April 8 – April 14, 2016

We burn cash for you – China tech. Mom & Pop investors in China are getting hosed. Water Wars in India.

The feedback has been positive for the new format, so it is here to stay.  Lots of good reads this week. Enjoy.



    • “Hong Kong insurance agent Raymond Ng sold HK$28 million ($3.6 million) in insurance policies to a mainland Chinese client in March. It took more than 800 credit card swipes to complete the transaction.
    • “Making multiple swipes can defeat a cap of about $5,000 per transaction set by Chinese authorities in February.”
    • “Chinese customers are accelerating the pace of moving assets outside China, especially through insurance products.” – Ng
    • “Mainland Chinese are coming to Hong Kong to also buy life insurance policies with an investment component that can be cashed out in a few years. The money can then be invested in property or other assets, raising fewer questions about how it got out of the mainland. Large portions of the premiums can be paid upfront. Sales of insurance policies to mainland visitors jumped 30% last year, according to Hong Kong’s insurance commission.”
  • John Gittelsohn of Bloomberg covered Calstrs intention to shift more of its real estate focus to Europe.
    • “The $180 billion California State Teachers’ Retirement System is buying more equities and real estate in Europe while selling U.S. properties, which are “priced to perfection,” according to the fund’s chief investments officer.
    • “Europe looks pretty reasonable and inexpensive compared to the U.S.A.”
  • What happens when a currency position moves against you…Neil Buckley of the Financial Times highlights a precarious development in Poland where about half a million people have home mortgages denominated in Swiss francs.
    • Poland’s newly empowered (came to power 7 months ago) political party ‘Law and Justice,’ is looking to convert $42bn of mortgages from Swiss francs to Polish zlotys.  About half a million Poles had taken out mortgages in Swiss francs pre-crisis “to take advantage of lower Swiss interest rates. But after the Swiss central bank scrapped its currency cap in January 2015, many found themselves struggling to meet higher repayment costs.”
    • Thing is, Law and Justice is proposing a measure that would force Polish banks to take on the loans and convert the currencies at historical exchange rates and bear the resulting losses, approximately €10.3bn – which Marek Belka, the governor of Poland’s central bank, called “evil” and a “recipe for a banking crisis.”
  • As highlighted by Steve Johnson of the Financial Times, China’s robot army is set to surge.
    • According to analysis by Citi and the Oxford Martin School, “more than 75% of jobs in China are at a ‘high risk’ of computerization.”
    • “The number of robots per 1,000 employees in China, as of 2013, was just 30% of the level of North America, 11% of the German figure, 9% of Japan’s tally and 7% of that in South Korea.”
    • Raul Chadha, chief investment officer of Mirae (an Asia-focused investment firm with $75bn of assets), projects that robots will replace around 3.5m Chinese workers over the next five years as companies seek to improve their productivity in light of falling demand.
  • On-shore corporate bond defaults by state-owned groups in China are starting to pop up and people are rightfully concerned as Gabriel Wildau points out in the Financial Times.
    • “Since the start of April, two SOEs have missed scheduled bond payments, while a third suspended trading of its notes as it warned of difficulty in making a payment due next month.”
    • “For years bond defaults were unheard of in China’s onshore corporate bond market, with the government reliably stepping in to bail out troubled issuers. The first-ever onshore corporate bond default occurred in March 2014 when privately-owned Chaori Solar missed an interest payment.”
    • The first SOE default, by power equipment manufacturer Baoding Tianwei, came last April.
    • “The defaults are also creating fundraising difficulties for other would-be borrowers. In the first 12 days of April, at least 18 bond issues worth a combined Rmb17.8bn ($2.8bn) have been cancelled, according to a tally of public filings by China Business News. That follows 62 cancellations worth Rmb44.8bn in March. In total, 12 publicly issued bonds have defaulted since 2014, according to Haitong Securities.”
    • “Many economists say SOE defaults are healthy for the long-term development of China’s debt market because they reduce moral hazard caused by the widespread assumption of a limitless government backstop for the bond market.”
    • “Yet bailouts have not disappeared. On Tuesday, Shanxi Huayu said it would pay out on its overdue bonds this week after receiving a capital injection from its parent company. Central government-owned China National Erzhong Group received a bailout last year, days of warning of imminent default.”

