China Sector Growth

by Joe

China’s Fastest Growing Economic Sector? You May Be Surprised!

If you were to guess what the number one growth sector in the Chinese economy will be in the next few years, which one would you pick?

If your answer is China’s quickly growing film industry, you’re correct!   In fact, in 2020, China’s total box office receipts it the #1 film market in the world, with an equivalent of $2.7 billion in sales, outselling US movie theater revenues ($2.3 billion) 17.4%, in a year when US industry revenues were down 80% due to theaters being closed due to Covid-19.  The market research firm, Ibis, projects 224% growth in Chinese movie theater ticket sales in 2022 over 2021.

 

Needless to say, China’s growing prominence in the industry is a cause for concern for the US movie production companies who, for the entire history of commercial film, have led world film revenues.

So, what’s going on?  Well, it’s true that it takes money to make money and in recent years non-box office returns have provided the capital needed to fuel the continued development of  

China’s film industry.  For instance, there has been steady expansion of movies into second, third and fourth-tier Chinese cities, where tickets are sold at lower prices to match the difference in average household incomes.  It also doesn’t hurt that China’s population is about four times the size of our own.

Another important factor is the increased use of internet and “big data” throughout the entire Chinese film ecosystem; this includes IP, production, marketing and promotion, distribution, and ticket sales.  One example is the rapid rise of internet film companies (like Netflix); Tencent (producer of internet-related products and services) Pictures and Baidu (internet-related services and products and AI) Pictures are examples.  The traditional Chinese film companies are in close pursuit of these recent entrants and are investing big into internet and big data technologies needed to support streaming video.

 

Crowd sourcing is another important source of the capital which is supporting the growth of Chinese cinema. 

Recent Chinese film releases indicate that projections, like the one coming out of Ibis, are on target even with Chinese theaters running at half capacity.  In February of this current year, the Chinese film industry posted its biggest month ever; 11.2 billion yuan ($1.7 billion).  Of course, being a communist economy, the state has a heavy hand in controlling competition and supporting domestic producers.  In the Chinese film industry, this comes in the form of ‘blackout’ periods where only Chinese films are shown.  Another factor that has worked in the industry’s favor has been the absence of both direct and indirect competition.  During Covid-19, there has been a lack of any American-made blockbuster films; this has given the Chinese films more ‘sunlight to grow in’.  In recent blogs, we have also talked about how the shutdowns have successfully kept the Chinese in their homes or at least in their hometowns.  With fewer entertainment opportunities, more people have been going to the movies, or streaming movies at home, to see domestically made films.  

This is a stark contrast with what we have experienced at home.  In the United States, few movie-goers have had the desire or courage to venture into a theater.  Some of us found we enjoyed lying on our recliners and couches at home while taking in a new movie on one of the many streaming options.  Others have opted to see fewer films and avoid exposure to the virus.  Never the less, Memorial Day weekend film receipts did show a significant improvement, and industry people are beginning to relax a smidge.  Consider this comparison:

All this is not to say that the Chinese film industry is not without its own set of challenges.  One of these is the ‘K-shaped’ economic recovery, like what has occurred here.  A few, giant film production companies are having massive success; the medium and small-sized companies are facing possible failure.  The return of the virus, in the form of the Delta variant, has also forced theaters to either close, or operate at 25% under full capacity at all viewings.  However, it is expected that this, too, is ultimately a short-term situation.

 

Meanwhile, the American production companies are concerned about what the continued long-term growth of China’s film industry may mean to their bottom lines.  For instance, the Warner Bros. film, Godzilla vs. Kong, which opened in March of this year, earned $48.5 million in its first five days in American movie theaters.  As of April 29, that take had increased to $86.6 million.  The film is concurrently running on HBO Max where it continues to earn millions.  In a recent interview, USC professor and film industry expert, Steven Ross said, “We still have some of the most advanced structures for filmmaking, and we also have a huge pipeline in terms of talent of writers, directors, actors, and producers, so, I still think the U.S. is in a position to lead through the good part of the next decade or two in the 21st century. Beyond that, I’m not sure.”

Other market issues also paint a questionable picture for the U.S. film industry, including the demise of the theater-mall shopping area.  With more and more retail sales going e-commerce, due to Amazon and all the mini-zons that have sprouted up in recent years, the theaters do not have the traffic flowing around their businesses anymore.  This pattern had been developing for years, before the pandemic and subsequent recession; that event was only the last nail in the coffin for many theaters.  By the end of 2020, the number of U.S. theater screens had declined 174%.  Meanwhile, as China’s economy has improved – especially in the large cities, the exact opposite trend has been occurring.  Since the early 2000’s, there has been a steady increase in the number of modern malls with inexpensive restaurants, museums, shops and movie theaters.  In 2019, China added 9,708 new screens and 1,453 new theaters. Even during the pandemic, the country added 300 more theaters and 5,794 more screens in 2020, which brought its nationwide total up to 75,581 screens.   

