The 10 biggest surprises from China in 2013
Starbucks turns out to be enemy No. 1
Westerners in China were probably the first to grumble about the price of a Starbucks latte. But China’s state-run media took Starbucks-bashing to a new level. CCTV consulted experts, former franchisees, and customers for a surprise October segment pointing out that Starbucks coffee is priced higher in China than in Chicago, London, and Mumbai. The report intoned, “What in Western countries is an average cup of coffee has in China become a coffee luxury product.”
First of all, Starbucks (SBUX) isn’t a normal cup of Joe. Second, China has learned greatly from the Western companies like Starbucks operating here. Why bash your friends? Reuters reported earlier this month that reporters within CCTV thought the report was “silly.”
China’s government allows banks to suffer
In June, China’s lending rates between banks almost tripled to more than 13%. It looked like the kind of cash squeeze that crippled Western banks during the credit crisis of 2007-2008. Some bankers desperately wanted the country’s central bank to step in. Instead, the People’s Bank of China held firm, refusing to inject more money into a system that was suffering from excessive lending. Surprise!
After the fact, the central bank’s moves looked shrewd. China was suffering from a large shadow banking industry that fueled speculation in real estate and infrastructure development. The central bank sent a clear message: Don’t rely on us when things get bad. It was an unwelcome surprise for some bankers, but a pleasant one for others who wondered how China would contain its rapidly expanding lending industry.
China added U.S. Treasuries
China’s U.S. Treasury holdings are up to $1.3 trillion. That’s not only the most of any foreign investor, but also a near record for China itself, almost matching the $1.31 trillion the country held back in 2011. These holdings have grown even as yields on the 10-year bond still trade near a pitiful 2.8%. The U.S. government shutdown this year and murmurs of a Congress-led U.S. default spurred talk of China selling chunks of its massive stake, maybe putting those dollars to work elsewhere. It wasn’t to be.
The big picture is pretty clear: China’s weak currency helps exports to places like the U.S., and it’s left holding U.S. dollars. That’s a net gain for China, despite holding greenbacks whose value are in part tied to the loose cannons in Congress.
China finally gets 4G!
4G came to the U.S. in 2010. In China, the rollout comes three years later. It’s important nevertheless. 4G has the potential to reshape industries across entertainment, mobile shopping, and other media in the world’s largest mobile market. China Mobile (CHL), the biggest of the state-owned mobile companies, has 760 million subscribers. The company flipped on its 4G services Dec. 18.
The faster services have been delayed in part by the government, which resisted offering licenses because it said the technology wasn’t ready. Bearish insiders thought 4G might be delayed several more years. It might take at least another six months to upgrade the network past the large cities like Beijing and Shanghai, but thankfully, the rollout is finally here.
Pilots have to learn to fly through smog
Maybe it shouldn’t be such a surprise in a country that regularly endures blanketing smog that airline pilots must now train to land blind because of smog. But the news created headlines around the world.
The state-run China Daily posted a story this month detailing the Civil Aviation Administration of China’s rule that pilots flying to Beijing’s international airport from the country’s 10 busiest airports must be trained to land when visibility falls below 400 meters. Could automated cars for smog-engulfed freeways be next?
Shanghai’s Free Trade Zone is a thing
China has spent three decades opening itself to outsiders. During the process, the tightly-regulated economy has grown into the world’s second-largest. In September, China took the next plunge toward openness by creating a Hong Kong-like free trade zone on the mainland. Shanghai’s FTZ is the first of its kind within mainland China and may provide clues for how China’s economy evolves over the next few decades.
Initially there was excitement. No more barriers for foreign companies! No more wait times for Chinese companies! Then reality set in. The Shanghai government imposed a long list of industries in which foreigners couldn’t invest — including telecommunications, media, and hydropower. Moreover, interest rates and the yuan’s value are still tightly regulated within the zone. Nonetheless, the FTZ is a surprise step in the right direction for an economy growing in complexity.
China’s real estate keeps rising
Despite local governments’ best efforts — cutting credit to individuals buying multiple homes, enacting restrictions on unmarried people buying real estate — home prices keep skyrocketing in China. The surging prices at times seem only loosely related to real demand. In November, for instance, Beijing prices rose 16% year over year, as prices in Shenzhen and Guangzhou, two huge cities, posted gains of 21% and 18%. These follow months of similar rises.
There are mounting frustrations among Chinese who believe the coastal cities in Beijing and Shanghai, along with other Tier 1 cities like Shenzhen, are becoming affordable only for the rich. The big surprise will come when China’s real estate market reverses, as all markets must eventually do. And it won’t be such a welcome one.
Tencent becomes a $100 billion company
What’s Tencent? For starters, it’s a public company worth $110 billion — just shy of Facebook’s current valuation. Surprise! Investors have sent the stock soaring 88% this year. Its instant messaging services QQ and WeChat are everywhere in China.
But it’s not just another Chinese firm ripping off Silicon Valley’s best ideas. Tencent has innovated more than any other Chinese tech giant, and it’s taking those innovations across borders. This year Tencent began heavily promoting its WeChat messaging app in international markets and was rumored to be in the running for a stake in a hot U.S. start-up, Snapchat. Tencent is a surprise no longer.
Foreign journalists face expulsion
The difficulties facing foreign reporters in China have been known for a while. Free speech isn’t allowed, and foreign reporters often bump up against this reality. A couple dozen reporters at the New York Times and Bloomberg waited until the last moments before the Chinese government recently renewed their journalist visas.
The reporters weren’t kicked out, but the message China sent to foreign reporters this year was discouraging. Recently, Bloomberg reportedly killed a story about a Chinese billionaire’s ties to government officials, and the New York Times broke news this year about former prime minister Wen Jiabao’s daughter’s ties to J.P. Morgan (JPM). A Chinese friend recently told me that the New York Times’ series about Wen Jiabao’s family’s wealth over the past year has been the most popular news among the intellectuals in Beijing. The Chinese were sending a message by delaying the journalist visas — and the world received it loud and clear.
The biggest box office hit
The 10th biggest surprise out of China? Journey to the West: Conquering the Demons, an action-comedy in which a 16th century monk aspires to become a demon hunter, was the year’s most popular flick. It bested Iron Man 3. Iron Man 3!