Supreme court does not declare VIE's illegal - Paul Gillis

Paul Gillis

Company constructions via fiscal paradises, VIE's or variable interest entities, are regular ways to avoid corporate government restrictions in China, and under official attack just for that. The Supreme Court fielded a verdict on transactions by one of those VIE's, but - says accounting professor Paul Gillis on his weblog, it did not clarify whether VIE's might lose their validity.

Paul Gillis:

The court upheld the transaction, saying that the VIE was a Chinese corporation and there was no basis to void a completed contract between two Chinese corporations. The court did ask the Ministry of Education about the nature of the arrangement, and while the Ministry of Education acknowledged it was a conventional VIE arrangement, they did not express an opinion as to whether the arrangement was legal. 

What the decision appears to clarify is that the commercial transactions of a VIE are valid, and do not rest on whether the VIE is operating within the bounds of the foreign investment restrictions.  The decision does not relate to the validity of the VIE contracts between Ambow’s VIE and Ambow’s wholly foreign owned enterprise (WFOE). 

It is the enforceability of the  VIE contracts between the WFOE and the Chinese shareholders of the VIE that are of greatest concern to investors. In the Gigamedia case, these contracts were found to be unenforceable.  That concern remains.

More at the ChinaAccountingBlog by Paul Gillis.

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Mattel, do or die in China - Shaun Rein

Shaun Rein

Mattel has seen its earlier operations in China falter, but now closed a new deal with Alibaba to sell interactive learning toys on the fragmented Chinese toy market. For Mattel it is now do or die, says business analyst Shaun Rein to Reuters.

Reuters:

Alibaba's reach and China's preoccupation with education could give Mattel the thrust it needs to win over the country's so-called "tiger mothers", who aggressively push their children to be the best in school. 

"Chinese parents tend to buy more educational toys, science kits and learning toys than all their counterparts in America and Europe," said Shaun Rein, managing director of China Market Research Group. 

While Mattel has garnered a nearly 2 percent share of the estimated $31.5 billion toys and games market in China, it has been unable to replicate the success it has enjoyed in the United States... 

Mattel isn't the only U.S. company that has struggled to navigate the Chinese market. Wal-Mart Stores Inc (WMT.N) sold its online grocery store Yihaodian in China last year in return for a stake in e-commerce firm JD.com Inc (JD.O), saying the country's e-commerce market was hyper competitive. 

Several others including Home Depot Inc (HD.N), Hershey Co (HSY.N) and Costco Wholesale Corp (COST.O) have also struggled in China. 

For now, nearly everything is riding on Mattel's partnership with Alibaba. "It is just one of a hundred initiatives for (Alibaba)," said Rein. "But for Mattel, it is really do or die."

More at Reuters.

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Fewer people have more wealth - Rupert Hoogewerf

Rupert Hoogewerf

More wealth is concentrated in less hands, and the pace is accelerating, says Rupert Hoogewerf, chief research of the China rich list Hurun after publishing his Hurun Global Rich List, according to the CNBC. And most billionaires are living in China.

CNBC:

The world's billionaires are now worth $8 trillion, greater than the GDPs of Germany and France combined. 

According to the latest Hurun Global Rich List, published by the China-based Hurun Report research unit, there are now 2,257 billionaires in the world — up 3 percent from last year. 

Their combined fortunes jumped 16 percent over 2016, to the equivalent of 11 percent of the world's annual GDP. Their wealth was also larger than every country's individual GDP, other than the U.S. and China. 

"Billionaires are concentrating wealth at a supercharged rate," Rupert Hoogewerf, Hurun Report's chairman and chief researcher, said in a statement. 

Indeed, the number of billionaires has exploded over the past five years, rocketing 55 percent higher. Because much of the world's wealth is hidden or difficult to find, the actual number of billionaires may be closer to 5,000, Hoogewerf said. 

"While some billionaires go to extraordinary lengths to conceal their wealth, for the most part it is that they are discreet and prefer operating under the radar," he said.

More at CNBC.

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How Alibaba Pictures gets an advantage with big data - Jeffrey Towson

Jeffrey Towson

Alibaba is pushing into the entertainment industry. The internet giant has one huge advantage, traditional filmmakers can only dream of, says business professor Jeffrey Towson in the Nikkei Asia Review. "Alibaba is attempting to create a new type of smart production that replaces "big bets" with "big data"."