Special Reports


Washington Post – “What the iPhone has done to cameras is completely insane” – 4/7

WP_iPhone destroys camera sales_4-7-16

Source: CIPA/Photographylife.com

FT – China’s robot army set to surge 4/8

FT_Chinese wage appreciation_4-8-16


*Note: bold emphasis is mine, italic sections are from the articles.

China tech: Renminbi to burn. Charles Clover. Financial Times. 10 Apr. 2016.

“Burning cash has become alarmingly fashionable among Chinese internet companies, many of whom have taken to paying customers massive subsidies to use their services in hopes that their competitors go out of business before they run out of money.”

A recent ad from Emao.com, an online platform for car dealerships: “We burn cash from our investors to win the hearts of car shoppers.”

According to Cheng Wei the chairman of Didi Kuaidi, the China ride-sharing app, “the company spent $4bn last year in what he called ‘market fostering.’ Uber also disclosed it was losing more than $1bn a year in China.

“‘Burning cash’ may not sound like a viable business model, but these young companies argue that paying customers to use their services is necessary to build their brands and achieve the scale needed to compete.”

“‘A lot of these companies will be forgotten when the money runs out,’ said Ma Jihua, founder of Datareal consulting, who estimates that as much as Rmb50bn a year is being poured into subsidies aimed at connecting Chinese consumers via their smartphones to taxis, massages and car washes.”

“But he concedes that companies have little choice. ‘In this market, if you don’t burn cash you won’t get market share which means you won’t get funding, consequently meaning you won’t stand a chance against competitors that do burn.’

Damned if you do, damned if you don’t.  Also reminds me of the phrase ‘a fool with money is one hell of a party.’

“The potential benefits to the market leaders help explain why they are so willing to spend: according to HSBC, China’s online-to-offline (O2O) sector is a Rmb10tn market that is only 4% penetrated, and grew 80% year-on-year in the first half of 2015. HSBC estimates that in five years the “profit pie” in the industry would be worth Rmb26bn.”

“Start-ups are busy raising funds from investors at ever more dizzying valuations, only to plough them back into subsidies. Recent funding rounds have valued Didi Kuaidi at $20bn, up from $15bn last July. Uber china was valued at $7bn in a January funding round, while the merger of Meituan and Dianping, the two largest food delivery and group discount sites, was valued at $15bn-$17bn in November.”

However, as Ken Xu of Gobi Capital, a VC firm in Shanghai, points out “the user has no loyalty to anybody in these sectors; they only go for the apps that have the subsidies…”

“A driver for both Uber and Didi, who gave his name only as Mr. Guo, says both companies pay subsidies that often amount to two to three times the cost of the ride.”

“A lot of these companies have one thing in common – their perceptions of the odds of success are higher than they actually are.” – Brian Viard, economist at Cheung Kong Graduate School of Business in Beijing

China’s New Security Challenge: Angry Mom-and-Pop Investors. Chuin-Wei Yap. Wall Street Journal. 12 Apr. 2016.

“Small investor, angry over lost savings, are emerging as a new security threat to Chinese authorities, who are watching warily as investors around the country hit the streets in protest and picket government offices to demand their money back.”

“A common thread: Protestors are convinced government officials and the ruling Communist Party encouraged their investment of money and labor in ways that helped build modern China, and now they feel betrayed.”

“Since the People’s Republic of China was established in 1949, the Communist Party has always been something that the people viewed as trustworthy.  Who can you trust, if you can’t trust the government?” – retired army Lt. Col. Guo Bojin, 72, who has claims to have lost approx. $120,000 to Henan Tengfei Investment Wealth Management, which collapsed in 2014.

For a sense of scale “the outstanding balance in wealth-management products was 18.4 trillion yuan ($2.8 trillion) at the end of the first half of 2015, according to Moody’s Investor Service – about the size of the U.S. money-market-fund industry.”

“The government hasn’t provided a count of the losses to investors. A Wall Street Journal tally of cases reported over the past year shows at least $24.3 billion owed to 1.6 million investors in wealth-management products, about $15,000 each on average.

“Many small investors the Journal interviewed say they hadn’t understood the nature of their investments. They considered it a government stamp of approval that state media ran advertisements by Tengfei and other such companies, and that government officials attended some of the companies’ public gatherings.”

It is interesting to see how smartphones and social media has changed the ability of people to organize; however, police forces are infiltrating the instant-messaging groups and are showing up in mass to prevent gatherings.

