China investment: Focus on P2P - Part 1

Internet finance is developing very fast. There are many different models. P2P internet loans is one of such models. While boosting financial creativity, it also introduces new risks.

P2P internet loan is to use internet as a media, to realize an online platform for dedicated network to provide loans via internet. Target audience are SMEs and individuals who are not covered under traditional financial services. It’s an enhancement to the traditional financial system. Currently, there are more than 1300 P2P such online loan companies. Business model is differentiating. Some only provide the platform but do not get involved with deal. For e.g. Yi Long Wang, Pai Pai Dai, Dian Rong Wang etc. These have smaller risks. On the other hand, some built up cash resources to provide cash loans and even interest guarantee. This is the current P2P mainstream model. For e.g. Xuan Xin, Ren Ren Dai. They entered the money transaction area. On top pf that, companies like Lu Jin Suo and You Li Wang converted loans into asset securities before selling them on the internet.

In recent years, P2P developed very quickly due to low barriers of entry, strong liquidity, convenient procedures etc. traditional financial institutions have higher CAPEX and barriers of entry. Internet uses a formless network as medium to reduce CAPEX and enhance efficiency to satisfy the needs of investors. This also provides a crucial helping hand to SMEs who badly need support but do not get it. Traditional banks have obvious preference for bigger companies. SMEs had to resort to small loans from finance companies charging sky high interest, causing SMEs to resort to loan sharks for help. With the new P2P platform, SMEs can settle their financial difficulties much more quickly and safely.

John Wong PhD, CA

China Investment: Time to sell shares to buy properties?

China property prices seems to be warming up again. Shenzhen led the rise in the entire China recently. Previously, many China residents sold properties to buy stocks. Today, it’s the reverse: selling stocks to buy property. Many property developers, even though acknowledging that the golden age has past, now coined a new term of “white silver era”.

During my previous talks, from the end of 2014, I mentioned China property has entered a new norm phase. As long as residential properties fulfil 4 conditions, in the long term, it will perform better than inflation by at least a percentage. At least, such properties’ value will be preserved.

These four conditions are: (1) local characteristic; (2) near to school zone; (3) near to MTR stations; (4) houses of necessities. Today, Shenzhen and Shanghai’s property appreciation coincide with either one or a few of these four conditions.

Let’s look at Shenzhen. This May’s price grew 1.67% compared to April. However, not every property rose. Guangming New District fell. On the other hand, Da Peng District rose due to local characteristic (condition 1) – where it was declared a test point for eco development.

Shanghai also rose by 1% because it fulfilled the third condition of being near to MTR stations. This was very obvious. Line 14 MTR was built end of last year. All districts along the MTR line rose. This proves that property price has reached a turning point, entering a new norm. It is a steady investment in the long term. Henceforth, property price will unlikely spike aggressively like in the past. Instead it will likely become a stable investment.

Some statistics.

Let’s look at property pricing trend. All 1^st (which include Beijing, Shanghai, Guangzhou, Shenzhen), 2^nd and 3^rd tier (which include Dongguan, Zhongshan, Huizhou) cities went through roughly the same cycle. The highest point was in July 2014. Then the price started falling. This year, the fall was stopped and is now stable.

1st tier cities Shanghai and Shenzhen’s May pricing rose from April this year. Beijing and Guangzhou is still lower than April but the difference is nearing to zero. Beijing was lower than April by only 0.5% while Guangzhou was only 0.1% lower than April. Year to year’s fall for the same period was bigger in magnitude though. Beijing fell by 5%, Shanghai 2%, Guangzhou 9%, and Shenzhen 10%. 2^nd tier cities went through the same cycle, this year being at water level of stability except for Hangzhou which continued to drop.

Average pricing value:

1^st tier cities: From the highest point last year to 2015’s May, 1^st tier property average values dropped by 7.2%.

2^nd tier cities: From the highest point last year to 2015’s May, 1^st tier property average values dropped by 16.5%.

3^rd tier cities: From the highest point last year to 2015’s May, 1^st tier property average values dropped by 21%.

Hence, 1^st tier cities dropped by the least while 3^rd tier cities the most. This is very normal. It’s price mechanism. If prices rose too fast previously, it will correct. It will then stabilize after correction, which is what is happening now.

