITIC Group in eldercare are seeking global glory. They are trying to sprint while most other SOEs are limping.

Luckily for China, the overall situation in the entrepreneurial sector is far rosier. All it needs is a more level playing field. Important steps to further free up the private sector are now underway-taxes are being cut, banks pushed to lend more, and markets long closed to protect SOE monopolies are being pried open. Healthcare is a good example in this regard.

All these moves are part of what the government calls its new “supply side” policy. The aim is to demolish barriers to competition and efficiency. Chinese entrepreneurs have shown time and again they have world-class aptitude to spot and seize opportunities. They are leading the charge now into China’s underdeveloped service sector. This, more than manufacturing or exports, is where new jobs, profits and growth will come from.

Opportunities also await smart entrepreneurs in less efficient industries like agriculture, in getting food products to market quickly, cheaply and safely. In cities, traditional retail has been hit hard by online shopping. Struggling shopping malls are becoming giant laboratories where entrepreneurs are incubating new ideas on how Chinese consumers will shop, play, eat and be entertained.

China’s economy is now 30 times larger than what it was in 1991, and far more complex. The private sector 25 years ago was then truly in its infancy. But, there is still huge scope today for China to gain from its original policy prescription: prodding SOEs to get in line for reform while letting entrepreneurs meet the needs of Chinese consumers.

The author is chairman and CEO of China First Capital.

http://www.chinadaily.com.cn/opinion/2016-04/08/content_24364851.htm

More investment options would check home prices — China Daily commentary

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More investment options would check home prices

By Peter Fuhrman (China Daily) Updated: 2016-03-17 07:57

More investment options would check home prices

Homebuyers at the sales center of a property project in Nanjing, Jiangsu province, on Feb 29. Cities like Nanjing and Shanghai have announced preferential housing tax policies, which have ignited local enthusiasm for home-buying. [Photo provided to China Daily]

China’s banks, financial regulators, government officials and homeowners can all perhaps breathe easier. Despite surface appearances, China’s over-heated property market will not collapse as the US housing sector did in 2008, taking much of the world economy down with it. Yes, there are danger signals in China’s enormous real estate industry. China’s problems are real and need addressing, but the differences with the United States are large and decisive.

Start with the fact the US housing crash was brought on by lax lending practices, a politically rigged regulatory system and a debt-fueled “buy-and-flip” short-term investment strategy. Another fundamental difference: in the US buying a house with borrowed money is subsidized by the tax code. Not so in China. China also, thankfully, has nothing like the subprime “Ninja Loans”-meaning loans to those with no income, no job, no assets-that were widely available in the US before the crash.

The biggest risk in China is not a US-style tidal wave of failed mortgages that leave families homeless and banks insolvent. Instead, the risk comes from an unbalanced flow of capital into property investment. Too much of China’s total savings are now going into this one form of investment. While buying apartments has long been popular, other types of investments-especially in the stock market and in unregulated fixed-income securities-have suffered a big decline in popularity in recent months, with good reason.

The weight of all that additional money flooding into property investment inevitably pushes housing prices up, especially for apartments in major cities. Putting more land on the market for development and building more low-cost housing are both good moves.

But the best way to cool China’s housing market both now and for years to come is to have more good and safe alternatives for people to invest in. This will take some time as well as a strengthened regulatory and legal environment. But changes are urgently needed.

Meantime, the government should continue its policy to gradually expand the amount of money Chinese can legally invest in shares and mutual funds outside China.

Chinese savers and investors, like those in other countries, look for the highest return at the lowest possible increment of risk. In the last nine months, this risk-return calculus has undergone some profound changes. That’s not only because of the steep slide in the stock market since July last year, which caused many Chinese investors to pull their money out.

Other hot areas have tumbled just as sharply, as slowing growth exposed the risks of these alternatives. Wealth management products are basically a form of collateralized lending direct from savers to larger Chinese companies and municipalities. Investors have grown more worried about defaults and other signs of mounting trouble among borrowers. The interest rates on offer don’t seem adequate to compensate for the risk.

Even more worrying is what’s happened of late in so-called peer-to-peer (P2P) lending. This was until recently the hottest new way for individuals to earn big money with their savings.

The amount of money invested in P2P lending last year nearly quadrupled from 2014 to 982 billion yuan ($149 billion). But P2P investors’ worst fears came true when one of the bigger P2P loan packagers, Ezubao, suddenly went bust in January. Ezubao had offered mostly fake investment products to nearly one million Chinese investors, with promises of annual returns of up to 15 percent. Ezubao allegedly took more than 50 billion yuan from investors. Sadly, the cardinal rule of investing, “if something sounds too good to be true, it probably is” is not as widely observed in China as it should be.