As in other industries, American films also face trade restrictions when looking for distribution in China.  To start, there are quotas on the number of American-made films that can run at any one time in China.  Presently, that number is 34 films per year.  The number increases if Chinese production companies are involved in the film.  American studios also create separate edits with changes in characters, deleted parts, removal of certain symbols (such as Japanese or Taiwanese flags) in order to get past China’s censors.  Peter Newman, a film professor, and head of the dual MBA/MFA Graduate program at New York University’s Tisch School of the Arts, stated, “The policies of the [Chinese] government and the entertainment business change, literally, on a weekly basis.”  These changes can mean that a film which had previously been green lit for distribution is suddenly ineligible.  

The industry implications of Covid-19, and China’s increasing global economic dominance are playing out in many industries.  We’ve used the examples of the Chinese and American film industries because it’s something that almost all of us can relate to, given our culture’s fascination with the media.  From our perspective at Word4Asia, it simply means that our role as experts on Chinese regulations, and consultants to organizations who seek to do more business with China is as important as ever, maybe more so.  As always, if your organization is on the verge of an important initiative involving China, we sincerely wish you success.  We’d be happy to talk with you about your plans, and possibly a role in your efforts.   Feel free to contact us at gene@word4asia.com

 

 

All the Best.

Sources

Update on Travel Restrictions Into Mainland China

by Joe

It’s been seventeen long months since the U.S. set Covid-related travel restrictions, and in our recent vlog, Dr. Wood shared Word4Asia’s own situation with regard to short-range plans for a return to our presence in China.  We thought it might be helpful to your organization’s planning if we share more about what we know regarding travel to China.

The Chinese government continues to ban most foreign nationals from entering its borders.  However, starting March 15 of this current year, China has made it easier for members of various groups from 23 different countries to start traveling there once again.  These groups include people coming to work for humanitarian reasons, like reuniting with family, and people who hold APEC (Asia-Pacific Economic Cooperation) Business Travel Cards. 

Chinese residents can also return. Under the March 15 decision, people traveling to China must also have received the Chinese version of the Covid vaccine within 15 days of travel.  At that time, China also stated it was their goal to have a 40% vaccination rate by June.  They beat that objective, having vaccinated over one-billion of their citizens by that date.

In April,  the Chinese embassy in the United States confirmed that travelers with documented Covid-19 vaccines from Pfizer-BioNTech, Moderna and Johnson & Johnson vaccines would also be eligible.  In order to travel to China, all authorized travelers will need to apply for a health certificate via the local Chinese diplomatic mission prior to travel. Travelers should be prepared to face health screenings, including body temperature scans and nucleic acid testing, at ports of entry throughout China.  Depending on port of entry, including Beijing, Shanghai, and Qingdao but possibly others, international arrivals in some locations, will face mandatory anal COVID-19 swabs. Most international travelers will need to quarantine for 14 days and receive a negative COVID-19 test result before release from government-designated hotel facilities  Some regional governments will actually require inbound travelers to self-quarantine and undergo medical observation for three or four weeks. 

Covid-19 related travel requirements include:

  • Presentation of two negative tests, including the PCR and antibody tests, taken within 72 hours of travel.
  • Officials require all authorized inbound passengers from specified countries to provide evidence of both nucleic acid COVID-19 and IgM antibody tests from designated facilities in the departure country within 48 hours of boarding flights.
  • For newly qualified entrants, entry also requires having received two doses of Covid-19 vaccines at least 14 days prior to entry. They must apply for a visa in advance, and show their proof of vaccination on arrival, as well as the negative tests.
  • Passengers who test positive for COVID-19 antibodies may be allowed to enter China if they have documentation showing they are fully vaccinated.
  • Arrivals are screened once more at the airport.  Passengers that fail the checks will be sent to government-designated hotels to complete 14-day or 21-day quarantines, depending on the travel region and at their own expense.  

As of June 7, the measure applies to travelers from Argentina, Australia, Austria, Bangladesh, Belarus, Brazil, Bulgaria, Burundi, Cambodia, Cameroon, Canada, Cote d’Ivoire, Denmark, Egypt, Eswatini, Ethiopia, Finland, France, Germany, Ghana, Greece, Guinea, Indonesia, Iran, Iraq, Italy, Japan, Kazakhstan, Kenya, Laos, Malaysia, Myanmar, Nepal, the Netherlands, New Zealand, Nigeria, Pakistan, the Philippines, Poland, Russia, Saudi Arabia, Senegal, Serbia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Tanzania, Thailand, Turkey, the UAE, the UK, the US, and Vietnam.

