China PMI Drops to Lowest in Almost 3 Years

A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world’s second-biggest economy.

The Purchasing Managers’ Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

An index of export orders contracted for the second time in three months as Europe’s failure to resolve its debt crisis dims the outlook for shipments to China’s biggest market. South Korea reported today the weakest export growth since 2009 and Taiwan’s government said yesterday that the island’s economy expanded by the least in two years.

The PMI reading “is a reflection of slowing momentum in the economy” and exports may “slow sharply in coming months,” said Wang Tao, a Hong Kong-based economist at UBS AG. “Policy will ease more visibly in the first quarter of 2012.”

A separate manufacturing index released today by HSBC Holdings Plc and Markit Economics rose to 51 from 49.9. The surveys have different sample sizes and methodologies.

Premier Wen Jiabao said last week that economic policies will be “fine-tuned” as needed. That fueled speculation that the government may ease reserve requirements for smaller banks and add fiscal stimulus, putting growth ahead of inflation risks.

‘Weak’ Figure

The MSCI Asia Pacific Index fell 0.9 percent as of 11:07 a.m. in Tokyo. The benchmark Shanghai Composite Index rose 0.3 percent on speculation that more easing is possible after the government last month offered tax breaks for smaller companies that have been hardest hit by lending curbs and slowing growth.

“The weak PMI figure may prompt the government to loosen policies going forward such as a cut in reserve-requirement ratios for small banks and that’ll be positive for stocks,” Liu Li-Gang, head of GreaterChina Economics at Australia & New Zealand Banking Group Ltd., said in an interview in Bloomberg’s Shanghai office. “China’s economy is poised for a soft landing in the fourth quarter rather than a hard landing.”

On Oct. 26, the government announced a trial of changes to value-added taxes, a move that HSBC Holdings Plc economist Qu Hongbin said heralds the “official start” of selective easing. The finance ministry yesterday raised the threshold for payment of VAT and business taxes.

Exports, Orders

The manufacturing index from the logistics federation and National Bureau of Statistics is based on a survey of purchasing managers in more than 820 companies in 20 industries. The gauge hasn’t fallen below 50, the level dividing expansion from contraction, since February 2009.

The gauge of new export orders declined to 48.6 from 50.9 the previous month. The new orders index fell to 50.5 from 51.3 in September, the lowest reading since February 2009. A measure of output dropped to 52.3 from 52.7 in September.

The data “indicate fourth-quarter economic growth will continue to slow,” Zhang Liqun, a senior researcher at the Development Research Center of the State Council, said in today’s statement. “Export and investment growth will continue to fall.”

China’s economy grew 10.4 percent in 2010 and 9.4 percent in the first nine months of this year.

Shipyard Orders Drop

Positive signs for policy makers include a decline in a measure of input prices to 46.2 in October from 56.6 the previous month, the first reading below 50 since March 2009.

The drop suggests cost pressures on companies are decreasing, although it may also signal destocking is increasing because of expectations prices will fall, Zhang said.

In a sign manufacturing growth is moderating, new orders placed at Chinese shipyards in the first nine months of the year dropped 42.8 percent, the Ministry of Industry and Information Technology said on its website on Oct. 20. Guangzhou Shipyard International Co. said last week its third-quarter net income dropped 45 percent from a year earlier due to higher costs and an impairment provision for shipbuilding contracts.

--Zheng Lifei, Victoria Ruan, With assistance from Ailing Tan in Singapore, Regina Tan in Beijing and Zhang Shidong in Shanghai. Editors: Nerys Avery, Paul Panckhurst

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at +86-10-6649-7560 orlzheng32@bloomberg.net;

Zellers CEO rewrites the book on liquidation

Zellers CEO rewrites the book on liquidation

MARINA STRAUSS — RETAILING REPORTER

MISSISSAUGA, ONT.— From Tuesday's Globe and Mail

Published Monday, Oct. 31, 2011 6:32PM EDT

Last updated Monday, Oct. 31, 2011 7:42PM EDT

Mark Foote is breaking new ground in retailing, even as the vast majority of his chain’s stores tumble toward extinction.

The chief executive officer of discounter Zellers Inc. has the daunting task of running his 273 stores as though it’s business as usual, although it’s nothing of the sort. By this time next year, he will be in the midst of Canada’s single largest retail liquidation to prepare for most of the stores’ takeover by U.S. mega-rival Target Corp. (TGT-N54.75-0.49-0.89%), starting in March, 2013.