Little wonder then that investing in property should now seem to many Chinese like the safest and sanest investment, apart from putting money in a State-owned bank. While the investment logic is sound, the unfortunate result is that buying a place to live in is getting too expensive for too many people in China, especially in Beijing, Shanghai and Shenzhen.

More than most other places, China’s housing market is dominated more by investors looking for profits than people looking to put a roof over their head. The balance needs to be restored. For that to happen, these investors need to find other places to invest that offer the potential for equally attractive risk-adjusted returns.

The author is chairman and CEO of China First Capital.

http://www.chinadaily.com.cn/opinion/2016-03/17/content_23903326_2.htm

 

Shining lights brighten future of SOEs — China Daily Commentary

 

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Shining lights brighten future of SOEs

By PETER FUHRMAN (China Daily) Updated: 2015-10-23 07:29

Shining lights brighten future of SOEs
While the need for SOE reform is great and too many SOEs still fight to maintain the troubled status quo, there are also some Chinese SOEs leading by example.

As China’s leadership prepares its 13th Five-Year Plan (2016-20), it confronts multiple economic challenges, reform of State-owned enterprises being one of them.

Shining lights brighten future of SOEs

SOEs account for at least 30 percent of China’s total GDP. Some estimates put the share as high as 45 percent. But there are two worrying signs of the worsening situation for China’s SOEs: Their profits are dropping and indebtedness is rising sharply. According to the Ministry of Finance on Wednesday, the profits of the SOEs from January to August decreased by 8.2 percent year-on-year, while the total debt of SOEs from January to September has surpassed 77 trillion yuan, a 20 percent year-on-year increase.

Last month, the government introduced its guidelines for the next stage of SOE reform, including more outside capital. The guidelines are in the right direction, but, there is also some enormous potential within the SOE sector in China that, if unleashed, would also help contribute to the overall turnaround.

There are centers of research excellence, especially in applied engineering, on par with the best in the US and Europe. One example is the China Iron and Steel Research Institute Group in Beijing. It employs 2,000 staff with doctorates along with other experienced research scientists. Every visit, I leave impressed not only by the commitment of the large staff, but also the level of the research institute’s globally-important innovation.

If there is an area that needs improving-one not uncommon for SOE research institutes-it is in how to commercialize their many technologies and how to initiate and structure profitable licensing deals, both with other SOEs in China and global steel and new materials companies. The Institute, based in Beijing’s Haidian district, is making great strides, but, a greater focus as well as a stronger push from the government to get technologies out of the lab and into factories would be helpful.

SOEs too often focus excessively on increasing gross output rather than on pleasing customers and accumulating profits. One positive mold-breaker here is Yangzhou’s AVIC Baosheng Group, which makes steel and copper cable. Though operating in a brutally-competitive market with lots of competitors, Baosheng holds its own. Also in Yangzhou are two examples of how SOEs can take a valuable traditional brand name and rejuvenate it. Restaurant chain Yechun Teahouse and cosmetic manufacturer Xiefuchun have both been around since the Qing Dynasty (1644-1911) and became SOEs in the 1950s.

Yechun is now opening beautiful restaurants both inside and outside China that maintain consistently high quality. Xiefuchun is more of a jewel-in-the-making, with great all-natural products in tune with buying trends in China and abroad. However, Xiefuchun is not as good as it could be on branding, packaging and retail, areas where SOEs often tend to do poorly. Xiefuchun, against all commercial logic, is now stuck inside a large SOE chemicals holding company.

Meanwhile, China Huadian Corporation stands out for its success doing something few SOEs have mastered-investing to build from the ground up and then running profitable large-scale projects outside China. All SOEs know about the central government’s “Go Global” policy. Huadian is getting it right and so has much to teach other globally-ambitious SOEs.

Then there’s my choice for most exceptional high-tech SOE in China, Sichuan Aerospace Tuoxin Basalt Industrial. Though little known, it could be a model for how SOEs might develop in the future. Based in Chengdu, 90 percent of the company is owned by the giant centrally-managed SOE, China Aerospace Group. Tuoxin internally developed a revolutionary process for using ordinary quarried stone to produce a lightweight waterproof, heat-resistant material with broad applications in everything from auto parts to wind-energy. It is on track to become a billion-dollar company within the next five years. Tuoxin suggests what more SOEs could be capable of.

But to get to where it is, Tuoxin needed an owner with long-term vision and patient capital, as well as a senior management team that wants to break out of the cocoon of supplying mainly other SOEs by partnering extensively with China’s private sector companies.

While the need for SOE reform is great and too many SOEs still fight to maintain the troubled status quo, there are also some Chinese SOEs leading by example. They are blazing a path toward a more productive and profitable SOE sector all Chinese can take pride in.

The author is chairman and chief executive officer of China First Capital

http://www.chinadaily.com.cn/opinion/2015-10/23/content_22260934.htm