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REPORT Can Major League
Baseball score in China? p26
PERSPECTivE New Delhi,
Beijing and trouble in Tibet p20
SOUTHEAST ASiA Inside
May 2008 Vol. 19, No.05 www.chinaeconomicreview.com the palm oil supply chain p22
Growth capital
China private equity shoots upward
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CoNTENTS
CHinA ECOnOmiC REviEw: winnER, 2007 SOPA AwARdS, bEST ExPlAnATORy REPORTinG
34 SPECiAl REPORT
Domestic and foreign
capital go head-to-head
in China’s ever more competitive
Published monthly since 1990
private equity industry
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China Economic Review Ltd.
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Tim Burroughs
deputy Editor
Wong Joon Ian
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Darfur anyone? “While the Dream for Darfur campaign certainly expresses
solidarity with the people of Tibet ... Our focus is on the unsur-
passably urgent task of improving security for civilians and hu-
manitarians in Darfur,” said Eric Reeves, a Smith College pro-
other causes have been sidelined by fessor who helped start the Dream for Darfur campaign, when
asked for his response to the current situation.
Tibet’s dominance of the news cycle He said that the urgency was because Sudan’s rainy season,
traditionally a period that has caused food shortages among the
population there, was nearing.
T
he Olympic torch relay has become a convenient news As the games draw closer, will activist groups jostle more
hook in recent weeks, much to the delight of groups who intensely for media attention? The torch relay-Tibet conflation
are dissatisfied with various aspects of Chinese rule. As appears to have pushed the Darfur-Olympics grouping out of
the flame traveled through London, Paris, San Francisco, Kara- the news cycle for now.
chi and New Delhi, protesters in those cities were ready for their This raises the question of whether some causes are more
moment in the media spotlight. worthy of our attention than others. All but the most rigidly
The grab for the media spotlight began with the torch-light- utilitarian among us would surely have difficulty weighing al-
ing ceremony in Greece. Three members of media-rights group legations of genocide against claims of colonization, for ex-
Reporters Without Borders shouted “Freedom!”, tried to grab ample. Smith’s remark about Sudan’s rainy season bearing
the microphone from the Beijing Olympics organizing commit- down on a hungry populace, for instance, also forces us to
tee’s chief as he made a speech, and unfurled a banner that said, ask if some causes deserve to be addressed before others.
“Boycott the country that tramples on human rights.” The various activist groups that have converged on the
Since then, the Tibetan cause has dominated Olympic pro- Olympics have confronted us with some uncomfortable ques-
testing news. This is hardly surprising given the torch-lighting tions. All of them lay claim to some moral high ground, but
happened on March 24, just days after rioting and fires broke which of them do we pay attention to?
out in Lhasa, Tibet’s capital city. Will it simply boil down to which group is able to stage the
Being center of the media circus is great for the Tibetan most media-savvy protest? Or will it be a calculation of how
cause, but what about the other groups that had been using the much blood has been spilt for each cause, or is there some other
Olympics as leverage against the Chinese government? Most formula? If so, it would be an unfortunate situation for a sport-
prominent of those were the Darfur activists, who had scored ing event that’s supposed to be about humanity’s virtues, rather
some victories before Tibet stole the limelight. than a desire for exciting news.
Seller’s market of the 180 equity funds operational in 2007
actually managed to beat the CSI 300 Index.
While it is tempting to suggest that China’s
If 2007 was the year in which Chinese investors fund managers effectively earned US$4 billion
fell in love with mutual funds, what are we to for doing nothing out of the ordinary, it is also
expect from 2008? Based on current progress, unfair. It is not unusual for funds in a volatile,
it may be the year in which fund managers see fast-growing market to trail the index.
their egos punctured and their bonus checks Furthermore, fund managers in China are
decimated. said to keep a relatively large portion of assets
The first quarter of the year was not good in cash to cover the frequent redemptions by
for China’s stock markets, or anyone else’s investors who are still focused on the short-
for that matter. The Shanghai Composite In- term gains.
dex (SCI) finished March down 29%, its worst In the months ahead, growth in assets
quarterly performance on record. under management and management fees
The index also had a rough time of it in will be more moderate than last year – but this
the final three months of 2007, posting a 20% doesn’t mean a fund manager’s value will fall.
decline, but the mutual fund investors hung in The turning point for mutual funds in
there, with assets under management rising 2007 was the May 30 hike in the stamp duty
by 5%. Not so this year. Assets under manage- levied on stock market transactions. Shares
blEAk: Stocks began 2008 in poor fashion
ment were down 24% in the first quarter of slumped and scores of individual investors got
2008, according to reports. market. The fund managers made a whop- burnt, but the funds emerged with minimal
TH
However, this is not the most shocking ping US$4 billion in fees, up from US$813.9 losses. With this timely reminder that industry
E
fund management statistic to emerge in million the previous year. Put those figures professionals are better at picking stocks than
CH r s ra ks 0,0
recent weeks. Pride of place goes to the in context: The SCI more or less doubled in taxi drivers, investors placed their money and
in mor ise del 31
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Fu
o
A e d d: ive
fees earned by China’s fund manag- value last year; fund management assets faith in the funds.
nd boo 1
RE et U re
ers in 2007 for sinking people’s nearly trebled; fund management fees grew If 2008 continues as it has begun, a fund
Ad ails S$3 d:
hard-earned cash into what by close to 400%. manager who can spot a dog from a darling
in see 2,6
was then a buoyant A-share The overriding irony here is that only 14 could be worth his weight in gold.
G p 76
PR
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6)
EC
T
bEST OF THE EdiTORS’ jOURnAl
Niu Yue, Niu Yue
newsflash: Chinese (which would be truly bizarre – I wonder if even 20% of Eng-
prefer their word for it, lish-speakers would use that name these days).
march 2: While it isn’t whether this means Chinese people would like
A survey, initiated by the “standard” Chinese names applied universally across the globe
China Youth Daily in as- or just on the street signs in their own cities, the article’s author
sociation with the website decides to let other unnamed “experts” speak for them: “Some
sina.com.cn, found that experts have pointed out that “only by preserving its own cul-
over 80% of Chinese peo- tural traditions and nationalism in international communication
ple are opposed to trans- can a nation speak to the world in an equal voice.”
lating China’s capital city No word yet on whether New Yorkers prefer “New York”
as “Peking,” favoring in- over “Niu Yue.”
stead “Beijing.”
Fair enough, I A through-train casualty, April 14:
suppose, though this According to an analyst at Bank of China International (BOCI),
would seem a non- a corner of the bank’s Hong Kong office is piled high with un-
issue. Aside from used equipment. This equipment was brought in to cope with the
names like Pe- king Duck, Peking University and Peking expected surge in trading business as mainland individuals start-
Opera, which predated the creation of the pinyin system, who ed trading Hong Kong stocks under the H-share through-train
on earth still says Peking instead of Beijing? (Aside from the scheme. Premier Wen Jiabao put the brakes on the through-train
French, that is. And the Germans.) Still, I’m guessing that the in November and, based on current progress, BOCI’s equipment
survey result means 20% of Chinese people still like “Peking,” might be obsolete by the time the wagons start rolling.
REAd mORE OnlinE AT www.CHinAECOnOmiCREviEw.COm/EdiTORS
China Economic Review • May 2008 7
REviEw • Po LITICS & SoCIETY
CHinAbynUmbERS Hu, Siew meet in Hainan
40% The migrant
worker share of China’s
Taiwan’s Vice President-elect
Vincent Siew met with Presi-
dent Hu Jintao in Hainan on
Torchured
urban population by 2025,
according to McKinsey
Global Institute.
April 12. The meeting was
the highest-level cross-strait
talks in almost 60 years and
path
covered topics including the
30m
C
Projected 20- establishment of cross-strait hina’s hopes for a
foot equivalent air services. Ma Ying-jeou, smooth Olympic torch
unit (TEU) cargo-box President-elect of Taiwan, relay were snuffed out
capacity for Shanghai’s will take office on May 20. after disruptions in London
container port in 2008. and Paris. The protests centered
on Beijing’s heavy-handed
$50b Amount
China has
response to anti-China riots
that broke out in Tibet and sur-
offered Nigeria in export rounding areas in mid-March.
credit guarantees over the Things started badly in
China Foto Press
next three years to fund Olympia, Greece, on March 24.
infrastructure projects. A speech by Beijing Olympic
committee chief Liu Qi was
Wal-Mart’s
share of all for-
30% visa restrictions
interrupted by members of Re-
porters Without Borders who
eign buying in China. The China has stopped issu- unfurled a protest flag and tried
company’s imports to the ing multiple-entry visas for to grab the microphone.
US from China amounted foreigners. The visas, popular The torch passed easily
to US$321 billion last year. among foreign business trav- through Almaty, Istanbul and
elers, will be barred until after St Petersburg, but protests
19 US deaths caused by
contaminated heparin,
the Beijing Olympics in favor
of single- and double-entry
flared up in London on April
6. Police arrested 37 people
a drug used in kidney di- visas. In addition, residents of who tried to stop the torch as it
alysis, produced at US firm 33 countries will no longer be moved through the city.
Baxter International’s joint able to apply for China visas The next day in Paris, 3,000
venture plant in China. in Hong Kong. officers were deployed to protect torch runners. The flame
was extinguished several times by China’s Olympic Sacred
Corruption convictions Flame Protection Unit when protestors came too close.