For Mr. Foote, it has meant having to write the rules for an unprecedented retail transition. In January, when Target unveiled its stunning $1.8-billion deal to buy most Zellers leases and convert the stores to the Target name, Mr. Foote faced about two years of keeping outlets operating – and profitable – knowing the end was near. Yet he still doesn’t have a schedule for the closings, which will be staggered over time.

The uncertainty will have ripple effects in the entire sector. Even before other retailers feel the squeeze of the savvy Target, they will be pinched by customers being enticed to Zellers’s sales. And for the broader industry, Zellers will provide a unique case study as it moves in new ways to reach shoppers – including an interactive holiday Facebook campaign – even as it winds down.

“I don’t think there’s a precedent for this,” Mr. Foote said at his store in Mississauga’s Square One Shopping Centre, one of his top performers that is among outlets being scooped up by Target. “Rarely do you have an opportunity to plan for your own liquidation with as much lead time as we have ... It’s a weird time.”

Mr. Foote has responded by mapping out a blueprint for change that is based largely on the model of a retail liquidation, although without the typical stress of insolvency and desperation. With estimated annual sales of roughly $4-billion, Zellers was showing signs of progress under Mr. Foote, who arrived in 2008, but for years it had been losing ground to discount titan Wal-Mart Canada Corp.

Now Mr. Foote is tackling his latest challenge by focusing on pumping up profits, even if it costs the chain a few customers. He is slashing costs and ramping up inventory levels of higher-margin categories of goods, such as apparel, while scaling back on low-margin items such as detergent, which often draw shoppers. He’s shaving marketing spending, replacing the usual – and pricey – fall television ad campaign with an unusual social media blitz. Beginning Tuesday, Zellers will usher in the company’s last full holiday season by allowing customers to vote on sale prices on Facebook.

The strategy seems to be paying off. Zellers’ operating profit is “well ahead of expectations” and the retailer has “performed very well” in 2011, Mr. Foote said. He no longer feels the same pressure to increase market share by trumpeting loss leaders, such as deeply discounted paper towels. “Because we’re not chasing market share the same way we would have been last year, it’s allowed us to run the business in a different way.”

But his mission of keeping Zellers profitable will not be easy. “It’s complex in the sense that you have to co-ordinate a number of issues to minimize the ultimate loss,” said Hap Stephen, a restructuring expert who has overseen an array of bankruptcy procedures, including the failed department-store retailer Eatons more than a decade ago. “You want to capture as much margin on a regular basis before you have to start really discounting.”

In the case of Eatons, one of this country’s biggest retail failures, it benefited from the flurry of publicity about its demise, which drew a flood of customers to the stores, said Mr. Stephen, of Stone Crest Capital. “Eatons didn’t have to discount a lot in the first wave of the liquidation, so they did extremely well,” he said.

Zellers will be able to learn from Eatons – which generated about $360-million from its liquidation sales – and other high-profile retail wind-downs. It has hired as an adviser a top liquidation specialist, Hilco, of Northbrook, Ill., which had a hand in Eatons’ and many other retail flameouts. Zellers could raise more than twice what Eatons did from its liquidation business, industry followers estimate.

In the meantime, Mr. Foote has slightly stepped up Zellers’s inventory levels in 2011, and by as much as 10 per cent or more in high-margin areas, such as fashion and home decor. Low-margin categories, such as household goods and electronics, are being reduced; seasonally skewed departments such as sporting goods will be downsized early next year, and toy merchandise will be kept at healthy levels because Zellers remains a top destination for those products, he said.

To deal with anxious suppliers, Mr. Foote has assured them that Zellers’ purchasing for the holiday season and the first half of 2012 “continues to run on a status quo basis,” he told vendors in a recent letter.

In planning for fall of 2012, “we will work closely with vendors to plan volumes and programs in accordance with store closing schedules which will become clearer over time,” his letter said, noting that Zellers will get six to nine months notice of each store shutdown. The chain is expected to decide next year on what it will do with the 84 Zellers outlets not being picked up by Target or others.

“In advance of the actual closing schedule being defined, our teams have created preliminary forecasts for the entire year based on our expectations of store-closing schedules ... We continue to see significant sales upside for many businesses and vendors in 2012.”