Starting in June, China has delineated several risk levels regarding regions with known Covid infections.  

Hi risk:   Two communities in Guangzhou have also been declared high-risk areas several Medium-risk:  Several communities in Guangzhou and Foshan, Guangdong Province, along with one community in Lu’an, Anhui Province.  Local governments often carry out several rounds of mass testing in medium- or high-risk areas.

Low risk:  Other locations in mainland China are officially designated as low risk. 

Individuals residing in or having recent travel history to high- and medium-risk areas will face travel, movement, and gathering restrictions. 

When regions are categorized as medium or high-risk, local authorities often lock down the affected communities, including road blocks and check-points.  Residents are required to remain in their homes or provide a negative COVID-19 test result before departing the affected area.  In these areas, individuals who wish to travel face mandatory testing.  Long-distance transportation services into and out of these areas have been limited. 

Authorities in China have also implemented health-checks at airports, train and subway stations, increasing travel times.  Public transportation operators are also requiring passengers to share health code information before boarding mass transit.

Exceptions to travel restrictions include: 

  • Foreigners from most countries with valid residence permits for work, family visits, and personal matters can enter the country. 
  • Some immediate family members of foreign employees may obtain entry permission for emergency humanitarian purposes. 
  • Specially designated foreign workers with invitation letters from provincial or municipal government officials can also enter the country. Foreign nationals traveling to mainland China for work, business, or humanitarian reasons can waive the requirement for obtaining invitation letters prior to applying for new visas if they are fully inoculated with Chinese-produced COVID-19 vaccines. 
  • Most foreigners arriving from Bangladesh, Belgium, France, India, Italy, the Philippines, Russia, and the United Kingdom are banned, regardless of residency status, unless they have received Chinese-made COVID-19 vaccines. 
  • Diplomatic personnel and C visa holders, generally flight and shipping crew members, are exempt from entry bans regardless of country of origin. 
  • Officials have also banned flights to and from the UK until further notice.

Chinese citizens must update their information through WeChat to obtain a health code before boarding flights. 

Besides all of the point-of-entry restrictions, China has also reduced the number of flights into their nation.  For instance, the Civil Aviation Administration of China (CAAC) manages international airline flight volume based on how well the airlines themselves are limiting the number of positive-testing passengers they transport there.  If a foreign carrier achieves three weeks with no passengers testing positive, officials will permit one more flight on pre-existing routes. If five passengers of an airline test positive, the CAAC will suspend the carrier’s operations for one week; if 10 of the airline’s passengers test positive, the suspension will last four weeks. China and US regulators continue to limit available flights from each other’s countries to eight per week.  

Close up of arrivals information board.

Due to the many travel restrictions, a desire to protect the health of our employees, and a desire to support both America’s and China’s efforts to protect each nation’s populations, Word4Asia continues to manage our operations in China from our California office.  We’re grateful to our clients for their continuing support and understanding during this difficult period.  We applaud the continued hard work of our mainland China network, and we are thankful for the blessings of modern communications that make all of this possible.  Our advice to our readers:

  • Consider postponing nonessential travel to mainland China. 
  • Confirm all scheduled international flights. 
  • Consult airlines and Chinese diplomatic facilities for details on restrictions prior to any travel. 
  • Follow all official instructions and closely monitor official announcements on any other precautionary restrictions. 
  • Confirm all travel and business reservations. 
  • Allow additional travel time due to screenings at airports, train stations, and other transport hubs. 
  • Make allowances for possible business disruptions.

We hope that this information has been helpful to you in thinking through the options your organization might have as related to travel to and within China during this period.  In over 20-years of continuous working with many different organizations who have interests in China, we have always found a way to provide valuable support, no matter what the conditions were.  If your objectives also include a presence in China, Word4Asia is here to assist.  We hope you’ll reach out.  You can reach Dr. Gene Wood at gene@word4asia.com. 

The U.S. Innovation and Competition Act

by Joe

Helping America Regain Lost Ground in Economic Leadership and Influence

Few areas amid the continuing trade scuffle between the United States and China are as heated as the ones that exist in the semi-conductor industry.  If your organization competes in this sector, you have doubtlessly been observing recent legislation in the U.S. Senate with a keen eye.