Projected
value of
$143b Former Shanghai Party
Secretary Chen Liangyu was
The torch encountered fewer problems in San Francisco,
where its route was changed, and in Buenos Aires, where
China’s national pension sentenced on April 11 to 18 heavy security kept all but three water balloons away.
fund by 2010, twice its years in prison for abuse of As the torch moved to Dar es Salaam, Chinese reac-
current size. power and taking bribes in a tions to the earlier protests began to heat up, particularly
5.4%
2006 pension fund scandal. online. Complaints of biased reporting in Western media
Sinopec’s The sentence is were joined by calls for a boycott of French goods as retailer
profit growth the most severe Carrefour was accused of backing Tibetan independence.
in 2007, compared with a passed in Foreign leaders expressed concern. US presidential
30% gain in 2006. Rising raw China on a
material costs and govern- high-rank-
ment fuel price curbs were ing official. tycoon Zhang Rongkun is baidu set for day in court
blamed for the decrease. Chen will appealing a 19-year prison A Chinese court will hear
not appeal term handed down for his copyright infringement cases
China by numbers Now in book the sentence. role in the same scandal. brought against Baidu.com
form, a comprehensive listing Shanghai and Sogou, Sohu.com’s search
of China statistics with business jiang zemin energy paper
full sources. Former Chinese president
Visit www. Jiang Zemin released a
chinaeco- 16-page academic paper on
nomicreview. national energy strategy argu-
com/cbn ing for energy conservation.
Retired Chinese leaders have
Imaginechina
CHEn: 18 seldom commented publicly
years inside about national affairs.
8 China Economic Review • May 2008
more money for rice, wheat
Payments made to farmers for rice and
wheat will rise in a bid to boost supply
and lower inflation. Grain prices paid to
farmers will increase by up to 9%.
missile mix-up
China’s Foreign Ministry expressed
“strong displeasure” with the US over
an accidental delivery of missile fuses to
Taiwan. The Pentagon said in late March
that it mistakenly sent four interconti-
nental ballistic missiles fuses to Taiwan
in August 2006 instead of helicopter
batteries ordered by the island’s military.
xinjiang terrorists foiled
China said in April that it foiled two ter-
rorist cells targeting the Olympic Games
this year. Ministry of Public Security
spokesman Wu Heping said the groups
intended to plant bombs and kidnap
foreign journalists, tourists and athletes.
No supporting evidence was supplied.
Urban salaries on the rise
Average salaries of workers in China’s
urban areas rose by 18.7% to US$3,561
in 2007. This is the largest pecentage
China Foto Press
gain in six years.
in PARiS: Torch, torch bearer and
the Sacred Flame Protection Unit Chinese-born spy gets 24 years
Chi Mak, a Chinese-born engineer,
hopeful Hillary Clinton urged Presi- was convicted of conspiracy to export
dent Bush to join British Premier US defense technology to China and
Gordon Brown and German Chan- sentenced to 24.5 years in prison. A
cellor Angela Merkel in skipping the naturalized US citizen, Chi was also
Olympic opening ceremony. Bush convicted of acting as an unregistered
equivocated, but urged Beijing to foreign agent, attempting to violate
meet with the Dalai Lama. export control laws and making false
Beijing was incensed by the per- statements to the FBI.
ceived interference in its internal af-
fairs. But the Tibet issue is expected
to continue burning overseas as the
torch approaches Lhasa on June 20.
China Foto Press
engine, for linking to unlicensed music.
The international music labels behind
the cases are seeking US$9 million in
damages from Baidu and US$7.5 mil-
lion from Sogou. Anti-piracy progress highlighted
China’s State Intellectual Property
People’s daily reshuffle Office Beijing said more than 4,000
Wang Chen, former president of People’s people were convicted of product piracy
Daily, was named the new minister for in 2007. Authorities seized 76 mil-
the State Council’s Information Office. lion pirated movies, software discs and
Zhang Yannong, former People’s Daily goods last year and shut down 13,170
editor-in-chief, will become the paper’s businesses involved in piracy. A total of
president, and Wu Hengquan will be- 4,322 people were convicted by courts of
come editor-in-chief. product piracy.
China Economic Review • May 2008 9
REviEw • FAT DRAG oN
Empty stomachs, hot heads
C
fatdragon hina is rightly proud of its modern record nine months. With factory gate inflation leaping
of successfully feeding its vast populace. in March, economists now predict a CPI figure
After the disastrous famines of the 1950s between 8.0% and 9.3% for the second quarter.
and 1960s, when crazy Maoist economics helped Another concern is that rising expectations of
kill millions, the leadership has done a much better spiraling prices will become a self-fulfilling proph-
job of ensuring that one-fifth of the world’s popu- esy, as producers delay selling goods to benefit from
lation does not go hungry. higher prices tomorrow, while consumers jump in
But growing signs of a world food shortage are early for the opposite reason.
worrying the policymakers in Beijing. They fear Beijing hopes its tight monetary policy will
that a combination of international price rises and nip these expectations in the bud. Aside from food
An insider’s view of the
changing face of China
domestic inflation could provoke unrest at home. shortages, economists also blame an over-abun-
The soaring price of staples has already sparked dance of money in the economy for pushing up
riots in Haiti, and India’s government recently im- consumer prices.
posed a ban on all rice exports in an attempt to The central bank has ordered commercial banks
prevent similar protests there. Last month World to set aside more money as reserves and imple-
Bank president Robert Zoellick called for a “new mented tighter lending quotas. Further increases
deal” to address the emerging world food crisis, in interest rates are also in the cards. Despite mak-
while IMF head Dominique Strauss-Kahn warned ing a record US$115 billion in loans in January,
that rising food prices risked provoking war. banks now appear to be toeing the line. There was
China’s primary concern is that food inflation a moderate slowdown in both new money supply
will hit the rural poor – who devote a large portion and lending during March.
of their income to expenditure in this category. Yet the problem remains that tightening mon-
Premier Wen Jiabao was obliged to reassure etary policy is likely to have little effect on infla-
the country that grain stores are sufficient to en- tion, because soaring food prices reflect a shortage
sure supply and keep prices in check. But officials of supply rather than excess demand caused by
at the State Grain Administration have warned easy access to capital.
that shortfalls in production, rising fertilizer costs A better plan would be to keep speeding up the
and the global food shortage will put pressure on appreciation of the yuan. This would give China
domestic grain prices. It announced that rice farm- greater buying power in international markets,
ers would be given increased subsidies to ensure no – lowering the cost of importing expensive com-
further shrinkage in rice acreage this year. modities like grain – and help to cut the inflow of
Nevertheless, rising food prices have driven in- cash from export earnings.
flation to its highest level in nearly 12 years. The With the yuan breaking through the psycho-
consumer price index (CPI) hit 8.9% in February logical barrier of 7.0 to the US dollar in April, Bei-
and barely slowed in March. The official target for jing seems to agree. Perhaps US critics of China’s
the year is to keep the CPI at 4.8%. To meet it, in- exchange rate policy should be thanking the global
flation would have to stay below 4.2% for the next food shortage for finally getting their job done.
CHinAbUzz
US President George w. billion in hot money that entered stuff that we’re buying from Wal-Mart.
bush, on pressing for China in the first quarter: So I think our relationship with China
greater religious free- “The massive amount [of hot money] has certainly changed. I think they’re
dom in China: is not hype but a scientific conclusion. basically the same bunch of goons and
“But nobody needs to ... To be frank, we had no clue of how the thugs they’ve been for the last 50 years.”
tell old George Bush ... that money flowed into our country.”
he needs to bring religious new zealand trade minister Phil
freedom to the doorstep of Cnn’s jack Cafferty, during an April Goff, speaking during the signing
the Chinese, because I’ve done 9 broadcast of The Situation Room: of a free trade agreement between
that now for – I’m on my eighth “We also are running hundred of billions China and new zealand:
year doing it.” of dollars worth of trade deficits with “Just about every country in the world
them, as we continue to import their wants a trade agreement with China.
zhu baoliang of junk with the lead paint on them and New Zealand was important because we
the State infor- the poisoned pet food and export, you set the basis for the future negotiations
mation Center, know, jobs to places where you can pay and we have tried to come up with a
on the US$80 workers a dollar a month to turn out the high-quality and comprehensive deal.”
10 China Economic Review • May 2008
RE viEw • Pu NDITRY
Still time to tap the
China price
From “So why aren’t export- On the one hand, we
ers in pain?” by UbS Global have endless talk in the
Emerging markets Economist press and the wave of
jonathan Anderson, April 14: complaints [of traditional
Chinese exporters being
in trouble] coming from firms on the ground, and on the other
virtually no indication of trouble at the macro level. In our view,
there’s a simple explanation. As we highlighted many times in
previous research, all the signs of growing pressures are in place –
the wage costs, the currency strengthening, the global slowdown
– but China is still in the very early stages of the inevitable ad-
justment process. And international experience suggests that this
is a process measured in years (if not five-year intervals) rather
than months. So while mainland exporters can’t raise prices and
pass on costs forever, and we have little doubt that traditional
sectors will lose competitiveness to a much greater degree down
the road, it’s far too early to talk about pending disaster.
From “Cost normaliza- Recently escalating produc-
tion,” by minggao Shen tion costs in China could
and ken Peng, Citigroup have signaled the beginning
Global markets, April 1: of cost normalization – pull-
ing distorted prices and costs
of key inputs back to the market level. Though likely irreversible,
this process would be gradual, probably taking a decade or even
longer to accomplish ... However, China’s comparative advan-
tages in manufacturing will not disappear even when key input
prices are determined by the market. The still relatively low labor
costs, the economies of scale due to extended production chains
and the potential consumer market will likely help maintain the
competitiveness of Chinese goods for a long time. [But] cost
normalization will continuously pressure profit margins of man-
ufacturers. Industrial consolidation through mergers and acqui-
sitions will probably become the main theme of investment.
From “Chinese property Moody’s has a negative out-
developers,” by Senior look for China’s property
Credit Officer Peter Choy development sector as tighter
and Analyst kaven Tsang, credit conditions are likely
moody’s investors Service, to prevail over the next 12-
April 16: 18 months and, at the same
time, business prospects have
become much more challenging. The overall sector has negative
prospects in the near and medium term because Chinese devel-
opers face challenges in funding their capital expenditure with
domestic and overseas funds, while also facing a more prob-
lematic sales environment ... [Developers] that fail to maintain
strict financial discipline and, in particular, disciplined liquidity
profiles, risk downward pressure on their ratings ... Government
policies are also restricting domestic bank credit and increasing
lending costs for developers’ prospective customers – predomi-
nantly the buyers of residential housing.
