Jun 23

China Watch Blog has learnt that an increasing number of Chinese people prefer buying computer, communication and other electrical products through the Internet.

It’s a trend that is resulting in the decline of traditional white goods stores to the benefit of their cyber equivalents. Or, as one writer put it, shopping is moving from bricks to clicks,the China Daily reported.

According to a report issued by Nuremberg-headquartered German research firm GFK Group, China’s online shopping market reached revenues of 498 billion yuan ($76.88 billion) in 2010, rising by 96 percent over the previous year. Online household appliance sales experienced even faster growth, up by 200 percent to about 80 billion yuan.

The growing demand and market potential have thrilled Richard Liu, the founder of 360buy.com. He said he hopes the company will become one of the top five e-commerce businesses in the world, rivaling the likes of Amazon.com Inc.

Born in 1974 in Suqian, Jiangsu province, a place known for producing commercially minded individuals since the Chinese feudal ages, Liu inherited his forefathers’ astuteness and courage, and invested 12,000 yuan in 1998 to run a small booth in Zhongguancun, the technology district of Beijing, selling CD writers.

The business quickly developed into a chain of 12 IT-related stores in Beijing, Shenzhen and Shenyang, Liaoning province. When the SARS epidemic erupted in China in 2003, Liu was forced to sell excess stock online. Had it not been for this act of providence he may well have set up another electrical products empire similar to Gome Electrical Appliances Holdings Ltd.

Liu closed his stores in 2004 and focused on trading online exclusively. He said he “hated the process of having two things going at the same time” and wanted to “be dedicated”.

The online website is called 360buy.com, or Jingdong Shangcheng in Chinese. Jingdong incorporates the last Chinese characters of his first girlfriend and his first name.

The online business-to-customer (B2C) retailer has seen its annual revenue increase by more than 200 percent in the past six years. It brought in annual revenue of 10.2 billion yuan in 2010 and accounted for a third of the Chinese B2C market last year, according to the consulting firm iResearch.

Although 360buy.com extended its business to other fields, such as general merchandise, books and clothes, electrical products remain the biggest proportion of total sales, contributing more than 90 percent of revenue last year.

Liu raised the earnings forecast of 360buy.com to up to 30 billion yuan this year, from a previous expectation of up to 26 billion yuan.

The growth rate of Chinese e-commerce traders has put great pressure on traditional bricks-and-mortar operations. Suning Appliance Co, a Chinese leading electrical appliance retailer, fought back by launching its own online outlet in January 2010, while Gome set up its online store in April this year.

Suning aims to grab more than 20 percent of the market share for China’s household appliances by 2013 and become the biggest B2C website in the sector in China, Sun Weimin, deputy chairman of Suning, said last year.

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Jun 23

China Watch Blog has learnt that Chinese companies listed in the US are now standing alone to face the onslaught of bearish investors, and the root cause for the crash has not been runaway inflation or a breakdown in China’s economic fundamentals, but rather fraud. Or more accurately: stock investors’ sensitivity to perceptions of fraud.

The fraud bomb came in two ways. Slowly and then fast. The slow cause has been the simmering concern about reverse mergers.

Bloomberg reported that since 2007 more than 150 Chinese companies had entered US stock markets through reverse mergers, also known as backdoor IPO listings.

The potential problem with these mergers is that it allows companies to turn public – by merging with US-listed shell companies – without undergoing strict screening and financial scrutiny usually required prior to main board IPOs.

The fast cause was a series of five slamming research reports exposing alleged accounting irregularities among US-listed Chinese companies.

The latest of these reports published by a boutique investment company, Muddy Waters, came out in the first week of June and accused Sino-Forest Corp, a Hong Kong- and Ontario-based timber farm operator, of overstating its land holdings and production figures.

The company’s Toronto-listed stock subsequently tanked 89 percent, sparking the biggest monthly decline for Chinese companies listed in Canada in three years. An index of these companies shrank 13 percent over the first two weeks of June, echoing a 24.7 percent fall Chinese stocks experienced during April in the US.

All the implicated companies have denied Muddy Waters’ accusations. The US Securities and Exchange Commission is currently also investigating alleged irregular trades by Muddy Waters in Sino-Forest stock.

But the damage has been done because the fraud bomb is bigger than just Muddy Waters. Forbes reported that close to a third of securities fraud cases opened over the past two months are related to Chinese microcaps – “some” of them entered the US via backdoor IPOs.

“There has been a huge explosion of cases in the last quarter,” Andrei Rado, a plaintiff lawyer at Milbrerg LLC told Forbes. “The fraud that Enron and WorldCom committed in the 90s and early 2000s was more sophisticated. These guys are much bolder in what they do,” says Rado. “Some of these companies are a complete sham.”

The timing couldn’t have been worse for Chinese companies. Europe is spooked again by a potential Greek default, the US is getting used to the end of quantitative easing and China has slammed monetary breaks on its economy and expects GDP growth to slow.

Also, the fraud expose comes as top US and other foreign investors have shown bullish interest in Chinese-run companies, helping to boost Chinese stock’s profile as a good buy.

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