China Reshapes Landscape for Firms From Alibaba to GM

By Jasmine Wang - Nov 19, 2013

Bloomberg

China’s planned economic reforms are poised to reshape the competitive landscape, allowing private companies such as Alibaba Group Holding Ltd. to compete with state-owned banks and easing the one-child policy to bolster demand for products from Nestle SA (NESN) to General Motors Co. (GM)

Plans to change the nation’s financial sector include a new registration system for initial public offerings and allowing qualified private investors to set up small-to-medium sized banks. Tencent Holdings Ltd. (700), Asia’s biggest Internet company, is part of a group applying for a banking license in China.

“Companies that got too comfortable with the old system now are going to have to change,” said Tim Condon, chief Asia economist at ING Financial Markets in Singapore, who previously worked for the World Bank. “This is potentially a huge step forward in opening up the economy.”

President Xi Jinping’s reforms, which may be the most sweeping since Deng Xiaoping’s liberalization in 1978, are aimed at giving more influence to market forces and loosening government controls. The changes outlined in a 60-point document after a Communist Party meeting last week present opportunities -- and risks -- to companies in almost every segment of the world’s second-biggest economy, which is heading for its weakest annual expansion since 1999.

Stocks Climb

Hong Kong’s index for mainland China companies rose to the highest since March after yesterday surging 5.6 percent. The city’s benchmark Hang Seng Index (HSI) was little changed after yesterday advancing 2.7 percent, the most in more than 10 months. The Shanghai Composite Index (SHCOMP) fell 0.2 percent after climbing 2.9 percent yesterday. The Bloomberg China-US Equity index rose 2 percent.

“The intention of the decisions is for liberalization for the markets and orientation of the economy,” said Daimler AG Chief Executive Officer Dieter Zetsche in a briefing in Beijing. “We see that as being supportive for successful development of this economy and definitely is in our interest.”

The maker of Mercedes-Benz cars said today it invested 625 million euros ($844 million) for a 12 percent stake in Beijing Automotive Group Co.’s passenger-car unit.

“It’s positive, very positive for sentiment,” said Catherine Yeung, investment director for equities at Fidelity Investment Management Ltd. in Hong Kong. Fidelity is adding more Chinese consumer-related stocks, including Internet and health-care companies, she said.

Securities Regulator

Policy makers seek to reform a registration system for IPOs that may hasten the approval process for the more than 700 companies awaiting regulatory permission.

The switch to a system of registration -- with regulators only ensuring companies’ disclosures meet requirements rather than approving share sales -- is key to capital-market reforms, Xiao Gang, chairman of the China Securities Regulatory Commission, said today.

“The capital market is still an administration-led one, and its operation mechanisms aren’t in line with an orientation to supply and demand,” Xiao said at a conference in Beijing. “Prices remain distorted.”

Historical Significance

The Communist Party leaders also decided to further increase the share of direct financing in the economy such as stock and bond sales, according to the statement published three days after meeting ended Nov. 12.

The four-day meeting, referred to as the third plenum, is set to have a similar historical significance as the one in 1978 when Deng decided on a reform and opening-up policy that heralded three decades of rapid growth, said Yao Yang, dean of the National School of Development at Peking University.

Grabbing headlines was the policy shift allowing couples to have two children if either parent is an only child, easing the rule which required that of both parents.

That could boost Chinese demand for diapers, infant milk powder and other baby-related sectors, said Summer Wang, an analyst at Bank of Communications Co. The one-child policy has left China with an aging population.

Of China’s 1.36 billion population, 17.1 percent are aged below 15, compared with India’s 28.5 percent, Brazil’s 25.4 percent and Russia’s 15.9 percent, according to data compiled by Bloomberg.

Nestle, Goodbaby

Diaper maker Hengan International Group Co. (1044) jumped 6.5 percent to a record in Hong Kong before advancing 0.1 percent today. Tissue paper maker Vinda International Holdings Ltd. (3331), which owns a stake in a diaper business, surged 7.4 percent.