China Economic Review • May 2008 11
CER EVENTS LEADING THRouGH CHANGE
Leaders of tomorrow
What foreign
firms must
do to deliver
the local
management
teams
they need
T
here appears to be a shortage of business were only 3,000-5,000 international-standard se-
leaders in China – or at least of people who nior managers in China. While some critics have
can work effectively with multinationals in scorned this conclusion, Moreton endorsed it. He
the global arena. The current talent squeeze and noted that many China-based EMBA programs
Sino-foreign corporate culture clashes came under have excess capacity because they turn away so
the microscope at “Leading Through Change,” an many local candidates who don’t have the requisite
event organized by China Economic Review in “language skills or international exposure.”
Shanghai in late March. The long-term solution is localization and en-
Making the keynote address, Dr Patrick More- gagement. This was a point of agreement for all
ton, assistant dean and managing director of the speakers at the event, which featured representa-
Washington University-Fudan University EMBA tives from recruitment consultancy Caliper and
Program, said the demand for international-stan- U21 Global, an online graduate school.
dard leaders in China is only going to rise. Success is dependent on creating an environ-
“One of the effects of a downturn in developed ment in which local staff can flourish and develop
countries is that companies will come to China and top-level leadership skills.
turn the dial up,” Moreton said. “China is a core “Too many Western managers come here and
market now and is expected to deliver results.” don’t interact with normal Chinese people,” said
However, there are not enough local people Mark Lawrence, managing director of Caliper
to meet the demand. A much-quoted 2005 study China. “The key is to have open communication
by McKinsey, a consultancy, concluded that there and have all team members engaged.”
The X factor: Jiaxing talks up its commercial edge
The space between the big industrial hubs of native to those three cities, said F.C. Kwong, While many of the region’s cities are known
the Yangtze River Delta is littered with dozens industrial director at property consultancy DTZ. as low-value production centers, Jiaxing is
of lesser-known cities that in fact do much of The opening this summer of the 32-kilometer climbing the value chain. Wealth is a key factor
the producing for the region. China EConomiC Hangzhou Bay Bridge, he added, will bring Ji- in terms of the industries an X-tier city attracts,
REviEw held an event on April 9 highlighting the axing closer to a fourth major hub, Ningbo. said Bill Dodson of Silk Road Advisors. Jiaxing’s
Xiuzhou district of Jiaxing, an up-and-com- Marty Paugh, president of Global Resourc- per capita GDP, at more than US$5,000, puts it
ing “X-tier” (that is, anywhere from third- to es International, an electronics manufacturer in the region’s upper range. This makes the city
fifth-tier) city nestled between powerhouses that relocated from the outskirts of Hangzhou more attractive for higher-end industries such
Shanghai, Hangzhou and Suzhou. to Xiuzhou five years ago, noted that the bridge as high-tech manufacturing and IT outsourc-
Jiaxing, with its lower costs and pro-busi- was one consideration in the move, but so was ing, he said. “Jiaxing is definitely a city to watch
ness government, presents an attractive alter- the living environment for his employees. over the next five years.”
12 China Economic Review • May 2008
REviEw
Follow the money
Top investment deals
value Target
date Target Acquirer
(US$m) sector
domestic m&A
Mar 18 Huaxia Bank Shougang Group 557.6 Financials
Mar 18 Huaxia Bank State Grid Corp 524.3 Financials
Mar 27 Wujianfang Coal Mine Datang Intl Power 488.8 Materials
Mar 28 Jiangsu New Yangzi Yangzijiang Shipbuilding 395.1 Industrials
Mar 26 Tongfang Unite Hldg China Kejian 352.7 Real estate
inbound m&A
Mar 18 Huaxia Bank Deutsche Bank AG (Ger) 552.9 Financials
Consumer
Apr 8 Inner Mongolia Mengniu Milk China Mengniu Dairy (HK) 386.6
staples
NWS Holdings (HK), Suez Energy &
Apr 8 Chongqing Water Group 214.5
Environment (Fra) power
Apr 9 Guangzhou Heyin Plaza Dvlp China Central Properties (HK) 198.5 Real estate
Outbound m&A
Mar 19 Fortis Investments (Bel) Ping An Insurance 3,358.9 Financials
m&A half of Fortis NV’s as-
Apr 10 Jinshan Gold Mines (Can) China National Gold Group 206.1 Materials set management arm for
Date: March 18 - April 18 Fiat asset purchase US$3.36 billion, raising its
Shanghai Automotive Indus- total stake in the Dutch-Bel-
m&A volume by industry Top 10 iPO bookrunners try Corp (SAIC) said Shang- gian bank to 4.99%. The deal
year to date includes A & H Share iPOs
hai VW, its joint venture with comes after Fortis reported a
Volkswagen, would purchase US$4.2 billion write-down in
Proceeds no. of
Target sector
value
(US$m)
no. of
deals
bookrunner
(US$m) issues the assets of Fiat joint venture subprime mortgage exposure.
Materials 5,910.7 93 CITIC 3,977.7 1 Nanjing Fiat. Reports indi-
Financials 3,535.2 131 China International
cate SAIC will pay US$214
Capital Co
2,418.0 2
million for the assets. CAPiTAl mARkETS
Real estate 2,842.0 58
China Galaxy
1,779.5 1
Energy & power 1,862.4 72 Securities
deutsche bank ups stake markets continue slide
Industrials 1,463.8 52 Essence
Securities
1,431.3 1 Deutsche Bank said it would A 4% drop in the Shanghai
Consumer staples 1,088.4 91
Macquarie Bank 864.4 1
pay US$550 million to Composite Index (SCI) to
High technology 691.3 74
Citi 864.4 1
increase its stake in China’s 3,094.67 points on April
Healthcare 497.5 43 Huaxia Bank from 9.9% to 18 capped another difficult
Retail 493.8 27
Bank of China 638.5 1
13.7%. The deal is still subject month China’s domestic
Media & entertainment 481.3 16
BNP Paribas SA 476.2 2
to regulatory approval. stock markets. The fall was
UBS 349.4 1 blamed on deteriorating
Consumer-related 360.4 46
Goldman Sachs 349.4 1 global markets and Beijing’s
Telecommunications 148.8 17
renewed commitment to a
Total 1,077.8 36
industry Total 19,431.6 664
tighter monetary policy. The
Date: January 1 - April 18 Date: January 1 - April 18
SCI is down 49% on its mid-
October peak of 6,092.06.
China Foto Press
new share listings
Trade Date Name Proceeds (US$m) Fewer first quarter iPOs
Apr 18 Zijin Mining (601899.SH) 1,288.2
The total value of initial pub-
Apr 17 Jinduicheng Molybdenum (601958.SH) 1,277.0
lic offerings in China came
CiCC sale shelved to US$7.85 billion in the first
Mar 26 Want Want China Holdings (151.HK) 1,048.1
Morgan Stanley delayed the quarter of 2008, down from
Mar 31 Solargiga Energy (757.HK) 126.9
sale of its 34.3% stake in US$9.06 billion in the same
Apr 15 Puyang Refractories (2225.SZ) 41.1 China International Capital period of last year.
Mar 31 Xingfa Aluminum Holdings (98.HK) 36.8 Corp (CICC) to private
Apr 8 Jiangsu Yuyue Medical Equip’t & Supply (2223.SZ) 3.2 equity bidders, citing low of- Red chip listings delayed
Apr 15 Zhejiang Sanlux Rubber (2224.SZ) 2.
fers. The US investment bank China’s State Council delayed
Total (from 8 offerings) 3,878.8
hopes to get at least US$1 plans to allow red chip list-
Date: March 18 - Apr 18 billion for the stake. ings on the Shanghai Stock
Exchange amid fears that
Ping An rescues Fortis weak market sentiment would
Ping An Insurance bought depress valuations. Red chips
14 China Economic Review • May 2008
Hot commodities 19.73% stake in Australian
miner Mount Gibson Iron
blocked in early April by
Australian regulators.
A
voracious appetite pany – perhaps Baoshan The regulators ruled
for commodities Iron and Steel – might buy that because a Shougang
saw China pursue a 9% stake in Australian subsidiary already held
a string of acquisitions in miner BHP Billiton. BHP shares in Mount Gibson,
March and April. denied the existence of a new stake would give
China’s typically con- a deal, but shares in the Shougang too control over
servative State Administra- company still spiked in the Australian firm.
tion of Foreign Exchange response to the rumors. However, such obstacles
(SAFE) seemed to be Aluminum Corp of are unlikely to hold back
heralding a new, more ag- China (Chinalco) also other Chinese investors.
gressive investment strategy entertained talk of buying. China National Petro-
China Foto Press
nEw mASTER: Fiat’s China joint
when it bought a 1.6% After partnering with US leum Corp (CNPC) and its
venture will be taken over by the
stake worth US$2.8 billion firm Alcoa to buy a 9% listed subsidiary, PetroChi-
SAIC-Volkswagen partnership
in French oil firm Total. stake in BHP rival and na, had two US$20 billion
Not long after, it was perennial takeover target deals with Spanish oil com-
firms are incorporated and announced that SAFE, Rio Tinto earlier this year, pany Repsol YPF fail last
listed overseas but controlled which manages China’s Chinalco said it remained year after Repsol backed
by Chinese shareholders. foreign exchange reserves, on the lookout for more out. But CNPC and Petro-
had bought just under 1% acquisitions. China are reportedly once
China life, CiC in visa iPO of British Petroleum for an Not all attempts have again mulling a US$10
China Life said it invested estimated US$2 billion. met with success. billion purchase of some of
US$300 million in Visa’s Meanwhile, rumors Steelmaker Shou- Repsol’s South American
March 19 initial public offer- spread that a Chinese com- gang found its bid for a assets and refineries.
ing in New York. This is the
China Economic Review • May 2008 1
REviEw
US$4 billion. Fund manag-
ers believe this is unlikely to
be repeated in 2008, as assets
under management fell 24%
RMB
in the first quarter.
rising
China Foto Press
CiC seals jC Flowers deal
China Investment Corp
T
(CIC), China’s sovereign he renminbi dipped
first overseas investment wealth fund, signed a deal below 7.0 to the US
by China’s largest insurer. Ac- with US private equity firm dollar for the first
cording to reports, China In- JC Flowers to launch a new time in a decade on April
vestment Corp, the country’s US$4 billion private equity 10 as it ended trading in
sovereign wealth fund, put fund. The fund will invest in Shanghai 6.9916. China’s
US$100 million in the IPO. US assets, and CIC will pro- currency has gained more
vide about 80% of its capital. than 18% against the dollar
insurance investment since its 2005 revaluation,
An agreement was signed rising 4% in the first three
to allow mainland insurance invESTmEnT months of 2008 alone.
firms to set up asset manage- The yuan’s climb wasn’t
ment firms in Hong Kong. more GE investments lost on investors as specula-
The scheme could allow up to General Electric said it tive inflows of “hot money”
US$54 billion to be invested plans around US$2 billion reached US$80 billion in
in overseas stock markets. in acquisitions and other the first quarter, accord-
ing to Zhu Baoling of the
State Information Center.