At the center of this tension is America’s contention that China has been an unfair competitor.   Most often at loggerheads in recent years, both parties worked together in the Senate to clear the bill with a two-thirds majority vote.  The bill, referred to as the U.S. Innovation and Competition Act, allocates $250 billion, more than $50 billion annually for each of five years, to subsidize semiconductor manufacturing.  This will help domestic semi-conductor firms compete on an even footing with Chinese firms and will address global chip shortage that’s disrupting supply chains for things like cars, smartphones and appliances.  To assess this budget, keep in mind that this is a funding level similar in real terms to what the U.S. government invested in the 1960’s Apollo space program.  

The global semi-conductor market is at the heart of new Capitol Hill legislation.

A huge amount of the total budget would be funneled directly into applied science initiatives.  For instance: 

$81 billion – allocated to the National Science Foundation.  Roughly one-third of this will be used to establish ten focus areas including artificial intelligence, robotics and biotechnology.

$10 billion – to be directed to university technology centers and innovation institutes to conduct research on the key focus areas. 

$17 billion – directed to the Energy Department for research and development in energy-related supply chain activities.

$10 billion – to be invested over five years to the Department of Commerce to create regional tech hub programs.  One-third of these hubs will be located in rural areas.

$1.5 billion – to be invested in 5G related wireless technologies.

U.S. Commerce Secretary Gina Raimondo has said the funding could result in seven to ten new U.S. semiconductor plants.  The once vibrant U.S. industrial commons supporting the semiconductor industry will need to be re-vitalized to support these plans.  Buy American requirements will support the growth of that industrial commons, and they have also been written into the bill.  Buy American categories include iron, steel, manufactured products and construction materials used in federally funded infrastructure projects.  Also, in reflection of the difficult lessons learned during the Covid-19 pandemic, government agencies will commit to two-year contracts with U.S. suppliers of Personal Protective Equipment.

  

:A People’s Liberation Army Soldier stands guard in front of the Great Hall of the People

In recent essays, this blog has pointed out that the United States, as well as other nations, are taking steps to reassert their economic strengths, especially in the technology sector and that these steps may have the result of further slowing China’s growth, which since the beginning of 2021 has shown some signs of cooling.  This recent Senate bill is clearly part of this trend.   Clearly, no one expected China to show great pleasure about the U.S. reasserting itself economically.  In fact, China’s parliament expressed “strong indignation and resolute opposition” to the bill. The Chinese parliament said in that the U.S. bill showed “paranoid delusion of wanting to be the only winner” and had distorted the original spirit of innovation and competition. In Beijing, Chinese foreign ministry spokesman Wang Wenbin said, “We firmly object to the United States seeing China as an imaginary enemy“.   On the other hand, the American business community has long held that China’s growth in the semi-conductor industry has been based on unfair trade practices like intellectual property theft and forced technology transfers.  The new bill directs the US secretary of state to publish a list of all state-owned enterprises in China that have conducted business using these sorts of tactics. Additionally, America is also working to strengthen its political and business alliances with Japan and Australia, with an eye toward ceasing the importation of Chinese products made with intellectual property that the Chinese did not develop, own or license.

In addition, the U.S. President’s authority to impose sanctions against people or entities that have stolen US trade secrets or benefited from such theft is being reinforced and expanded.  Sanctions against foreign entities or people that have supported or engaged in cyberattacks or otherwise undermined US cybersecurity on China’s behalf are likewise strengthened in the new bill.  It would create an inter-agency task force to address Chinese market manipulation in the United States and authorize spending to support an independent media in China.

Of course, there are very important geo-political implications related to the bill, and support of the U.S. semi-conductor industry.  Senate Majority Leader Chuck Schumer explained it this way,:

“The premise is simple, if we want American workers and American companies to keep leading the world, the federal government must invest in science, basic research and innovation, just as we did decades after the Second World War. Whoever wins the race to the technologies of the future is going to be the global economic leader with profound consequences for foreign policy and national security as well.”

Having only recently passed through the Senate, the bill is now in the House of Representatives and the usual deliberations and negotiations will occur.  However, with the strong support from both parties that the bill received in the Senate, it’s expected that the bill will eventually clear the House and be signed into law.

Any time a large stone like this is tossed into the waters which define U.S.-China relations, there will be many ripples.  The Chinese have already expressed discontent.  It’s difficult to know exactly what the implications of these events will be.  However, Word4Asia will continue to monitor and inform as we always do.  

As ever, if your plans include China, we’d love to dialog with you.  Our large mainland China network, and our over twenty-years’ experience guiding our clients to success in China may be an important part of your success.  We’d love to discuss options with you.  Please contact Dr. Gene Wood at gene@word4asia.com if you’d like to talk!  We’ll keep an eye out for you!