Jeffrey Towson:

Alibaba Pictures' cinemas naturally show a mix of the company's own films and ones from other domestic and foreign studios. Cofinancing and equity partnerships can play a role in this, as seen in the company's investment in Paramount Pictures' last "Mission Impossible" movie. Such partnerships are important because getting to international levels of quality has proved to be more difficult for Chinese studios than expected. 

Yet Alibaba Pictures is also making unconventional moves in distribution. With its Tao Piaopiao movie ticketing app, the company is subsidizing pre-release purchases. This gives it a two-week advance window to gauge interest in specific films and insight into what Chinese consumers actually want to see. The ticketing app in turn is linked to Alibaba Pictures' theater operations software, which is in use at some 70% of local cinemas for ticket sales, screen booking and other functions, further expanding the company's data gathering. 

Add to this distribution channels controlled by Alibaba Group, such as the Youku Tudou video streaming sites, the growing Alibaba Cloud computing service and UCWeb, a popular internet browser for mobile phones. In this way, Alibaba can see what hundreds of millions of Chinese consumers are buying and watching in real time. Compare that to to a typical film studio, which spends 1-2 years making a movie based mostly on a gut feeling and then hopes it will do well if there is a large marketing budget behind it. Alibaba is attempting to create a new type of smart production that replaces "big bets" with "big data".

More in the Nikkei Asia Review.

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Chinese investors shun Trump estates - Rupert Hoogewerf

Rupert Hoogewerf

Trump properties might have gotten some extra glamour after their name-giver became president of the United States. But China's rich have historically shown very little interest in the Trump assets, says Rupert Hoogewerf, chief researcher of the Hurun China Rich List, and it is unlikely it's going to change, he tells the New York Post.

The New York Post:

Like much of the luxury market right now, (New York real estate brokers) Maitland and Karadus’ listing struggled even before Trump stepped into the Oval Office. The unit originally went to market with Town Residential in December 2014 for $10 million. After a price cut to $8.95 million it was delisted in October 2015, then went on and off the market at that price with BHS. It just reappeared for $7.5 million. 

While buyers from China are not out of the question — Maitland says a recent Chinese investor said “no” to other neighborhoods and insisted on “Central Park, Fifth Avenue, Madison Avenue, Trump” — they’re less likely. Rupert Hoogewerf, publisher of Shanghai-based luxury magazine the Hurun Report, which tracks the spending habits of Chinese one-percenters, says the Trump name has historically held little appeal for that market. 

“I’ve talked to a lot of [wealthy Chinese] in the past about property in New York and other cities, and nobody has ever come forward and suggested Trump Tower,” he says. Instead, he notes, “it was always talk about new developments.”

More in the New York Post.

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Bad loans: government avoids bankruptcies - Paul Gillis

Add caption

The government has been pulling in bad loans, rather than letting companies face bankruptcy and letting the markets do the job. For China's leaders stability is key, says Beida accounting professor Paul Gillis to Reuters.

Reuters:

Stability is always uppermost in the minds of Chinese leaders, and even more so this year, ahead of the five-yearly party congress this autumn, when a new generation of senior leaders will be selected. 

"China is avoiding the crisis of calling in loans that can't be repaid anyway," said Paul Gillis, professor of accounting at Peking University's Guanghua School of Management. "This buys time to do things in an orderly way."... 

Premier Li also identified debt-for-equity swaps among key items in the toolkit for bringing down corporate debt, and the figures demonstrate their extensive use. 

Since October, China's banks have undertaken nearly 500 billion yuan in such swaps at more than two dozen firms, mostly state-owned coal and steel enterprises, according to analysts. 

That could double to more than 1 trillion yuan by next year, preventing as much as 3.5 trillion yuan in total loans from turning bad in the near future, according to estimates by Hou. 

"A lot of these loans needed to be looked at as equity in the first place," said professor Gillis. 

"There was never any realistic possibility that the companies would be able to pay them back," he added.

More in Reuters.

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China does not need bombs to win a war - Shaun Rein

Shaun Rein

South-Korea is not the first country to see China can fight an argument without sending the army in: Japan and France are just a few examples where tinkering with economic power was more effective, for example by redirecting its tourists. It is easier to bully South Korea than Japan," says business analyst Shaun Rein in the South China Morning Post.

The South China Morning Post:

Its heavy reliance on exports to China leaves South Korea more exposed to boycotts of its goods and services than Taiwan and Japan – both of which have been similarly targeted in the past by unofficial ‘sanctions’ imposed by the mainland. 

“South Korea’s economy over the last decade has really been geared towards selling to the Chinese consumer – everything from cosmetics to tourism to K-pop,” said Shaun Rein, managing director of China Market Research Group. 