FUndS This compares to inflows of
US$120 billion during the
Pension fund to double whole of 2007.
China’s national pension fund However, US Treasury
said it would double in size Secretary Henry Paulson
to over US$143 billion by the – a regular critic of China’s G7 group as a whole, which
Phototex
end of 2010. The fund will exchange rate policy – said called on China to let its
target investments in finance, he was “pleased” with the currency appreciate even
transport and energy sectors. investment deals in China currency’s appreciation. more quickly.
over the next three years. The Paulson reiterated these Remarks made at an
mutual fund slowdown company wants to increase its positive sentiments at a IMF meeting in Washing-
Mainland mutual fund China revenues from US$4.4 subsequent G7 meeting but ton by Zhou Xiaochuan,
brokers saw management billion in 2007 to US$10 bil- this didn’t hold back the governor of China’s central
fees rise by 395% last year to lion by 2010.
FTSE All-world and FTSE China indices FTSE/xinhua China 2 index
110
Highest performers for the month to April 17
100 name Price (Hk$) Change (%)
China Merchants Bank 28.7 34.11
90
China Citic Bank 4.59 28.93
80 China Coal Energy 16.3 26.55
Bank of Communications 10.18 25.68
70
Bank of China 3.75 24.58
Economic indicators
60
December 2007
FTSE All-World index
February 2008
FTSE China 25 index
April 2008
US dollar-Rmb exchange rate (US$100)
750
SCi Hang Seng 740
5,000 25,000 730
4,500 24,000 720
4,000 23,000 710
3,500 22,000 700
690
3,000 21,000 Nov Dec Jan Feb Mar Apr
Feb Mar Apr Feb Mar Apr
16 China Economic Review • May 2008
Fdi up 61.3% in Q1
Foreign direct investment
in the first quarter rose by
61.3% to US$27.4 billion,
according to the Ministry of
Commerce. Investment in
March alone was up 39.6%
year-on-year to US$9.3
billion. The first quarter saw
6,949 new foreign-funded
enterprises, down 25.2% on
the previous year.
mACROECOnOmiCS
inflation on the rise
The consumer price index
rose by 8% in the first quarter,
though price growth eased
slightly in March to 8.3%
from 8.7% in February. Food
prices soared by 21% in the
first quarter compared to the
previous year.
FAi up 24.6% in Q1
China Foto Press
mAGiC nUmbER: The Fixed-asset investment rose
yuan has crossed the 7.0 by 24.6% year-on-year in the
to the US dollar threshold first quarter. This compares
to a gain of 23.7% in the first
bank, indicated that three months of 2007. Urban
Beijing would contine to fixed-asset investment rose
resist such pressure.Nev- 25.9%, while rural fixed-asset
erthless, analysts expect investment rose 18.3%.
the yuan to keep gaining
in strength. Some see it China revises 2007 GdP
reaching 6.10 to the dollar The National Bureau of
by the end of this year. Statistics raised its estimate
for 2007 GDP growth to
Economic data
Value (US$ billion) % change from a year earlier
GDP 878.4# 10.6
Consumer price index 8.3
Producer price index 8
Retail Sales 116.04 21.5
Consumer confidence -1#
Actual FDI 9.3 39.6
Exports 109 30.6
Imports 95.6 24.6
Trade surplus 41.4# -10.6
Industrial output 17.8
Enterpreneur confidence -0.99#
Foreign reserves 1682.2 39.94
Bank lending 4,198.57 16.23
M1 2,155.7 18.25
M2 6,044.2 16.29
Urban fixed-asset investment 312.07# 25.9
National property index 3.5
# 1st Quarter
China Economic Review • May 2008 17
REviEw
11.9% from 11.4%. China’s
Slowing growth GDP totaled US$3.56 tril-
lion based on current prices,
up US$41.63 billion from
the original estimate. GDP
China Foto Press
growth for 2006 was also
C
hina’s economic Foot off the gas raised to 11.6% from 11.1%.
growth, though China’s monthly trade surplus
still sizzling by 30
most standards, moder- 25
FOREiGn TRAdE lion tons of liquefied natural
ated somewhat in the first 20
gas (LNG) each year from
three months of 2008. US$ billion 15 landmark trade deal Qatar. Petrochina’s agreement
The National Bureau of 10 China and New Zealand to buy 3 million tons of LNG
Statistics said that first 5 signed a comprehensive free annually for 25 years is with
quarter GDP growth 0
Oct 07 Nov 07 Dec 07 Jan08 Feb 08 Mar 08
trade agreement, the first the Qatargas 4 project, a joint
stood at 10.6%, compared Source: China Customs, NBS such deal China has signed venture between state-owned
to 11.7% for the same with a developed economy. by Qatar Petroleum and
period last year. “providing a possible New Zealand will eliminate Royal Dutch Shell.
Indeed, slowing counterweight to the tariffs on Chinese goods by
growth was the mantra slowing industrial econo- 2016. Almost all Chinese
among economy watch- mies” such as the US. tariffs on New Zealand goods TElECOm
ers, with several groups Meanwhile, the Asian will be removed by 2019.
revising their GDP Development Bank Ericsson nets mobile deal
projections for China. (ADB), having previ- Ericsson will supply US$1.44
The World Bank ously put China’s 2008 billion of equipment to
lowered its 2008 growth economic growth at China Netcom and China
estimate to 9.4% from 10.8%, revised its estimate Mobile. The US$1.3 billion
9.6%, which was already downwards to 10%. deal with China Mobile cov-
China Foto Press
down from a previous The bank also outlined ers core radio and network
projection of 10.8%. Ris- a worst-case scenario equipment, support and
ing prices and the effects in which China’s GDP power-saving features, while
of a global slowdown growth would slow to 7%. the US$140 million agree-
were blamed for the low- Both the World Bank nigerian guarantees ment with China Unicom
ered estimate. and the ADB highlighted China offered Nigeria US$50 focuses on WAP services.
However, the bank falling exports as one cul- billion in export credit
asserted that Chinese prit for slowing growth. guarantees over three years Telcos post 2007 results
growth would still be This was confirmed by to fund projects. The offer China Mobile, the country’s
robust enough to drive China’s first quarter trade by Sinosure, China’s export largest telecom operator,
the global economy, thus figures. The trade surplus credit guarantee agency, posted net profits of US$12.5
declined by 10.8% year- would support Beijing’s billion in 2007, up 32% year-
on-year to US$41.42 efforts to secure access to on-year. China Unicom’s prof-
billion. Exports grew 21% energy resources in Nigeria. its were up 115% to US$1.3
to US$305.9 billion while billion on the back of a tax
imports were up 29% at refund and other exceptional
US$264.48 billion. EnERGy gains. Full-year profits came
Exports to the US to US$1.5 billion for China
were flagged as being Huaneng’s wind farm plan Netcom, while China Tele-
expecially slow. Fan Gang, Huaneng Group will begin com posted US$3.4 billion, a
an economist with the construction on China’s larg- 13% year-on-year loss.
central bank, warned est wind farm, with a 300-
that a 1% slide in the US megawatt capacity, in June. China mobile on top
economy could trans- The Liaoning-based project Telecom companies’ profits
late into a 5%-6% drop will use 200 wind turbines 14
in China’s exports to and reduce carbon dioxide 12
America. Fan added that emissions by 750,000 tons 10
8
US$ billion
a year-long US economic and sulfur dioxide by 4,000 6
slowdown could end tons a year. 4
2
up wiping 1% off 0
China’s GDP Oil firms sign lnG deals -2
2004
2003 2005 2006 2007
growth. Petrochina and CNOOC China Mobile
China Netcom
China Unicom
China Telecom
committed to buying 5 mil- Source: Company annual reports
FAn GAnG: China Economic Review • May 2008
18
Export warning
PERSPECT ivE
Diagnosis: critical
M
underfunded y first advice to anyone bEijinG say he was going to administer another
moving to mainland China CAllinG epidural. All he did was roll her on her
and corrupt, is: Buy the best health in- side and jiggle the cord he’d already in-
China’s surance possible, preferably a policy jected in her spine.
that will airlift you to Hong Kong or By then, the baby was coming and
healthcare beyond if you get really sick. the anesthetist disappeared, replaced
system is in Anyone who has been unfortunate by a nurse who grabbed my wife’s fin-
enough to spend any time in a Chi- ger, dipped it in red ink, blotted it on
need of a cure nese hospital will agree the country’s a piece of paper and then ran from
health system is in a perilous state. A seasoned observer of China’s
the room before we could find out
The de facto privatization of much business scene explores the issues
making waves in the capital
what it said. We can only assume it
of the state-funded health apparatus was the hospital’s indemnity form.
