Top News of the Week
Beverage Tycoon Tops the Richest People List in China
The richest person in China this year according to Hurun Report is Zong Qinghou, who tops the list with CNY 80 billion in net worth, thanks to his controlling stake in the beverage empire Wahaha. A well-known entrepreneur in China, Zong grabbed headlines a few years ago in a high-profile, bitter dispute with Danone over Wahaha, but the immensity of his wealth created from selling bottled water, juice, and soft drinks still took many people by surprise. Hurun Report, similar to a Forbes Rich List, publishes research and rankings on China's often-elusive newly rich.
That Zong can top the list is surprising, because consumer goods is considered a highly competitive, low-margin business in China. Branding is weak for most local firms, and building an efficient nationwide distribution network is often an insurmountable task, so many companies are content being a regional player, and resort to price wars for survival. Since Zong's Wahaha is private, its sales and profit data are hard to find, but the competitive landscape that the firm faces should be similar, in our opinion.
Wahaha's advantage is that it benefits from strong branding, and offers a wide selection of beverages (water, milk, energy drinks, soft drinks, juice, you name it) to meet all demands. Another blessing is that the government seems to have adopted a laissez-faire approach to the consumer goods industry in general, so there is less distortion in supply and demand. While Zong must have his "secret ingredients" to success, we think there should be many more success stories in the making in the consumer goods space, given the favourable secular trends of rising disposable income and changing dietary habits and lifestyle. Zong's success is a rebuttal to those that dismissed consumer goods as a boring and unprofitable business. Perhaps not totally coincidental, the fifth-richest person on this year's list also made much of his money in the beverage industry, selling the Red Bull energy drink.
The other surprise this year is that real estate tycoons are notably absent. For the first time in 10 years, none made it to the Top 5 list. This is hardly surprising, however, if you take into account the unprecedented tough tightening measures taken on the property market this year and their effect on both housing transaction numbers and the sentiment of shareholders. Most real estate tycoons have their wealth tied to their company stocks. This reflects how much influence the government retains over wealth creation in China today. On the flip side, this year's fourth-richest person, whose business is in heavy machinery, saw his net worth soar as his firm rode the infrastructure boom in China. The runner-up this year is in the drugmaking business, while entrepreneurs from the industries of paper and the Internet round out the list.
The list below shows the richest people in China since 1999 based on Hurun Report rankings. While the exact net worth numbers are not always reliable given the lack of transparency in tracking personal assets in China, we think the list should give us a good idea of which sectors have witnessed the most wealth creation in the past decade.
Market Recap
In the four-day trading week shortened by the start of the week-long National Day holiday celebration, the stock market moved up on signs of renewed growth in the manufacturing sector. The Shanghai Composite Index rose 2.5% last week, and was flat for the month of September, up just 0.6%. Similarly, the Shenzhen index rose by 2.3% for the week and was up by 1.2% for the month. Stock exchanges will remain closed this week during the week-long National Day celebration.
Macro and Industry Updates
China Unleashed More Tough Measures to Cool Real Estate
The second round of tightening measures was announced last week, ahead of the seasonally strong month of October, demonstrating the central government's determination to check the rise in housing prices. The property market froze after tough tightening policies were issued in April, but has seen signs of recovery since August as volume and prices both crept up.
The government used more stern language this time requesting local authorities and banks to adhere to the tightening rules. Down payments will go up to 30% from 20% for first-home purchases, and third-home mortgages will be suspended. The government is also mulling nationwide implementation of property taxes and is expected to soon levy the tax in tier-one cities such as Beijng, Shanghai, and Shenzhen. To meet housing needs of lower-income residents, the government will increase land supply for affordable housing and incentivise builders with tax cuts and financing support.
We expect that such tightening measures will have a positive effect on the market, as property pricing will become more rational, resulting in higher transaction volume from buyers with real housing needs. For the remainder of the year, we expect transaction volume to continue to grow, unless there are significant interest rate hikes.
September PMI Rose to 53.8 on Higher Output and New Orders
The monthly index showed a marked improvement from 51.7 in August, further confirming the recovery in the manufacturing sector. It shows that the sector maintained strong growth momentum despite production cuts in a number of industries deemed energy-intensive and heavy polluters by the government. The index has stayed above 50, which indicates expansion, for 19 months in a row, but was hovering dangerously around 50 in July and August, sparking fears of a slowdown.
However, in our opinion, the positive PMI trend also reflects the fact that fixed-asset investment remains strong and that China still lacks the resolve to rein in such investment in a meaningful way. The lack of resolve will remain an obstacle to China's economic restructuring aimed at achieving more balanced and sustainable growth. China's top policy-makers seem to indicate some tolerance towards lower growth and higher inflation during the restructuring in the next few years, according to media-reported leaks about the new five-year economic plan being drafted. We hope to find some confirmation of that in future economic data.
Click here to view the trend in China's PMI since July 2008
Iron Ore Prices Linked to Chinese Steel Prices? Unlikely
The China Iron & Steel Industry Association last week suggested that iron ore prices should be linked to steel prices in China, instead of the proposed spot iron ore indices. In our opinion, if the proposal can be accepted by both the suppliers and the steel mills, this could stabilise iron ore prices and reduce the breach of contract on the part of Chinese mills when spot prices are lower than contract prices. However, we think this is just wishful thinking. As Chinese state-owned mills dominate the top spots in the world in terms of output, we think a link between iron ore prices to steel will give the mills considerable influence on iron ore pricing. This clearly does not appeal to the major iron ore suppliers, which enjoy strong pricing power now and are poised to benefit from rising demand from emerging economies. Moreover, the price linkage will be hard to implement in the fragmented Chinese steel industry that faces chronicle problems of oversupply.