Svenska Cellulosa AB, which has made an offer for the Vinda shares it doesn’t own, may inject its diaper business into company, Wang said in a research note dated yesterday.

Stroller and crib maker Goodbaby International Holdings Ltd. (1086), China Mengniu Dairy Co., China Modern Dairy Holdings Ltd. and Yashili International Holdings Ltd. (1230) had also climbed in yesterday’s trading before paring some of their gains today.

Nestle, the world’s biggest foodmaker, said Greater China is its fourth-largest market with annual sales of about 5.2 billion francs ($5.7 billion). It had no comment to make about the new policy or how it might affect its business, Chris Hogg, a spokesman, said by e-mail.

Mengniu will increase the ratio of infant formula in its product offering, it said in a statement.

GM Investment

The impact on demand may be seen only in 2015, and a study by the China Academy of Social Sciences implies the policy should add about 1 million babies by then, Jessie Guo, a Hong Kong-based analyst at Jefferies, said by phone.

“If you have two kids, you are definitely more likely to have a car than if you have one,” said Shen Minggao, head of China research at Citigroup Inc. (C) in Hong Kong. Makers of appliances, clothing and shoes will also benefit as the new rules will boost rural income, Shen said.

U.S. companies have been increasing investments in the country. GM this year committed to spend $11 billion in China by 2016 on new plants, products and people. Through joint ventures, the Detroit-based carmaker sold 2.84 million vehicles in the country last year and aims to sell 5 million by 2015.

Mondelez International Inc. (MDLZ), maker of Oreo cookies and Ritz crackers, is expanding a plant in Suzhou, one of eight manufacturing facilities in the country.

“We continue to invest in China to expand our routes to market, sales capabilities and innovation,” said Michael Mitchell, a spokesman for the Deerfield, Illinois-based company, declining to comment on China’s new policies.

Enter Alibaba

Yum! Brands Inc. (YUM), owner of the KFC and Pizza Hut chains, said it expects the Chinese consuming class to double to 600 million people by 2020.

“Our strategy is to build leading brands in China in every significant restaurant category,” Jonathan Blum, a spokesman for Louisville, Kentucky-based Yum, said in an e-mail.

Billionaire Jack Ma, Alibaba executive chairman, has said China’s financial sector needs an outsider to “stir things up,” according to a transcript compiled by the official People’s Daily.

Alibaba’s entry into the lending business “should give the nationwide banks some concerns about future competition,” said Jim Antos, an analyst at Mizuho Securities Asia Ltd. in Hong Kong. “Private banks that can rely on technology to bypass the expensive and time-consuming job of building out a branch network could become significant competition for the commercial banks in only a couple of years.”

Commodity Pricing

Still, new entrants won’t have the scale to challenge China’s biggest banks in the next three to five years, said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, which manages more than $22 billion of assets.

Among proposed changes are making budgets more transparent, improving transfer payments, setting up risk-warning and debt-management systems for central and local governments and speeding up legislation on a property tax.

The pledges included establishing market-determined prices for resources, boosting private-sector and foreign investment, and encouraging urbanization by scaling back the hukou, or household registration system, to allow rural migration to smaller cities. The measures are to be implemented by 2020.

“China will become a high-income country under the leadership of Xi,” Justin Lin, former chief economist for the World Bank and adviser to China’s top leadership, said Nov. 17.

The country is also trying to bring in a market focus for commodity pricing. The plenum’s proposals are negative for sectors including coal and power equipment, because of environmental protection initiatives, Citigroup’s Shen said.

China has typically used its state-owned oil companies, of which PetroChina Co. (857) is the largest, to control domestic fuel prices, and further pricing reform would only help their refining operations.

“More market-based pricing will raise costs for most consumers where the resource is currently undervalued,” said Sijin Cheng, a commodities analyst at Barclays Plc.

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net