has left looming funding gaps, which hospitals and Two days after the birth of our daughter, my
doctors are forced to fill by resorting to predatory wife found she couldn’t lift her right leg and had
practices that exploit the vulnerable. It is common shooting pains in her lower abdomen. Back at the
for doctors – looking to supplement their meager hospital she was put through a series of (expen-
incomes – to request unofficial payments from sive) tests. Three hours later, a doctor finally rec-
families in return for promises of “special care” for ommended she bend at the waist and wiggle her
their ailing loved one. Unsurprisingly, most fami- hips in order to realign her internal organs.
lies dare not refuse. The following week we re-
My wife recently had a baby in turned to the hospital and were told
Beijing and in the months leading The nurse dipped by another doctor that the problems
up to the event I was regularly ad- were most likely the result of nerve
vised by Chinese parents on how my wife’s finger damage in my wife’s spine, caused
much cash I should put in the hong in red ink, blotted by the useless epidural.
bao (red envelope) required before May I remind you that this is the
the birth by the doctor, mid-wife, it on a piece of best (or at least the most expensive)
anesthetist and nurses to ensure a hospital in Beijing, if not the coun-
safe delivery. paper and ran try. I have experienced first-hand
from the room some of the less reputable corners
Scan scams of the Chinese health system and
Even the most dilapidated, grimy before we could can attest that the situation is infi-
hospitals are equipped with state- find out what it nitely worse elsewhere.
of-the-art MRI machines, because
patients can be charged huge fees was. we can only money matters
for scans, necessary or not, that al- Chinese citizens live in fear of be-
low a hospital to quickly recoup
assume it was ing struck down by a major illness,
its investment. Arbitrary over- the hospital’s which will go untreated until they
prescription of expensive Western or their families come up with a
medicines, particularly antibiotics, indemnity form cash deposit covering the entire
is a chronic problem and stokes estimated bill. Indeed, the lack of a
fears over the rise of drug-resistant super-bugs. credible health system is one of the major reasons
Even for the well-insured or the very rich, the for China’s unusually high savings rate.
options are limited. A number of private, high-end After decades of dismantling the welfare state
“international” hospitals and clinics have sprung up it had constructed under communism, the Com-
to cater to expats and affluent locals. While their munist Party now realises that health care for its
facilities are positively luxurious and patients don’t citizens is a social stability issue.
have to worry about bribing their doctor, the level In March, Premier Wen Jiabao pledged to in-
of care they provide hardly warrants fees of at least crease the central government’s spending on health
10 times that charged by local hospitals. care by 25% this year. This follows a quadrupling
In the end, thanks to excellent insurance, my of spending in 2007 over the previous year, which
wife and I opted for the top international hospital brought the national health budget to just US$9.5
in town, which specializes in delivering babies. billion – about the same as the country’s newly-
During the labor my wife was given an epidural, established sovereign wealth fund has to spend on
but when the anesthetist checked his handiwork he its first batch of offshore acquisitions.
found he’d only numbed her from the knees down. No wonder the long-term outlook for China’s
His panicky reaction was to keep adding drugs and insurance industry looks so bright.
China Economic Review • May 2008 19
PERSPECT ivE
PERSPECTiv E
Elephant in the room
I
Recent unrest ndia is in the midst of a delicate diSPATCHES with New Delhi’s security establish-
diplomatic dance with China. The ment, the economic liberalization of
in Tibet has last thing policymakers in New the 1990s promised to take bilateral
placed the Delhi wanted was for Tibet to return to relations in a new direction.
the global stage – and by extension the However, mistrust still runs deep.
India-China Indian mountain hamlet of McLeod Mukherjee’s recent efforts to tone
relationship Ganj that is home to the Dalai Lama down statements from McLeod Ganj
and Tibetan government-in-exile. were seen domestically as a sign of
under renewed But the protests that erupted in weakness, especially after New Delhi’s
Lhasa following the March 10 an- envoy to Beijing received a 2am sum-
strain ED LANE
niversary of a failed 1959 uprising India-based writer with over a decade of mons over Tibetan protests at the
against Chinese rule in Tibet were reporting experience in Southeast Asia Chinese embassy in India.
hard to ignore. The Dalai Lama was Meanwhile, India’s opposition par-
quick to react to the violence, gathering a new ties are turning China into a political hot potato
wave of international support that has disrupted ahead of elections due in early 2009. They com-
the Olympic torch’s journey around the world. plain of Beijing scooping up the country’s iron ore
India found itself, officially, mildly on the side reserves and pushing India around on the disputed
of China as the Olympic torch spent an unventful, border by encroaching into new areas. Editorials
but well policed, day in the country in mid-April. have taken note.
The Dalai Lama is a “guest” in India and “In the past few months India has stomached
should not do anything that has a “negative impact every Chinese insult,” columnist Swapan Dasgup-
on Indo-Sino relations,” Foreign Minister Pranab ta wrote in the Times of India on April 6. “India has
Mukherjee told reporters. His sim- become the prisoner of an unequal
ple plea sidestepped decades of bit- relationship.”
ter history between India and Chi- Singh and
na. It looked to the future, showing in competition
why Tibet is the elephant in the mukherjee see India is playing catch-up with Chi-
room when the two sides engage. little value in na economically and in the race to
secure new markets and commodity
nuclear priorities confronting streams. In April, New Delhi hosted
India needs Chinese support in its first-ever summit with African
the 42-nation Nuclear Suppliers China over nations to ensure its long-standing
Group as it moves to complete a Tibet. Rather, ties to the continent are not eclipsed
deal with the US to sign a safe- by China. And through deals such as
guard agreement on some of its they recognize Tata Motors’s acquisition of the Jag-
nuclear plants. The hope is that this the region as uar and Land Rover brands, India
will end the current ban on sales of has shown the potential to work as a
nuclear power equipment. part of China, as counterweight to China in Asia. The
Prime Minister Manmohan they delicately competition may even prove a boon
Singh, who sees the nuclear deal as for their economies.
vital to energy security, met Presi- try to step into Then there are the 110,000 Ti-
dent Hu Jintao earlier this year to betan exiles in India. They represent
seek at least tacit support from the the future a litmus test for both sides.
China – also one of the five perma- Many Indians are happy and
nent UN Security Council members. The leaders proud that the Dalai Lama has made his home
also pledged anew to double trade to US$40 bil- at McLeod Ganj and support his stance on hu-
lion by 2010 and to try and settle a long-festering man rights and autonomy. Mukherjee and Singh,
border row that brought them to war in 1962. however, see little value in confronting China over
For both countries, 1962 is a watershed for Tibet. Rather, they recognize the region as part of
post-war and post-colonial relations. China, as they delicately try step into the future.
When the Dalai Lama fled across the Hi- The domestic response to the unrest in Tibet
malayas in 1959 after the failed uprising, it put – a general condemnation of Beijing’s crackdown
a frost on ties between the two countries previ- both in print and in actual protest – suggests that
ously described by Jawaharlal Nehru, India’s first the realpolitik of India’s leadership is not a win-
prime minister, as Hindi-Chini Bhai Bhai (India ning political formula. The electorate – like an el-
and China as brothers). Although the mauling ephant – remembers there is more to this bilateral
India suffered in the subsequent war still rankles relationship than trade.
20 China Economic Review • May 2008
End of the affair?
F
Chinese firms or some of the global financial kEn for 4.2% of Dutch-Belgian bank Fortis
services sector’s most venerated dEwOSkin only to see the value of its holding de-
may have names, it is a buyer’s market. The cline by 20% to date.
lost out on subprime mortgage crisis is deepening, These unrealized losses look even
monoline insurers are struggling and worse when adjusted for renminbi ap-
financial sector new concerns are emerging about the preciation and viewed in terms of ren-
investments prospects for large issuers of consumer minbi returns.
credit – in the US and Europe. But the fundamental appeal of fi-
overseas, but Financial services have become a nancial sector investment overseas is
primary target for outbound Chinese unchanged. At worst, there is a sense
this won’t investors, including the country’s sov-
Senior advisor, Deloitte China
and professor emeritus at the that timing could have been better.
dampen their ereign wealth fund, China Investment
university of Michigan
There are also broader strategic goals in
Corp (CIC), big state banks and investment trusts, play, such as promoting domestic reform through
interest and cash-flush domestic insurance companies. participation in foreign financial service firms.
Three drivers are propelling this forward. First,
after years of criticism over poor management of Reason for optimism
the state banks, China’s leaders have turned a corner. Some recent successes are also encouraging further
Now feted for the sucessful listings of those same investments. China Life put US$300 million into
lenders, these leaders are also called Visa’s mammoth initial public of-
upon to bail out some of the most fering and is presently sitting on a
prestigious names in banking. China’s leaders 36% gain. CIC put US$100 mil-
Secondly, distressed assets are lion into the offering. It is evident
attractive targets for opportunistic have turned a that China’s large funds, banks and
Chinese buyers. They want to find corner. now feted insurers will continue to fish the
outside of China the kind of fast choppy waters of global financial
turn-around, balance sheet boosters for the successful services, likely expanding their net
they can easily find at home.