David Soberman, a marketing professor at University of Toronto’s RotmanSchool of Management, said Mr. Foote is following a textbook model of how to prepare for liquidation by going heavy on high-margin merchandise and taking the spotlight off markdowns on items such as Tide detergent, which simply nab shoppers at the cost of profits.

“Building store traffic is of less interest to him now,” Prof. Soberman said. “What he really wants to do is minimize misforecasting ... He doesn’t want to be left with [low-margin] inventory when the store closes.”

Mr. Foote also needs to keep staff motivated. This year, Zellers introduced retention bonuses for managers, resulting in turnover in those ranks staying close to normal levels of 2 per cent to 3 per cent, and rising slightly now to between 2.5 per cent and 3.1 per cent, he said.

Once Zellers stores close, employees will be terminated and must apply to Target or elsewhere for jobs, with Zellers offering career-transition counselling.

And while Mr. Foote is chopping marketing costs by less than 10 per cent, he’s moving into new social media territory to reduce expenses and reach out to his existing customers. In doing so, he’s laying the foundation for a cheaper and more direct way of communicating with consumers once the massive liquidation sales begin next year.

Zellers’ ad agency, John St., came up with the social media idea after Mr. Foote asked agency president, Arthur Fleischmann, for “something different, something provocative” to tout the final holiday sale. The campaign uses Facebook and Twitter to let customers vote on sale choices, store music playlists, store decor and even record their own radio ads.

It features three fictional Zellers employees who are going through the throes of change within the company that is being taken over by “a large American retailer.”

They speak candidly about tensions because “the executives from home office have got a bit weird since the deal was struck,” Mr. Foote said. “They don’t mince words at all,” he said. “It is a weird time – why not just have some fun with it.”

----------

POWER TO THE PEOPLE

Zellers social media campaign, dubbed internally “festive finale” and initially “power to the people,” underscores the shifting tides at the retailer.

On Facebook, it features three actors representing Zellers employees (a store manager, a cashier and an executive managing director,) who confront the situation of “a large American retailer” [Target] taking over Zellers stores soon.

It lets customers:

1. Set the sale. Each week Zellers will offer a promotion on its Facebook page. Customers will be given the chance to vote on the offer they want.

2. Pick the playlist: Customers can choose what genre of music to play in stores, including “hot pop,” “holiday pop” and “new age.”

3. Record radio ads. Customers can record radio spots on Facebook. Zellers will choose the top recordings and run them in national radio ads in the holiday season.

4. Set holiday store decor: Customers will have the chance to decide where to hang mistletoe and what hats employees should wear for Christmas events.

EU to China: Let’s make a deal

EU to China: Let’s make a deal

MARK MACKINNON

BEIJING— From Saturday's Globe and Mail

Published Saturday, Oct. 29, 2011 8:00AM EDT

Last updated Saturday, Oct. 29, 2011 10:43AM EDT

Once upon a time, European envoys to China came aboard gunboats, extracting the concessions they sought – such as the island of Hong Kong – by force. Today they come cap in hand, hoping to convince the latest Chinese emperors to bail them out of a financial mess of Europe’s own making.

China’s defeats in the 19th century Opium Wars, and the succession of unequal treaties with European powers that followed, marked the beginning of what’s known here as the “Century of Humiliation.”

Now it’s China’s turn to demand the concessions and Europe’s to understand humiliation. Klaus Regling – the head of the European Financial Stability Facility (EFSF), the continental bailout fund whose very existence testifies to the shifting balance of power in the world – was in China Friday as a supplicant, rather than a superpower. He was clearly willing to bend to Beijing’s wishes if it gets the world’s most cash-rich government to back the new euro zone bailout plan.

In both China and Europe, Beijing is being portrayed as carefully considering whether it should come to Europe’s aid in its hour of need, and weighing what return – political as well as economic – it can expect for doing so. In reality, China has a strong self-interest in making sure the euro zone doesn’t collapse, something it knows well could badly damage its own export-reliant economy.

There’s no question which side has the upper hand in negotiations about China’s role in the bailout of Europe.

Mr. Regling told a press conference in Beijing Friday ahead of his meetings with officials from the Ministry of Finance and the People’sBank of China that there would be no “special deal” to convince China to buy EFSF bonds. But pressed about some of the possible conditions Beijing could attach to its help, he sounded more flexible.