“The level of Chinese media attacks is much harsher towards South Korea because they know how much of Korea’s economy is geared towards China. It is easier to bully South Korea than Japan. Taiwan has back up plans due to ongoing tensions, while Korea does not.”

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China: becoming part of the world - Zhang Ying

Zhang Ying

RSM professor Zhang Ying discusses China's relations with the EU and the US, after the election of Donald Trump as their president. China is becoming part of the world, says Zhang, and whoever is elected, those relationships will prevail.

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Beijing beats New York again as billionaire capital of the world - Rupert Hoogewerf

Rupert Hoogewerf

For the second year more billionaires call Beijing their home than New York, says the latest Global Hurun Rich List report. Concentration of capital into a few hands is outpacing the global creation of wealth, says Hurun chairman Rupert Hoogewerf to ECNS.

ECNS:

The new list ranked 2,257 billionaires, up 69 from last year and a growth of 55 percent or 804 over the last five years. 

Total wealth among billionaires increased by 16 percent to $8.0 trillion, equivalent to 10.7 percent of global GDP, and up from 7 percent of global GDP five years ago. 

Rupert Hoogewerf, chairman and chief researcher of Hurun Report, said global wealth is being concentrated in the hands of the billionaires at a rate far exceeding global growth.... 

Chinese billionaires led the USA for the second year running, with 609 compared with 552, up 41 and 17 respectively. Hoogewerf said "China and the USA have half the billionaires in the world." 

The combined net worth of Chinese billionaires is $1.6 trillion, 2.1 percent of the global GDP. Real Estate has generated most billionaires (120), followed by Manufacturing and TMT with 115 and 78 respectively, according to the report. 

China is number 1 in the world in terms of generating self-made billionaires akin to "rags to riches" and is home to two-thirds of the world's self-made female billionaires. 

Led by Beijing, 5 Chinese cities made the top 10 cities and 7 the Top 20. Average age is 58, six years younger than the list average. 

Shenzhen surprised many by adding 16 billionaires to propel it into fourth place, just behind Hong Kong. 

A February IPO propelled Wang Wei, 46, of SF Express to third spot, with a five-fold growth in his wealth to $27 billion, just behind Wang Jianlin and Jack Ma. Corporate raider Yao Zhenhua of Baoneng saw the fastest growth on the list, rising almost eight-fold to $15 billion.

More in ECNS.

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The people behind my novel Lotus - Zhang Lijia

Zhang Lijia

After the first raving reviews of Zhang Lijia's book Lotus: A Novel on prostitution in China, interviewers dive into her research and how her novel relates to real people. At ChinaReadings Mike Cormack takes a look at (among others) the photographer Zhao Tienlin.

ChinaReadings:

Can you tell us the story of how you researched the novel? 

I interviewed many sex workers in Shenzhen, Dongguan, Beihai, Beijing and Tianjin. When you don’t know them well, they don’t always tell you the whole story. I tried to make friends with them, but it was hard to maintain a friendship with them, as their lives were often transient as they moved from one city to another, from one parlour to another, they changed their mobile or they simply vanished. What really helped me to gain insight was my experience of working for a NGO for female sex workers in a northern city in China. Lotus is a purely work of fiction (not another memoir based on personal experience) but many details, Lotus’s first handjob, for example, are real, and learned from the girls I befriended. 

The character Binbing is based on the real photographer Zhao Tielin, who photographed sex workers in Hainan. Did you meet Zhao in person? 

Yes, I indeed met him, quite a few times. But I never really had in-depth conversations with him, which would have allow me to find out the deeper reasons why he would live among the working girls and photographed them obsessively, beyond the grand reason of giving a voice to people with no voice. I was hoping to do so after I got to know him better. But he fell ill and passed away. I did read all of his books. The photographer character Hu Binbing in Lotus is inspired by Zhao. What’s Hu’s motivation? I hinted – perhaps too subtly – that photographing prostitutes serves Hu as a tool to achieve success, to prove to his ex-wife that she’s wrong about him, as well as to feed his own sexual fantasies.

More at ChinaReadings.

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China's internet wars have become global - William Bao Bean

William Bao Bean

Competition in China is bloody and fierce, but as the Chinese internet companies go global, also China's internet wars go global, says William Bao Bean, partner at SOSV to FTChinese. Didi taking on Brazil's 99, its home-grown taxi-hailing app, it a telling sign.