Thirdly, the large global banks
listings of state to include interests in insurance, re-
insurance, leasing companies, con-
shopping for infusions of capital banks, these sultancies and service companies.
appear to be bankrupt-proof, just
like China’s state banks. The semi-
leaders are also Private equity firms, hedge funds
and venture capital could also come
nationalization of Northern Rock called upon to into the equation.
by the UK government and the Sellers seeking Chinese invest-
recent move by the US Federal Re- bail out some ment would do well to invest in un-
serve to save Bear Stearns confirm of the most derstanding what is behind these
the idea that the national utility of decisions.
large financial institutions will pre- prestigious The mix of drivers has its own
serve them from bankruptcy. Chinese characteristics, being a
names in banking product of the unique challenges
Party’s over China faces in managing its wealth
There is now a crisis of confidence in this strategy, and sustaining growth. These drivers include pres-
which led China Daily in mid-March to declare sure to diversify geographies, currencies and target
that China’s “love affair” with Wall Street is over. types; the need for short- and mid-term growth
As the financial crisis in the US and Europe potential and for cash-flow potential; and the de-
has deepened, China’s funds and banks have suf- sire to impact their own domestic reform agenda.
fered along with other investors. Viewed in the Results from domestic activity of large Chi-
shortest of terms, the performance of foreign in- nese enterprises in 2006 and 2007 demonstrate
vestments by mainland financial institutions has the importance of wealth creation through finan-
not been good. cial asset investment to complement operational
Shares in Blackstone have sunk almost 50% earnings on their balance sheets. In the broadest
since CIC bought into the private equity firm in overview, we are watching now a similar transfor-
June last year. The failure of Barclays to acquire mation of the national economy, as China’s success
ABN AMRO has wiped 40% off the value of China as a global exporter of goods and services is being
Development Bank’s investment in the UK-based complemented by a strategy to create more wealth
bank. Shares in Morgan Stanley are down 23% on through global financial investment.
December levels when CIC bought a US$5 bil- It is far too premature to declare the love affair
lion stake. Ping An Insurance paid US$2.8 billion over. In fact, it is just beginning.
China Economic Review • May 2008 21
SPECiAl REPORT • SouTHEAST ASIA
Oil’s well
A
Palm oil from Malaysia t an oil palm estate near Melaka
Town in peninsular Malaysia, the
and Indonesia is grabbing harvesters are winding up the day.
market share in China as The Regent Estate, owned by IOI Cor-
poration, employs around 300 workers in
demand for the versatile all. With the sky turning dark and little
commodity rises shelter out in the plantation, the harvest-
ers hurry to avoid being caught in a tropi-
cal downpour.
One harvester, a Bangladeshi nation-
al, cuts down a final bunch of fruit from
a palm. He swings his sickle – modified
with an elongated, four-meter-long han-
dle – and a cluster of yellowish-orange
palm oil fruit falls from the tree. It hits
the ground with a heavy thud.
Once these fruits are crushed and re-
fined into palm oil, there is a good chance
they will end up in China. IOI exported
230,000 tons of palm oil products to Chi-
na last year, accounting for 6% of Malay-
sia’s total palm oil exports to the country.
Malaysia itself is responsible for 40% of
world palm oil output.
The versatile commodity is used as
cooking oil, in food and cosmetics pro-
cessing, and myriad other industries. Chi- CIMB in Kuala Lumpur.
na, perhaps unsurprisingly, is the world’s Palm oil, traditionally unglamorous,
biggest importer of palm oil. has lately become a hot commodity. Ac-
“If we look at the major importers, cording to investment bank Credit Suisse
China has been number one for many crude palm oil prices rose 38% – from
years,” said Ivy Ng, who researches palm US$917 a ton to US$1,265 a ton – over
oil plantation stocks at investment bank a 12-week period from the start of De-
Raw materials: China feeds its need bought about 357,000 tons the same year. In
2007, however, imports slowed and market
prices softened, as supply was boosted by do-
Coal the same 20 million ton a year rate we would mestic output of natural rubber, according to
China became a net importer of coal for the have expected 12 months ago,” Driscoll said. the Hong Kong Trade Development Council.
first time last year but there have been sharp Policies designed to keep domestic coal
increases in coal imports for some time now. in-country and a rise in sea-borne coal prices Oil & Gas
Imports primarily come from Australia, In- means that domestic coal will be more price Liquefied natural gas (LNG) is not widely used
donesia and Vietnam, according to Andrew competitive this year than last. Indeed, China’s in China. Its consumption has been limited to
Driscoll, head of resources research at CLSA. coal imports were down 10% year-on-year in Sichuan province and parts of northeastern
Customs statistics show that Vietnam was the first two months of 2008, Driscoll said. China, where domestic gas fields are located.
China’s biggest supplier last year, accounting However, the energy-intensive east coast
for 24.6 million tons of coal. But the import Rubber could potentially be serviced by natural gas,
story this year may be less bullish than before. China is the world’s top tire producer, and it according to Fitch Ratings. The State Council
“You would expect China on an overall basis has increasingly had to import rubber from projects that natural gas will account for 8%
to be a net importer this Southeast Asia to meet demand. Indonesia is of total energy output by 2010, up from 3%
year, but not at a big supplier, exporting more than 337,000 in 2005. In the coastal areas, natural gas de-
tons of rubber to China in 2006, according to mand will likely be met by imports from Aus-
the Rubber Association of Indonesia. This tralia and Indonesia. China has built two LNG-
made China its second-largest receiving terminals in Guangdong and Fujian
market behind Japan, which provinces for imports from these countries.
22 China Economic Review • May 2008
COAl: National necessity
in demand the only reason for palm oil’s current
Crude palm oil futures prices
popularity. Demand is rising across the
950
developing world while biofuel policies
introduced in developed countries are an-
900
other contributing factor. In Europe and
the US, the commodity is a substitute for
US$ per ton
850
800 rapeseed and other edible oils, which are
750 increasingly being used for fuel purposes.
700 Of the 17 types of edible oils and fats
that are traded globally, palm oil remains
Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08
Source: Bursa Malaysia Derivatives
the cheapest, going for US$300 less than
cember. There haven’t been highs like this soya oil, according to Credit Suisse.
since 1998.
China is a key driver of these tower- The rivals
ing prices. The disastrous snowstorms this Palm oil’s great rival in China is soybean
winter mean the spring rapeseed harvest oil, which is mainly imported from South
will likely be poorer than planned. Rape- America. China is the world’s biggest
seed is a major source of edible oil in Chi- soybean importer, buying 33.5 million
na, and palm oil imports are expected to tons last year, a CLSA report said. Soy-
make up the difference. At the same time, bean oil occupies 37% of the edible oils
broader trends, like China’s increasingly market in China, according to research
wealthy population, also mean individu- firm Beijing Agribusiness, compared to
als are consuming more oil than before. palm oil’s 21% share.
“China was consuming a very low But palm oil has momentum on its
amount of edible oil per person com- side. In 2002, it overtook rapeseed oil to
pared to some of the more developed gain its current second-place position in
China Foto Press
countries,” Ng said. “But over the past terms of market share.
FRESH HARvEST: Palm oil
few years they’ve been catching up.” “Traditionally, the Chinese market
fruit set to depart for the mill
Increasing demand from China isn’t is a big market for rapeseed oil; prob-
China Economic Review • May 2008 23
SPECiAl REPORT • SouTHEAST ASIA
From Southeast Asian refineries,
the oil is imported into China. Wilmar,
which has most of its plantations in In-
donesia, is responsible for some 60% of
palm oil imports to China, according to
Cargill’s Zhou. Unlike most producers,
Wilmar is vertically integrated, running
its own estates and refineries as well as
handling imports to China and even pro-
ducing end-products for the China mar-
ket. Zhou’s own firm imports about 10%
into the country, mainly for selling on to
second-tier traders or end-users.
One of the main applications of palm
oil in China is industrial frying. As such,
the country is very reliant on RBD palm
oil, which is prized for its resistance to
China Foto Press
oxidation. This allows users to fry many
batches of food without it going rancid.
“Palm oil has a big advantage over
inSTAnT dEliGHT: Palm oil is a key ingredient in instant noodle production soya bean oil or other oils,” said Wong
Chee Kuan, who runs Loders-Krokland,
ably 15 years ago rapeseed oil was the pur-listed Sime Darby or IOI. the specialty fats subsidiary of IOI Corp,
number one oil, followed by soybean and Estates in Malaysia and Indonesia ac- in the Netherlands. “With palm oil you
then palm. But today the relationship has count for 90% of global palm oil output. are able to fry much longer with less de-
changed,” said James Zhou, who heads In 2006, 65% of China’s palm oil imports terioration in quality of oil.”
Cargill’s grain and oilseed supply chain were from Malaysia, with nearly all the
unit in China. remainder coming from Indonesia, ac- Fried and dried
cording to Beijing Agribusiness. One industry that does plenty of indus-
History lessons The plantation companies conduct trial frying is instant noodle manufactur-
The fact that Southeast Asia and China agricultural research and planting at their ing. Instant noodles have to be fried to
are linked by palm oil is a quirk of ge- estates. The palms are harvested for “fresh remove moisture in order to be preserved.
ography and history. The plant is native fruit bunches,” the basic metric for estate Hong Kong-listed Tingyi, which claims
to West Africa, and was first transported output, which are transported to nearby to be the biggest instant noodle producer
to Indonesia by the Dutch. In 1917, the mills for crushing and separation. Mills in the world by volume, has 32 factories
first oil palm plantation was established process the fruit bunches to produce in China. It pumps out 9 billion packets
in what is now peninsular Malaysia. crude palm oil and extract the fruit ker- of its Master Kong brand instant noodles
The Dutch transplantation turned nels before shipping it all to a refinery. The a year. Tingyi buys refined palm oil from
out to be a felicitous move. According to crude palm oil is bleached and deodor- Malaysia and Indonesia.
Tan Teck Hock, an agronomist at IOI, ized to produce RBD palm oil. Kernel oil According to Tingyi CFO Frank
oil palms grow best within five degrees is turned into oleochemicals or specialty Lin, the palm oil price increases have
latitude of the equator, and in areas with fats that are used in cosmetics and soap eaten into the company’s gross margins.
evenly distributed and heavy rainfall. Ma- manufacturing, and in food processing as He said palm oil makes up 12-18% of the
laysia and Indonesian Borneo, in particu- products like cocoa butter substitutes. cost of a packet of noodles. The higher-
lar, with vast expanses of rainforest, were An additional step of fractionation end the noodles and the more expensive
ideal candidates for plantations. produces palm olein, a liquid, and stearin, the packaging, the lower the percentage.
With China’s rise, palm oil again a solid. These are used for making things Instant noodles, in turn, make up about
seems to be benefiting from being in the like margarine or as ingredients in ice half of the company’s annual turnover,
right place at the right time. cream, for example. which was US$2.3 billion in 2006.
