On your bike! China’s latest asset bubble
Australian Financial Review, 1 March 2017
On the footpath outside one of Shanghai’s most popular shopping malls, China’s latest asset bubble is on display. Fighting for the attention of consumers are five different brands of shared bikes, each with their own brightly coloured frame and modern design. For as little as 4¢ an hour one of these can be rented, as cash-rich start-ups fight to secure market share and seek to emerge as the dominant player in this industry which barely existed 12 months ago.
That a single city, even one as large as Shanghai, can have at least five different companies offering near identical services shows how cheap money and a lack of investment options can at times distort the Chinese economy.
“There’s too much money sloshing around in the system . . . that’s the only explanation for why so many of these bike sharing projects have been funded,” says Mark Tanner, the managing director of digital consulting firm China Skinny.
Whether this cheap money which has fuelled previous asset bubbles in everything from property to ornamental walnuts continues, will be one of the most keenly watched messages from the Communist Party’s annual conclave which begins in Beijing on Sunday.
In his speech to open the National People’s Congress, Premier Li Keqiang is expected to lower the money supply growth target to around 12 per cent this year or even scrap the target in favour of keeping credit in a “reasonable range”.
While that may go some way to reining in runaway credit growth, which topped 15 per cent last year, there is little hope the Premier will announce any meaningful measures to reduce “over-capacity” in the economy.
Previously, this was mainly confined to industries dominated by state-owned companies in areas such as steel, glass and cement making. But such excess capacity has bled into the private sector over recent years, as seen by the number of shared bikes on streets across China.
There are now 20 companies offering this service throughout the country and an estimated 2 million bikes available.
By the end of this year that number is forecast to top 30 million, based on the roll-out plans of the main players, while registered users are forecast to reach 50 million.
If bike numbers and users meet these projections then there will be one shared bike for every 40 people in China, or three shared bikes for every five registered users.
And that’s in a country already known as the “bicycle kingdom”.
Scale is everything
“Scale is everything in China,” says Ben Simpfendorfer, chief executive of consulting firm Silk Road Associates in Hong Kong.
“If you don’t get big quickly you are likely to struggle, and this inevitably leads to over-capacity.”
But Simpfendorfer says such over-capacity is also fuelled by easy credit and the lack of investment options for private-sector firms.
“There is not a lot of space for them [private companies] to invest,” he says.
This so called “crowding out” of the private sector by state firms was supposed to have been partially alleviated by President Xi Jinping’s economic reform agenda.
In the Party’s official reform manifesto, released after the Third Plenum in November 2013, the market was to play a “decisive role” in the economy.
Amid all the talk about a new reform era in China this was interpreted as a desire to weaken the dominance of the state-sector. But it has not happened.
“The state sector is still far more important than we would have expected five years ago,” says Simpfendorfer.
The result is private-sector firms chasing deals in the few crowded areas where they are allowed to operate, while also having to compete with state-backed giants who are encouraged to invest in emerging areas of the economy.
“It then become survival of the best funded. We have seen this in areas like ride hailing and meal delivery,” says Tanner from China Skinny.
In shared bikes, this has seen China’s biggest tech companies and some government-owned players throw money at start-ups.
In the last six months, it’s estimated more than $1 billion has been pumped into the top three players alone.
The market leader Mobike, with its distinctive orange wheels and futuristic silver frame, has received $650 million in funding from the likes of Tencent, which owns the WeChat messaging platform, online travel company Ctrip and the world’s biggest contract manufacturer Foxconn.
A company spokesman said it now had 10 million registered users in 24 cities across China.
It’s the most expensive of the services, charging 1 yuan, or 20¢, for each half hour rental, although users must provide a 299 yuan ($56) deposit when signing up.
That means the company has around $560 million in deposits, which it can utilise to fund its roll-out.
Like all the other players, Mobike uses smartphone, GPS and payments technology to locate, unlock and pay for hiring the bike.
But unlike other schemes around the world, the bikes in China are not picked up from a parking station and can be left on any sidewalk where bikes are permitted.
On the streets of Shanghai, this rush to secure market share has led to clogged pavements in a city already short on space.
Outside the IAMP mall, on the edge of the city’s French Concession, five brands are jostling for attention. The Australian Financial Review counted 287 bikes parked in a 100-metre strip.
It’s the same near subway stations and other busy areas across the city.
“There are very low barriers to entry,” says Tanner.
“That means it’s all about outlasting and then wiping out your opposition.”
Mobike’s main completion is Ofo, which was started by five students from Peking University and has raised $260 million in funding over the last six months.
Its main backer is the ride-hailing service Didi Chuxing, which just acquired Uber in China after a gruelling and expensive two-year fight.
But unlike the battle to dominate ride-hailing in China, there are not just two or three main players competing to emerge as the dominate force in bike sharing.
“Any good idea in China, everyone jumps on it,” says Tanner.
McKinsey & Co have warned this herd mentality will come at a price. In a recent report it said the potential size of the bike sharing market did not justify the more than $1 billion which has been pumped into the industry, which suggests there will be some big write-downs to come.
Read more: http://www.afr.com/news/world/asia/on-your-bike-chinas-latest-asset-bubble-20170228-gumxew