FTChinese:

“The focus for the partnership with 99 is on developing the enormous, untapped potentials of Brazilian and Latin American markets,” said Didi, adding that it has “a very firm commitment to a globalisation strategy”. 

“The war on one front is now being fought everywhere, globally,” said William Bao Bean, partner at SOSV, the Chinese software start-up accelerator. “Before it was fine to be the top app in China or in the US. That’s no longer enough for Uber or Didi.” 

Didi has also invested in Lyft, Uber’s main US rival, as well as GrabTaxi, which is popular in Southeast Asia. The three car-sharing apps are part of a global anti-Uber alliance in which users of one app can hail the others’ cars when travelling abroad.

More in FTChinese.

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What Xinjiang needs is de-escalation - Ian Johnson

Ian Johnson

While religion is getting more leeway in China, the opposite is happening for the Tibetans and Uighur, says journalist Ian Johnson, author of the upcoming book The Souls of China: The Return of Religion After Mao in the Globe&Mail. Just last week Xinjiang, home to the Uyghur, saw a strong increase in security forces.

The Globe&Mail:

The treatment of Tibetans and Uighurs offers a glimpse of the downward spirals that can emerge under harsh policies. 

In Xinjiang, what’s needed is de-escalation, “some kind of a peace process like the British had in Northern Ireland,” said Ian Johnson, a Pulitzer-winning journalist and author of The Souls of China: The Return of Religion After Mao. But that’s difficult to do when strict government policies have largely eliminated moderate voices and civil society. 

“It’s a tough hole for them to climb out of there,” he said. “And this is going to be the largest conflict area for religion and state in China going forward.” 

Elsewhere, China has so far been more lenient. Though hundreds of crosses were removed from churches in Zhejiang province, such action has barely been seen elsewhere – and virtually all Zhejiang churches remain open. 

There are signs, however, that China is preparing for stronger action. Draft rules released last fall threaten fines for those who rent space to unregistered religious organizations, and new restrictions on contact and financial transactions between Chinese believers and foreign groups Mr. Johnson warned that such a strategy could “create a lot more problems for them than they think. They’re essentially picking a fight with people who are not likely to back down.” Under Mao, he noted, the Christian church roughly quadrupled in size despite the imprisonment and death of pastors and priests.

More in the Globe&Mail.

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China's sexual revolution - Zhang Lijia

Zhang Lijia

Author Zhang Lijia explored for her book Lotus: A Novel China's sex trade. The book is also an account of the sexual revolution the country is going through, she tells City Weekend. "Some women get more pleasure with clients than they experienced with their husbands."

City Weekend:

Lotus has conflicting ideas about sexual pleasure. How are attitudes towards sexuality changing?  

China is going through a sexual revolution. Studies show that a much higher number of people are having sex before marriage than previously. In sociologist Li Yinhe’s 1989 study, 85 percent of people claimed they had no sexual experience before marriage. Among the sexually active 15 percent, some were already engaged, which means that they are already a couple by Chinese standards. 

According to 2012 statistics, 71.4 percent of people were sexually active before marriage.* This means more prostitutes, more pornography, more sex before marriage, more sexual partners, and a higher divorce rate. A woman can divorce her husband if he cannot satisfy her. Women will not stand for second-best because they don’t have to any more. 

Having a mistress to show status started with the Emperor, who would have many concubines. Maoist reforms changed that, even though Mao himself was doing all sorts of things with young women behind closed doors! For some time prostitution was uncommon in China. Now, men have mistresses to prove they have a lot of money and a high status. Ernais are just glorified prostitutes; that relationship is primarily economic, not about love. 

I met a woman who was empowered by her increased earning power and relative liberation since becoming a sex worker. People don’t get into the trade for sexual pleasure, but some women get more pleasure with clients than they experienced with their husbands.

More at City Weekend.

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Bike hailing does not make business sense - Paul Gillis

Paul Gillis

Bike hailing services got another round of funding this week in hundreds of million US dollars, but Beijing-based observers like Beida accounting professor Paul Gillis just do not see how those companies, involved in a giant competitive war, will ever pay back those loans, he tells QZ.

QZ:

But widespread customer negligence and razor-thin margins could make it hard for these businesses to stay afloat. The very factors that make China’s bike-share services so convenient—low prices and ease-of-use, namely—are the same factors that could spell their death. 

“What they’ve got is a very interesting technology, but a basic business model that makes no sense,” says Paul Gillis, who teaches accounting at Peking University in Beijing... 