“[Palm oil] is relatively cheap, and “Our production costs and gross mar-
we can get palm oil from Malaysia, In- Feeding the friers gin are squeezed by the rise in palm oil
donesia, which is only about five to 11 costs,” he said.
China’s crude palm oil imports
days’ voyage, depending on which part of Back at the estate, the harvesters are
China,” said Cargill’s Zhou. “Soybean oil 5
done for the day. They spent months
is primarily from South America, it has a 4
learning how to wield their sickles ef-
Metric tons million
much longer voyage – 40 to 45 days – and 3 ficiently – slicing a 20-kilogram fruit
higher shipping freight costs.” 2 bunch off a 4-meter-tall tree is no easy
The palm oil supply chain typically 1 task. But as China’s demand for oil con-
begins at an estate owned by one of the 0
tinues to rise, they can rest assured that
big plantation companies – firms like 2002
2003
Malaysia
2004 2005
Indonesia
2006
they will have plenty more work in the
Singapore-listed Wilmar, Kuala Lum- Source: General Administration of Customs, China coming years.
24 China Economic Review • May 2008
Who Should Attend:
Companies in the Electronics,
Precision Machinery, New
Instruments, Biomedical and
Medical Equipment sectors.
Attendees should work in
related industries. Contact
Invest in Zhejiang Province
us to see if you qualify. Leader in the Yangtze River Delta
June 9th and 10th 2008, Nanyuan Hotel, Ningbo
A two-day symposium with site tours, organized in conjuncton with the 10th
Zhejiang investment & trade symposium.
Zhejiang province, located in the Yangtze River Delta, has one of the
most attractive business and investment environments in China. Why does
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This event will answer these questions and introduce opportunities for
companies in a wide variety of sectors.
Agenda:
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09:00-12:00 One-on-one discussions with officials and experts specific
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12:00-13:30 Lunch
13:30-18:00 Customized tours to selected Industrial Zones
June 10th
09:00-12:00 Customized tours to selected Industrial Zones
12:00-13:30 Lunch
13:30-15:00 Customized tours to selected Industrial Zones
For more information:
Contact: Seth Jacobs/ Grace Tan
Tel: +86 (0) 21 5385 8951 * 859/851
Fax: +86 (0) 21 5385 8953
Email: conference@sinomedia.net
Website: www.chinaeconomicreview. com/conference
REPORTS
Small ball
F
Major League amed baseball manager Joe Torre
held court with reporters in Beijing
Baseball steps up to in March during batting practice
the plate in China for an exhibition game between teams
from America’s Major League Base-
ball (MLB). Speaking at the Wukesong
Baseball Stadium, Torre offered an old
chestnut regarding baseball’s path to suc-
cess in China.
“It’s all about playing the game and
you have to start with the youngsters and
give them a chance to enjoy it,” he said.
“You have to play the game here and you
have to have the baseball fields.”
The two exhibition games, part of
MLB’s China Series, were contested by
the Los Angeles Dodgers and the San
Diego Padres. One MLB executive de-
scribed the games as baseball’s “com-
ing-out party” in China. The stadium, MLB and the domestic Chinese Base-
however, is slated for demolition after the ball League) last year. This compares to
Olympics. This is indicative of the hard 23,573 hours of soccer and 9,477 hours
road ahead for MLB and baseball in a of basketball. Baseball is the 12th-ranked
fast-growing and potentially lucrative sport on television, according to TNS
sports market. Sport/CSM Media Research.
Pierre Justo, Asia managing director
Popularity contest at TNS/CSM in Beijing, said baseball in
“It’s going to take a lot of investment and China is on par with skiing and golf in
a lot of patience by organizations like terms of audience interest and awareness.
MLB to make baseball popular here,” It’s what his firm rates as a fourth-tier
said Nick Griffith, director of Olympic sport, out of a possible five tiers. That puts
consulting at sports marketing firm Oc- baseball ahead of even more unknown
tagon in Beijing. sports like rugby and cricket.
Baseball isn’t exactly new to China. Justo estimates that baseball’s poten-
American missionaries introduced the tial fan base in China is around 20-21%
sport over 100 years ago and the game is of the urban population between the ages
said to have once been popular with the of 15-54. What’s more, it’s a demograph-
People’s Liberation Army. But America’s ic characterized by relatively high levels
pastime was banned during the Cultural of education and spending power, which
Revolution and it’s only been in the last arouse interest among corporate sponsors
20 years that interest in bang qiu looking to market their products.
(which literally means “stick ball”) “I’m actually quite positive about
has resurfaced. baseball in China,” he said. “The big mis-
Chinese television aired 482 hours take [for MLB] would be to think that
of dedicated baseball coverage (both there’s no potential in China.”
Stars of the small screen
Ten most-aired sports in China in 2007
25,000
20,000
TV hours aired
15,000
10,000
5,000
0
Soccer Basketball Tennis Billiards Table tennis Volleyball Badminton Motorsports Golf X-Games Baseball
Source: TNS Sport China
26 China Economic Review • May 2008
Lines of communication
VoIP service providers are lining up to offer their
services in a liberalizing telecom market
T
wo years ago, Beijing banned
telephone products that use Get connected
both the internet and tradi- China’s broadband internet users
tional phone networks to place calls. 70
This wasn’t good news for voice-over- 60
internet-protocol (VOIP) products, 50
Million households
40
which do exactly that. 30
The VOIP ban was supposed to 20
give China’s carriers a leg up in the 10
China Foto Press
face of the disruptive effects of the in- 0
2001 2002 2003 2004 2005 2006 2007
CURvE bAll: China is a
ternet, which places calls more cheap- Source: Ministry of Information Industry
tricky market for baseball ly than telephone networks.
Yet VOIP products like Skype, for said Mark Natkin, managing di-
The message seems to have gotten example, continued to spread, albeit rector of Marbridge Consulting in
through. Last year, MLB launched an through computer-to-computer use. Beijing.
awareness program called “Play Ball!”, “[The carriers] are trying to hold China had nearly 70 million
which aims to introduce the sport to up the migration to an internet model broadband internet users at the end of
100,000 elementary school students this until they have the infrastructure,” February, according to the MII. The
year. It has also opened 48 MLB mer- said Fritz Ringling, an analyst at In- country also has 556 million mobile
chandise stores in China and signed sight Research in the US. “They are phone users – the most in the world
broadcast deals with Shanghai Media trying to milk this monopoly as long – and 364 million fixed-line subscrib-
Group and ESPN Star Sports. as they can.” ers. All are potential VOIP users.
When contacted, MLB wouldn’t say According to CCID Consulting,
how much it has spent promoting base- a Hong Kong-based telecoms consul- interest from overseas
ball in China or how much it spent on tancy, China Telecom loses US$286 Foreign VOIP firms are lining up
the China Series. A spokesman said the million a year in potential fixed-line to take a crack at China’s liberaliz-
China Series was a not-for-profit event revenue by also offering broadband ing telecom market. One example is
aimed at introducing the sport to a new internet access, which by extension Freshtel, an Australian provider of
market in Asia. lets users place VOIP calls. retail and wholesale VOIP products.
Even regulations are less benign The company has some 315,000 cus-
Regional support these days. In February, the Ministry tomers in the UK, hundreds of thou-
The region is indeed key to baseball’s in- of Information Industry (MII) man- sands of users in Australia and is now
ternational growth. This year’s MLB sea- dated considerable discounts for mo- looking to expand across Asia.
son opener was played to sell-out crowds bile phone roaming charges. Freshtel chief executive Rhonda
in Japan, where the sport has a devoted “For the telephone networks, the O’Donnell said the plan is to enter
following. Baseball has also enjoyed economics are not getting any better,” China by the end of the year.
success in Korea and Taiwan, thanks to said Ringling. “The opportunity is as big as the
strong local leagues and high-profile ex- A telecom industry restructuring number of people there are, and more
ports to US teams. is widely expected that should put and more people are getting access to
MLB said that Asia accounts for half all the carriers on a stronger footing. communications,” she said.
its international revenues, and that total China may then become a more wel- O’Donnell was appointed chief
revenues last year topped US$6 billion. It coming market for VOIP products. executive last July partly because she
will be hoping some of that enthusiasm VOIP providers typically use a has a background in Asia – she was
will rub off on China. business model based on the distri- Novell’s Asia Pacific head. The rest
“The Chinese look at baseball as an bution of broadband internet users in of her top executives also come with
Asian sport, not just an American sport,” a country. Providers tend to focus on knowledge of the region.
said Jim Small, managing director and cities with deeper broadband penetra- “A number of companies are not
vice president for MLB in Asia. “China tion before moving to outlying areas. successful because they assume that ...
wants to be the best at everything, par- “[This strategy] will be easier to they can just walk in and do business,
ticularly the best in Asia, and because implement after the restructuring,” and that’s not the way it works.”
their Asian neighbors are so strong in
China Economic Review • May 2008 27
REPORTS
baseball I think the competitive rivalry
can help the sport.”
But Taiwan, Korea and Japan have
homegrown star players who can galva-
nize public interest in the game. A na-
tional hero has yet to do for baseball what
Yao Ming did for basketball in China.
“The key to the growth and popular-
ity [of baseball] in China will be the in-
troduction of a Chinese player to the ma-
jor leagues,” said San Diego Padres chief
executive Sandy Alderson in Beijing.
While no one can predict how long
it will take for a player of that caliber to
emerge in China, Alderson noted that
more people now play baseball in China
than in other countries that regularly send
players to the US major leagues.
The missing ingredient is a strong do-
lOAdinG UP: Chery sales are
mestic baseball league. In basketball, for
Phototex
expanding in the Middle East
example, analysts say that the strength
of the Chinese Basketball Association
contributed to the sport’s skyrocketing
popularity. Conversely, the disappointing
performance of China’s national soccer
Finding middle ground
team, plus ham-fisted management of
the league and allegations of match-fix- Chinese carmakers are doing well in the Middle
ing, has meant that interest in football is
waning among younger viewers. East, but is expansion happening too quickly?