Let’s look at transaction volume.

All the three tier cities went through the same cycle. From 2014’s Jan to this 2015’s May, the lowest volume period was 2015’s Chinese New Year (CNY) period in Feb. Volume recovered after CNY.

Accumulated volume from Jan to May this year, compared to the same period last year: 1^st tier cities rose 43%; 2^nd tier cities rose 18.6%; 3^rd tier cities rose 46%.

Earlier this year, many China reports claimed that property prices fell drastically due to oversupply. I disagreed. Property supply in reserves will not affect normalized property prices.

To prove my point, let’s look at property supply reserves statistics for China. Price started to drop since mid-year of 2014. However, supply reserves reached the highest point beginning of this year. It rose 1.38 times compared to Jan 2014. This proves that property price fell way before reserves starting to reduce. In May, reserves dropped by 6.4%. Why? Price fell first, then property market recovered to its norm. The reserves were then slowly digested. Hence, reserves falling is an important step of property market resuming to its norm. At this point, due to price adjustment, it provided a warning to property developers. They can’t be aggressively developing properties anymore. They have to focus on high quality instead. Hence, we find that after price adjustment, property developers’ investment speed also fell drastically. In April 2015, investment growth was only 6%. Previously it has always been more than 20% growth rate.

I hope that property and stock market can form 2 entirely different investment target. Stock market will remain high risk high return. Property market should be like other developed countries where they remain a stable investment. Forget about property prices rising aggressively in future, but that it could preserve value in the long term. Rightfully, supply reserves will not affect price, but that instead, price will affect reserves.

May China property market become more holistic and healthy.

John Wong PhD, CA

China Investment: A comment on China’s latest reforms to drug pricing – marketization

Many observers feel that in any free economy, a product’s supply and price should be determined by the market.

China has made massive improvement in this respect. The National Development and Reform Commission (NDRC) and 8 medical associations have collectively issued a motion to reform drug pricing in China. In Chinese history, this is the largest scale drug pricing reform to take place. How do we interpret the issues associated with drug pricing liberalizing and reform?

Pricing is probably the most attractive phenomenon in economics. Price reform is also something we are very concerned about currently for a while as part of market reform in China. We see many areas in China undergoing price reform, including the current focus on drugs.

Many simplistically think of price reform as marketization, i.e. to let the market determine pricing. Hence, many think the government should exit in entirety. This is a wrong thinking.

In some of the talks that I conducted previously, I have been a proponent of a set of thoughts, namely what should the government’s role be. This thought can be summarized by the words of Chinese Premier Li Keqiang. On 13 May 2013, in a TV conference, Li pointed out that under market economy, the evolvement of government’s responsibility has to distinguish the boundary between the government and the market. This is marketization reform. It is not the government exiting the market to allow complete free price movement. Rather, it’s to determine clearly the duties of government and market respectively. This is good reform.

Why is that so? The ultimate objective should be the interest of people as top priority. This means, paying the lowest price for necessities. This will make a good reform.

Should the wet markets selling vegetables undergo price reform? You might feel that since wet markets affect people’s lives due to vegetable pricing, that should be more liberalized. Will more free market competition result in vegetable pricing become lower?

No. Let’s think. Where are the markets built? Mostly in residential areas. This means high rental. And there are also costs to entry into the business. There are also considerations of water and electricity and many other factors. Will vegetable pricing be low? No. At such instances, we will need to draw a clear boundary between government and the market. The government should intervene. On 28 April 2011, Beijing’s vice mayor raised a good point, i.e., to adopt the points of view from the public’s benefits. Government should buy or invest in wet markets to prevent risks or over marketization. How? This method is similar to the Hong Kong context. That is to let the Beijing government buy or invest in 90 wet markets. And to only collect some token of rental, water and electricity fees based on costs. And thereafter, the government should increase such subsidies to double the number of such markets.

Let’s look at some statistics. Particularly, let’s look at the wet markets the government invested in and compare with nearby supermarkets.  