One Year After Covid-19, China’s Economy Continues to Grow.

by Joe

Is There Trouble on the Horizon?

Over a year after the start of the global Covid-19 pandemic, the United States and China continue their competitive sparring for the spot of Earth’s largest economy.  Much has already been said about China’s incredible economic rebound in the final quarter of 2020.  This aim of this month’s blog is to provide a brief review of the industries in China’s economy that are leading the nation’s economic success.  At the same time, there are signs of a coming slow-down in China which will be briefly addressed.

Let’s begin the review by recognizing that China had a very strong first quarter in 2021; GDP rose versus same quarter a year ago by 18.3%.  Adjusting for the 2020 economic impact of the corona virus on China’s economy, this still means that China’s 1st quarter 2021 GDP is more than 12 percent ahead of the same quarter in 2019.  For another comparison point, consider that China’s average quarterly growth rate between 1989 and 2019 was 9.4 percent.  12 percent quarterly growth is a big deal.

China’s economic growth has historically come from three key areas:

  • Increasing affluence and market demands, especially among younger, urban consumers
  • A consistently positive balance of trade (although China has had to face increasing resistance to this over the last few years)
  • Government infrastructure investment 

A review of the leading Chinese industries, ranked by estimated percentage growth for 2021, reveals what will be required to continue growth.  Similar requirements will have to be achieved throughout China’s economy if growth at the Q1, 2021 level is to continue. 

Rank
Industry

Industry Revenue

(Billions)

Percent

Growth
Factors that Drive Future Growth
1
Passenger Rail Transport
$30.9
55.3%
  • Government investment in railways 
  • Robust demand for passenger railway transport  
  • Increases in operating scale
  • Improvements in structure and quality 
  • Increases in transport capacity 
  • Modernization of railway equipment
2
Internet Services
$803
18.5%
  • Significant increase in the number of internet users 
  • Pricing competition will slow industry revenue growth.
  • Growth will attract new industry competitors.  
  • Web portals will continue to play an important role in the industry. 
  • Leading competitors will expand to maintain market share.
3
E-Commerce
$1,800
18.5%
  • E-commerce companies continue to improve services
  • Internet penetration continues to increase
  • Customer sentiment is high 
4
Medical Device
$26.1
18.1%
  • Government healthcare policies and export incentives 
  • Exports
  • Continued increases in domestic demand driven by
  • Continued growth in affluence among certain demographics within China.
5
Toll Road Operations
$73.9
17.7%
  • Large government investment and demands for toll roads. 
  • China’s expressway network gradually being completed 
    • Personal demand for road use 
    • auto ownership increasing
    • Expanding tourism sector expands
  • Commercial road uses increasing 

Despite all of the good news, however, there are signs that China’s economy is beginning to slow. Several important KPIs (key performance indicators) follow:

Is the Chinese Economy Cooling Down?

Examples:

Consumer Price Index:  CPI rose to .9% in April, 2021 versus .4% in March.  Typically, rapid economic expansion can lead to price inflation, which, in the long run, can lead to an economic contraction if the decline in consumer demand results in higher unemployment.

Producer Price Index:  PPI in April, 2021 was 6.8 percent versus 4.4 percent.  Often, an increase in PPI is a precursor to increases in CPI, as wholesalers raise prices to cover manufacturer price increases.  

Balance of Trade:  Chinese imports increased by 43.1 percent in April 2021, versus the same period in 2020, and increased 13 percent over March, 2021 import values.  Obviously, increases in China’s imports. Represent GDP leakage out of the nation’s economy as well as having a significant impact on Chinese manufacturers.  A continuation of this trend could ultimately lead to a reduction in the size of the labor force.

The sources for our research are always listed below. Obviously, data errors will lead to inaccurate summarizing. Before you make decisions, we suggest doing your own due diligence.

Word4Asia occupies a unique niche in the world of consulting to organizations with their eye on China.  We continually keep ‘an eye’ on what is happening in this vital global economy and share our expertise with our clients.  If your plans include work in mainland China, we hope you’ll reach out to us.  We’d enjoy an opportunity to share our over twenty years of active involvement in this fascinating market and country and we’d love to be of service.  To start a conversation, please reach out to Dr. Gene Wood at gene@word4asia.com

All the best!

References:

https://fortune.com/2021/04/16/china-gdp-economy-2021-q1-recovery-losing-steam/

https://www.ibisworld.com/china/industry-trends/fastest-growing-industries/

 

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Update on Travel Restrictions Into Mainland China

It’s been seventeen long months since the U.S. set Covid-related travel restrictions, and in our recent vlog, Dr. ….’

 

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The U.S. Innovation and Competition Act

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