All of these factors merely compound the stress placed on an already shaky business model. Mobike and its rivals won’t reveal how much their bikes cost to produce, but an old estimate (which Mobike says has since decreased) places the cost of a standard Mobike at 3,000 yuan (about $437). Professor Gillis says that fares alone will hardly recoup these costs in a timely manner—let alone cover labor and R&D expenses. 

“They rent for one yuan every half hour, and they expect that they might be rented four times a day for a half hour, which amounts to four yuan per day,” he tells Quartz. “If you take four yuan per day and you take that into the 3,000 yuan, you’ve got a long time before you’ve recovered the cost of a bike.”

More in QZ.

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China's gunboat diplomacy, past and present - Howard French

Howard French

How do China's current global efforts to expand its power, link to its past as a world might? Journalist Howard French explores in his new book Everything Under the Heavens: How the Past Helps Shape China's Push for Global Power the historical roots of China's position as a world power. From ChinaFile.

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Repressing religion in China is not the big picture - Ian Johnson

Ian Johnson

The forceful removal of crosses at churches and the arrest of Christians have hit of Western media regularly. But that is not the big picture, says journalist Ian Johnson, author of the upcoming book The Souls of China: The Return of Religion After Mao, at CNN. Those government actions are mainly symbolic, he says.

CNN:

Hundreds of Christians have also been detained or arrested attempting to resist those demolitions, ChinaAid said. 

As the larger of the Christian denominations in China, Freedom House said Protestants had been “particularly affected by cross-removal and church-demolition campaigns, punishment of state-sanctioned leaders, and the arrest of human rights lawyers who take up Christians’ cases.” 

However, Ian Johnson, author of new book “The Souls of China: The Return of Religion After Mao,” said the focus on the cross removal misses the big picture. 

“I’d say that the most important point is that virtually none of these churches have been closed,” he said in a piece for CNN Opinion. 

“All continue to have worshipers and services just like before. In addition, the campaign never spread beyond the one province. Some pessimists see it as a precursor for a campaign that might spread nationally, but so far that hasn’t happened and there is no indication it will.”

More at CNN.

The full CNN opinion piece is here.

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Why we should not worry about Chinese nationalism - Kaiser Kuo

Kaiser Kuo

Sometime vehement explosions of nationalism have worried both the outside world, and the Chinese government. But today, nationalism is in decline, notes China-watcher Kaiser Kuo in SupChina. "I’m coming around to the view that we’ve exaggerated its proportions and the dangers it poses."

Kaiser Kuo:

But the appeal of nationalism in China appears to be dwindling. A recent paper by Alastair Iain Johnston of Harvard University, examining survey data measuring nationalist attitudes in the Beijing area over a period of 13 years from 2002 to 2015, suggests that at least in the vicinity of the capital, nationalism is indeed in decline. Johnston, aware that Beijing is not necessarily representative, notes that his findings nevertheless accord with nationwide surveys measuring those attitudes. 

The rising nationalisms of our times — and Trump’s “America First” approach in particular — may even have the ironic effect of diminishing nationalism’s appeal in China still further: Xi Jinping has, after all, stepped (even if opportunistically) into the role of standard bearer for globalization. His unapologetically globalist Davos speech played well at home. And if nationalism has an opposite number today, it is globalism... 

The specter of Chinese nationalism is invoked with some frequency by those who would douse the ardor for multiparty democracy. It’s invoked in this way, indeed, by many a liberal. It’s a twist of course on the familiar sùzhì 素质 argument — that the unwashed Chinese masses just aren’t ready for democracy. In this telling, the problem is that freed of its fetters, nationalism would run the table: “If we had free elections in China tomorrow,” said one liberal Chinese friend of mine, “we would elect Hitler next Tuesday and be at war with Japan by Friday.” The message is “Careful what you wish for.” In this view, some gratitude is perhaps due to an illiberal Party that serves as a bulwark against a nationalism that would be more illiberal still. 

The jury is out on what would actually happen were that bulwark to be dismantled, but I’m coming around to the view that we’ve exaggerated its proportions and the dangers it poses. While I’m not suggesting that Chinese nationalism is innocuous, and is not something we ought to continue to concern ourselves with, we really should keep in mind that nationalism is an ideology that feeds on perceived slights and tends, conversely, to diminish when it can’t claim to feel put upon. We should recognize it for what it mostly is — the unsurprising residue of China’s historical experience, utterly comprehensible by anyone with the least capacity for empathy, and remarkable mainly for its relative impotence.

More in SupChina.

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