RMB	Government-linked	supermarkets
vegetable	0.9	2
Green radish	0.98	2
White radish	0.78	1.5
cabbage	0.58	0.8
potato	1.08	2
carrot	1.38	5

 

Let’s look at carrot. A catty of carrot in government-owned wet markets costs 1.38 yuan. Privately-run supermarkets costs 5 yuan. The remaining items are also obviously cheaper compared to nearly supermarkets. Now, we can realize what reform is. These peasants are buying vegetables. If they can get the lowest prices for such necessities, that would be a good reform. Currently in China, there are many reforms including oil, electricity, gas, drugs and water.

Let’s discuss oil price. Let’s look at the reform that the government exited in entirety from.

The government should entirely exit from the oil industry. On 18 Nov 2014, Xinhua News reported that final oil product price reform successfully broke through the previous rigid price mechanism. Price will be entirely determined by the market. We just witnessed consecutive drops in pricing.

My views on this report: pricing for up, mid and downstream, for oil should be entirely determined by the market. The government need not participate. This should be the boundary of the market and government. For instance, let’s look at upstream. On 27 Aug 2014, the energy department approved the first private enterprise in China, Xinjiang Guanghui Oil Company to freely import oil. However, they are only allowed 200 thousand tons per year. This is a test point. I think it’s a good test point. I feel this test point should amplify. Upstream should allow more private enterprise to freely import oil.

Mid-stream refers to oil process. The process factories in China has capacity to treat 150 million tons per year. Shandong province represent 70% of such capacity. Due to private enterprises not being allowed to import oil, China has over-capacity. 70% facilities are vacant. Should we then open up midstream to allow local oil refinery to compete with “3 buckets of oil” (China Aviation Oil, Sinopec, CNOOC).

Downstream. Some of us drive cars. Look around at the various petrol kiosks in China. Most of CAO related. They are the mainstream. I propose downstream to be freely operated by private enterprise to compete fairly with the big petrol kiosks.

Another reform: Electricity and gas. What is the boundary of government and market for this sector? That should be the government controlling midstream. Upstream should be subject to free market. Downstream should also liberalize. Midstream refers to network. Government should only control network. How then do we calculate price? How do we charge fees via network? Fees should be collected by network. But via the electricity and power reform announced on 4 Nov 2014 using Shenzhen as a test bed method to collect payment. That means, the government should deduce a price determination method using international practice and accounting standard. The network itself should not be allowed to determine price.

What about Gas and LNG? Same. Currently upstream is not opened to free market. Private enterprise cannot freely import LNG. Downstream should allow users to freely choose LNG Company. What about midstream pipe network? It should be similar to the above scenario of electricity and power.  Let the government deduce a price determination method using international practice and accounting standard. The network itself should not be allowed to determine price.

Another reform, which is the key of this piece: drug reform. This is the most complex reform. I have expressed my views previously to investors. Today I will use Premier Li’s message during China State Council’s meeting on 15 Nov 2014 to interpret. He named three objectives, namely: drug pricing must drop; service must improve; medical insurance must maintain.

1^st. Drug price must drop. How? I propose the following. In 2010, when China determined drug price management method, they only mentioned patented drugs and imitation drugs. Patented drugs are expensive. That is a given due to high R&D costs. But another type of drugs from overseas whose patents have expired? These are original drugs. Such original drugs have no more patents. The price is still 10 times the local imitation drugs. In the top 3 hospitals in China, supposedly 65% drugs are patented or original drugs. Should this not reform?

2^nd. Service must improve. How? Simply said: Reduce patients, increase doctors. Service will surely improve. But how? A bypass system must be created. How? I have 2 suggestions. Firstly, to those high income earners with no medical insurance, China could set up a special channel in hospital with high charges. They could then use these fees to subsidize the masses. Secondly, encourage doctors to be like in HK: every week, use 30% of their time to engage in private practice, either as locums or open their own clinics. Hospital can tax from their additional income. Result? China could then stream some of the patients to private clinics, especially high income earners.

3^rd. Medical insurance must maintain. We want drug prices to drop while service improve. Take note: service improvement would be largely due to high income people paying higher fees. The masses need not bear the burden of increased cost. Medical insurance would then be in a better position to maintain

Hence, drug price reform should be implemented according to Premier Li’s message.  As for the boundary between government and market? The government must determine an implementable policy in this respect. Then allow hospitals to implement these 3 objectives.

Ultimate objective: to allow the masses to pay the lowest fees for important necessities including drugs.

 

John Wong PhD, CA