“Authorities have also sought to forestall protests, say investors, who contend they have been followed and threatened by police, and sometimes beaten and detained. Police and public-security officials have told some journalists not to report on the collapsed lenders.”

India: Water Wars Victor Mallet. Financial Times. 13 Apr. 2016.

“Ten of India’s 29 states from Uttar Pradesh in the north to Karnataka in the south have declared droughts this year; dams, canals and sacred rivers in some places have run dry; and groundwater in parts of India is being pumped out at an alarming rate that has sharply lowered the water table.”

“Neither the political class nor the intelligentsia have understood that a water crisis is literally staring us in the face.” – Shashi Shekhar, secretary at the Indian water ministry

“He and other experts warn that conflicts – not just between nations but also between states inside India – are already brewing because of competition over scarce river water.”

“‘It’s a crisis now and if we don’t arrest it, then 10 years down the line we’ll have water wars,’ says a senior official in Delhi. ‘Punjab and Haryana will be in flames in no time.’ Indeed, activists in Haryana recently sabotaged a canal supplying water to Delhi. ‘We are having water wars in India already,’ says Brahma Chellaney, author of books on the fight over water.”

“According to Arunabha Ghosh, chief executive of the Council on Energy, Environment & Water, a research group, the average Indian had access to 5,200 cubic meters a year of water in 1951, shortly after independence when the population was 350m. By 2010, that had fallen to 1,600 cu m, a level regarded as ‘water-stressed’ by international organizations. Today it is at about 1,400 cu m and analysts say it is likely to fall below the 1,000 cu m ‘water scarcity’ limit in the next two to three decades.”

“As in neighboring Pakistan, the problem is not an absolute shortage of water. In fact rainfall in India is high, albeit seasonal, and northern rivers are also filled with melted snow from the Himalayas. The real causes of India’s dearth of water are the country’s rapid population growth; its inefficient transport and use of the stored surface water in some 5,000 large dams; the planting of water-intensive crops such as rice and sugar cane in dry areas by politically powerful landowners; and a failure to control demand for water because of free electricity and subsidized diesel provided to hundreds of millions of farmers for their pumps.”

“Landowners can pump as much as they want from the ground.”

“A recent European Commission study on Indian water legislation noted that the number of boreholes or tube wells had risen from a few tens of thousands in the 1960s to more than 20m today.

“India, the report said, pumps 230bn cu m of groundwater, more than any other country. More than 60% of India’s irrigated agriculture, and 85% of its drinking water, depend on this groundwater.”

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – China’s GDP Data Shows a Very Predictable Pattern 4/12

Bloomberg – China’s Stock-Market King Reveals Some Trade Secrets 4/13

Bloomberg – It’s Been Rough Coming of Age in the New Century 4/13

FT – Oil price: ‘Shot in the arm’ misses economic target 4/5

FT – Investors, first catch your unicorn then hang on to it (Michael Moritz) 4/7

FT – Global company bond defaults at highest level since 2009 4/8

FT – Emerging markets face significant capital outflows 4/8

FT – Interest rates might not stay low for much longer 4/9

FT – What we have learnt from Tesla’s sale of the century 4/10

FT – Opec’s days as economic force are ‘over’ 4/10

FT – Active asset managers knocked by shift to passive strategies 4/10

FT – Negative rates may be nearing a political limit 4/11

FT – Caesars Entertainment bankruptcy shines light on law firm 4/11

FT – The old bets on defaulted bonds won’t work this cycle 4/11

FT – US economy in charts: gloom versus data 4/13

IPE Real Estate – CalPERS to ramp up real estate development 4/14

National Real Estate Investor – Rental Yields, Not Price Appreciation, Drive Current Single-Family Investments 4/11

NYT – Chinese Scions’ Song: My Daddy’s Rich and My Lamborghini’s Good-Looking 4/12

ValueWalk – Is There A US Corporate Credit Bubble? Yes Says UBS 4/12

WSJ – Apartment Market in the U.S. Shows Signs of Losing Steam 4/7

WSJ – Housing Bust Lingers for Generation X – 4/8

WSJ – China’s Missed Opportunities to Kill Zombie Companies 4/11

WSJ – Bets on San Francisco Office Boom Face Risks 4/12

WSJ – More Luxury-Home Sellers Drop Their Asking Prices 4/12

WSJ – What China’s Massive Insurers Are Doing With Their Money 4/14


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