| OPINION
Real Estate Woes
On July 18, Adidas confirmed that it will close its only company-owned factory in China, signaling a strategic transition by the German sportswear giant. The factory in Suzhou, east China's Jiangsu Province, will close in October this year to allow the company to realign its global resources.
The closure was partly caused by rising salaries in China, which drove Adidas to relocate its production line to Southeast Asia where labor costs are lower. Similar incidents occurred during the past several years. For instance, in March 2009, Nike closed its only shoe factory in China located in Taicang, Jiangsu, causing a massive layoff of 1,400 workers. The factory was relocated in Viet Nam. In 2011, Top Form, a listed Chinese company for lingerie and bras, moved its high-end production line out of China and expanded its production in Thailand and established a new factory in Cambodia. UNY Co. Ltd., a Japanese retail company, will reduce its proportion of clothing production in China against global clothing production from 74 percent to 65 percent in 2013. It will also enhance the proportion in Thailand and start new production bases in Bangladesh.
A key cause for the increasing costs of manufacturers is soaring real estate prices. Sharp rises of housing prices have pushed up the price of land and rentals. More importantly, it will bring about salary hikes as well. In many cities in east China, even if local governments grant preferential land prices to companies to build factories, workers can hardly survive due to the high housing and rental prices.
Southeast China's coastal region is a frontier of the country's opening up. The Yangtze River Delta and Pearl River Delta are dubbed base camp of "made in China." These regions will receive a heavier blow from rising cost.
Aside for rising costs, another side effect of continuous housing price hikes is that it will channel industrial capital into real estate. Since 2003, continuous rising prices have made companies and individuals with real property extremely richer. In 2011, for instance, investment in real estate totaled 6.2 trillion yuan ($970.3 billion), accounting for 14 percent of the GDP. That's much higher than Japan in 1989 and in Spain in 2007, when the real estate sector in both countries peaked.
In 2011, total sales revenue of new homes amounted to 6.1 trillion yuan ($954.7 billion), accounting for 60 percent of the newly added household savings that year. Among all newly added loans, 20 percent are used for housing mortgage and real estate development. Adding trust loans, at least 40 percent of the total amount of financing was used in real estate industry. The industry attracts the largest amount of capital. During the prime time, state-owned and privately owned enterprises are enthusiastically engaged in real estate development. Technological improvement and innovation have totally been forgotten and transformation of economic growth pattern has become a vain slogan.
In order to gain tremendous achievements in the upcoming decades, China has to get rid of its over-reliance on real estate. Japan's rapid economic development after the World War II was attributed to its manufacturing sector. Since the 1980s, Japan has been mired in a 20-year recession after a real estate bubble collapsed. Japan has yet to solve this problem. In Europe, after adopting the euro, many countries have witnessed soaring of housing prices, Spain and Greece in particular. Later, those countries are mired in severe debt crisis. Germany was an exception during the housing price hike and the crisis. The main reason lies in its stable housing price, which ensures its strong competitiveness in the manufacturing sector.
China has to pay a lot to get ride of its over-reliance on real estate. But we should have the courage to do so. Otherwise, Chinese economy will face a destined failure during this round of rebalancing of global economy.
This is an edited excerpt of an article by Yin Zhongli, an expert in finance at the Chinese Academy of Social Sciences, published in National Business Daily
THE MARKETS
Revenue Surges
Chinese Internet search giant Baidu Inc. on July 24 reported higher-than-expected second-quarter revenue, boosted by small and medium-sized advertisers. Baidu had 5.46 billion yuan ($855 million) in revenue in the second quarter, up nearly 60 percent year on year.
The company also said it is likely to go ahead with more acquisitions to beef up its presence in emerging sectors, such as mobile Internet.
Baidu launched a promotion campaign in about 100 Chinese cities in the second quarter in a bid to lure more small and medium-sized advertisers.
The company had about 352,000 active online advertisers in the second quarter, a 9.7-percent increase from the previous quarter. Its Web-based advertising service generated almost the entirety of its revenue.
Baidu accounted for more than 78 percent of China's search-engine market by revenue, compared with 15.7 percent for Google, according to Analysys International.
Profit Up
Great Wall Motor Co., China's largest sport utility vehicle (SUV) producer, announced on July 25 that its first-half profit will jump 30.29 percent year on year.
Net profits in the first six months hit 2.36 billion yuan ($369.6 million).
The company's sales maintained double digit growth in the first half although China's auto market slumped because of the slowing economy, the removal of subsidies and tighter rules on new car registration.
The automaker's sales grew 17 percent from one year earlier to 279,300 units in the first half.
The company's Haval series was one of the most-purchased SUVs in China in the first six months, with sales surging 41 percent year on year to 110,000 units.
Great Wall C30 was also a best-selling model due to its competitive prices. Its sales reached 68,000 units in the first half.
NUMBERS
$3.52 billion
In the first half of 2012, paid-in FDI from the EU totaled $3.52 billion, up 1.6 percent year on year, compared with a 5.1-percent drop in the first five months.
$27.24 billion
In the first half of 2012, paid-in foreign direct investment (FDI) in the service sector totaled $27.24 billion, a 2.9-percent year-on-year drop.
8.5%
In the first half of 2012, paid-in FDI in central China totaled $4.82 billion, up 8.5 percent year on year.
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