If China – which is reportedly considering buying up to $100-billion (U.S.) worth of EFSF bonds – wanted to funnel its contributions through theInternational Monetary Fund, a tactic that would grant Beijing greater say at future IMF meetings, that could likely be accommodated, Mr. Regling said. He noted that the IMF is already involved in the efforts to stabilize Ireland, Portugal and Greece.

And while all bonds issued by the EFSF have thus far been euro-denominated, Mr. Regling said “we have the possibility to use other currencies,” leaving open the door to yuan-denominated contributions, which would aid Beijing’s effort to promote the yuan as an international currency.

Mr. Regling said he didn’t expect to leave China with any firm commitments, warning that negotiations could take “weeks.” Part of the reason is Mr. Regling, who is a financier rather than a politician, doesn’t have the power to answer some of Beijing’s other anticipated demands. He said the EFSF’s managers would be asking how China and other potential investors would like to see the bailout fund structured “so that the money will actually come.”

“I could only go to one country first,” Mr. Regling said in response to a question from a Japanese journalist about why he had flown to Beijing, rather than Tokyo, after the euro zone bailout deal was reached Wednesday. “We will visit many different investors from many different countries over the next few weeks, but it was good to come to Beijing first.”

With many Chinese commentators questioning why China – a developing economy that recently has seen stirrings of a local debt crisis of its own, with defaults sparking panic in two cities so far – would bail out the far richer European Union, the Communist Party leadership is under pressure to get something in return. One relatively easy-to-satisfy demand might be Beijing’s long-standing appeal to be granted full market economy status within the World Trade Organization.

While China – because of lingering government involvement and control, as well as a lack of labour standards – remains a long way from meeting U.S. and EU specifications for a market economy, it’s an easy chip to trade away since China is due to receive market economy status in 2016 no matter what.

Other, quieter, requests might involve Beijing asking Europe to lower the pressure on China over the artificially low value of the yuan, or even to quiet criticism of the Communist Party’s human rights record. Among China’s rowdy community of 430 million Internet users, there were also calls for Europe to drop its arms embargo on China, which has been in place since the bloody 1989 crackdown on pro-democracy demonstrations on Tiananmen Square.

“China and Europe are not the type of sworn friend who can extend a non-hesitant helping hand as the other experiences a crisis. Both sides are adding calculations at the moment,” read an editorial published Friday in the Global Times, a newspaper controlled by the Communist Party.

“This help, from a purely economic standpoint, is straightforward. But from a public opinion and political standpoint, it’s not so straightforward. The Chinese delegation needs something to show at home, to show that we’re lending a helping hand but we’re [also] getting a helping hand,” said Li Wei, an economics professor at Beijing’s Cheung Kong Graduate School of Business.

But while China seems intent on making the most of Europe’s moment of need, there’s no sense that Beijing will let the continent flounder if some of its demands are unmet. Historical acrimony aside, the Chinese and European economies are now deeply integrated – China this summer surpassed the United States to become the bloc’s largest trading partner, accounting for 13.4 per cent of all trade – and Beijing understands that Europe’s crisis could spread if it’s not promptly dealt with.

“It’s much easier to help a neighbour put out a fire before it reaches your house,” Prof. Li said. “Who knows? In 10 years or 15 years, China may be the one who needs to ask for help.”

The EFSF bonds Mr. Regling is flogging also provide a convenient place for Beijing to park some of its burgeoning current account surplus (including a €12.2-billion trade surplus with the EU), which currently stands at $3.2-trillion and counting. In order to keep the yuan’s value down, Beijing needs buy foreign securities with that money, and the EFSF bonds will help with the goal of diversifying holdings away from the flagging U.S. dollar.

“For the moment, they’ve got these [foreign currency] reserves and they’ve got to put them somewhere,” said Patrick Chovanec, associate professor at Tsinghua University’s School of Management and Economics in Beijing. But that won’t stop the Chinese side from seeking to benefit from the situation, he said. “From the Chinese point of view, if you’re going to be doing something anyway, why not get credit for it?”

Despite repeated requests from European reporters at the press conference in Beijing, Mr. Regling refused to divulge how much China had already invested in the EFSF (he would only say that Asian countries accounted for 40 per cent of the fund's existing €440-billion). Nor would he say how much more he was seeking from China as the EFSF grows to €1-trillion under the latest bailout plan.