The Olympic angle
A
MLB has tried to improve the fortunes of nyone doubting the quality of This has prompted Chinese auto
the Chinese national baseball team, even Anhui automaker Chery’s cars firms to pay more attention to the
dispatching a former major leaguer to be should talk to Sami Haddad, Middle East market. Chery, which
its manager. But the team’s future is un- Lebanon’s economy and trade min- began exports to the region in 2001,
certain. Baseball was removed from the ister. In a country where politicians recently started an assembly joint
program for the 2012 Olympics, which are frequent targets of violent attacks, venture in Iran and is building a sec-
means that government funding for the Haddad and Mohamad Safadi, the ond regional plant in Jordan.
team will likely evaporate. public works minister, have chosen
Insiders downplayed the negative ef- armored Chery Eastar sedans as their An urge to export
fect this will have on the sport’s global favored mode of transport. China’s auto market is the world’s
growth. While no one views China as a The dealership that sold the cars second-largest and growing fast.
do-or-die market for MLB, a thriving has no doubts about their safety. Daiwa analyst Alex Fan says roughly
baseball culture here could bolster base- “It is a really good product,” said 8 million cars were sold in China last
ball’s case for reinstatement in the 2016 Chadi Louis, general manager of year, with first-quarter sales up 20%
Olympic Games. Lebanese Auto Agencies, who drives year-on-year. But local firms have
“That’s one of the arguments we’re a non-armored version of the Eastar. found that exporting offers a chance
making to the [International Olympic “It has a good-quality engine and to expand even more quickly.
Committee]. China is a growing force transmission, and I don’t have any Lawrence Ang, executive director
in baseball … so why would we want problems whatsoever.” of Zhejiang-based Geely Automobile
to take that away from the hundreds of As China’s carmakers expand, Holdings, said low domestic demand
thousands of kids playing the game here?” Louis and his political customers are for its inexpensive sedans led it to begin
MLB’s Jim Small said. among a growing Middle Eastern exports to the Middle East in 2003.
For the time being, MLB will have group turning to Chinese cars. “We had to sell something to pay
to content itself with a smaller, though “The consumer in the [Middle for our workers, to spend money on
not insignificant, piece of the sports pie East] is starting to look at Chinese R&D,” said Ang. “So we went out-
in China. cars for value-for-money,” said Lord side to find out whether ... there was
“Baseball won’t be as easy to develop Edwin E. Hitti, president of the Arab demand for affordable, easy-to-main-
in China as basketball, but there is still Chamber of Commerce and Industry tain, economic sedans.”
potential as long as there’s a strong strat- in Hong Kong. Geely chose the Middle East in
egy,” Justo said.
28 China Economic Review • May 2008
REPORTS
Selling overseas tween the two markets. Not a drop
to drink
“In Lebanon the customs duty is
Chinese auto exports
20%. In Syria [it’s] about 100-110%.”
1,000
He went on to say that Lebanese
800
customers are more service-oriented
than their neighbors – an issue for a
Thousand units
600
400 company like Geely, which does not A monumental water
directly oversee after-sales service in
200
the region. diversion project could
0
* Estimate
2002 2003 2004 2005 2006 2007 2008*
Geely’s early learn-as-you-go ap- pose more questions
Source: China Association of Automobile Manufacturers, China Customs proach has drawn criticism from ob-
servers more skeptical of the overseas than answers
part because, with no auto industry expansion of Chinese cars.
of its own, it had fewer regulations and “Why not get your business in
A
restrictions than other markets, Ang order in China before looking [over- t any point during Beijing’s morn-
said. With sales of about 1 million seas]?” asked John Bonnell, partner at ing rush-hour there are thousands
units a year, growing at around 10%, consultancy Automotive Resources of people at the Wukesong sub-
the market also suited Geely’s needs. Asia in Bangkok. “If they’re com- way station in the city’s west, all jostling
Although Ang considers the petitive in China, they’re going to be for a space on a train.
Middle East an “easy” market, Geely competitive in the Middle East.” What the Wukesong commuters may
still faced obstacles. Unfamiliar with not know is that a tunnel is being dug
customers’ expectations, it found itself Quality before quantity under them that will allow 300 million
operating on “a trial-and-error basis.” Mark Wilkinson, China editor of cubic meters of water to flow into the city
“We didn’t know ... how they use Automotive Engineering International, this year for use during the Olympics.
their cars, how they maintain them,” agrees, but points out that GM, for “[The project] is challenging indeed.
said Ang. example, already ships China-made If anything happens, the ground will sink
Geely’s unfamiliarity wasn’t nec- Cadillacs for sale in the Middle East. and the result cannot be imagined,” said
essarily its fault. Lord Hitti of the “This proves that Chinese work- Li Dawei, deputy director of the Beijing
Arab Chamber believes this is a com- manship ... can meet the quality re- bureau of the South-to-North Water
mon problem for Chinese companies quirements of [companies from] de- Diversion Project Construction Com-
entering the region. veloped markets,” Wilkinson said. mission, which oversees the tunnel’s con-
“The number one barrier [to trade For its part, Geely claims to have struction.
between China and the Middle East] learned from its Middle Eastern ex- The 13 kilometer-long tunnel will
is lack of information,” he said, not- perience. Now, it’s ready to move on. transport water over 23 flyovers before it
ing that even basic information about “We still spend lots of effort in the reaches Kunming Lake in the Summer
trade volumes is difficult to quantify. Middle East ... [but] more attractive Palace in northern Beijing. The tunnel
That lack of information can be markets in the short-to-medium term is one of 24 that are being built beneath
critical in a region where customs are Eastern Europe, Southeast Asia roads for water diversion from neighbor-
regulations and customer expecta- and Central America,” said Ang. ing Hebei Province, Li said.
tions vary widely between countries. Chinese automakers may already
Louis, who sells cars in Lebanon and be approaching exports differently. A convoluted path
neighboring Syria, noted some of the Chery, for example, is slowing its ex- The US$2.49 billion project also includes
differences be- pansion to focus on improving quality nine tunnels through mountains, 84 tun-
after a high-profile attempt to export nels under riverbeds, 118 overpasses and
cars to the US fell apart in late 2006. hundreds of canals. The water will travel
The company had “a splash of reality,” 300 km, from four reservoirs in Hebei
Bonnell said. through the tunnels before arriving in
For any other Lebanese offi- Beijing. The project is to be completed
cials thinking of trusting their before the games start in August.
lives to armored Cherys, Hebei, which is already parched, is
quality before quan- paying a price. Nine out of 10 farmers
tity will be wel- in the villages beside the reservoirs have
come news. left home and become migrant workers
because they are no longer allowed to use
TRiAl And the water for their fields, according to lo-
ERROR: Geely cal newspaper reports.
learned the The tunnel system connecting Beijing
hard way in the to Hebei is only a small part of the US$60
Middle East billion South-to-North Water Diversion
Project, which will channel water from
30 China Economic Review • May 2008
than the technical problems.”
The portion of the project to be
completed before 2010 will cost US$18
billion, 30% of which is funded by the
central government, 45% by state-owned
banks and 25% by a special fund estab-
lished for the project in 2004. That fund
is financed by increases in the price of tap
water nationwide.
After the diverted water is put into
use this year, the price of tap water will
go up even further to service loans for the
project, officials and researchers said. The
current price for households in Beijing is
RMB3.7 (US$0.53) per cubic meter, with
a sewage treatment fee included. The rate
has been raised nine times since 1991.
The price is right
A report released by the Ministry of Wa-
ter Resources last June suggests that tap
China Foto Press
water be sold at about RMB7 (US$1)
per cubic meter this year. The new rate
includes the cost of the diversion project
ClEARinG THE wAy: Excavators work on a water diversion project plus a 1% premium.
Raising the price of water this year
southern China to the arid north along issue of politics,” said Xia Jun, a scientist is not going to be easy. In February, the
three routes over the next 50 years. at the Institute of Geological Sciences consumer price index was up by 8.7%
The water diversion project will be and Natural Resources Research at the year-on-year, its highest rate since 1996,
one of the largest hydro-engineering Chinese Academy of Sciences. “All the and the government is struggling to rein
projects on earth. provinces along the routes have to follow in rising prices.
The Beijing-Hebei project lies on the [the] rules of the game strictly if the proj- The onus is on Beijing to establish a
central route, which will be extended fur- ect is to function.” pricing mechanism that encourages the
ther south after the games until it taps Yang Yongde, an official at the Yang- use of the diverted water – if only to stop
into the middle reaches of the Yangtze tze River Water Resources Commission, industry tapping the city’s groundwater re-
River in Hubei province in 2010. explained it in a more explicit way: “Wa- sources. Despite government restrictions,
About 14 billion cubic meters of wa- ter is a precious natural resource and these Beijing’s water table has dropped 11 m
ter will then be diverted from the Dan- provinces are competing for it. since 1999. As a result, Beijing is sinking.
jiangkou Reservoir near Wuhan annually, “For example, the lower reaches of “The diverted water is much more ex-
with 1 billion cubic meters allotted to the Yangtze River are often lacking in pensive than local water. We have to push
Beijing, said Wang Hao, a researcher at water because the many hydro-engi- for the diverted water to become the first
the Ministry of Water Resources. neering projects at the upper and lower to be used,” said Wang, the Ministry of
The eastern route, currently under reaches don’t allow enough water to get Water Resources researcher.
construction, will transport 3.9 billion through.” “The project has little meaning if peo-
cubic meters of water from the lower Then there are the financial chal- ple still use [groundwater] and save the
reaches of the Yangtze River in Jiangsu lenges of the diversion project, which are diverted water as a backup.”
province north to Shandong province by neatly summed up by Pan
2010. The city of Tianjin will also be part Jiazheng, a respected hydro
water prices in Shanghai and beijing
of this network. engineer who is one of the
Meanwhile, the western route will cut project’s chief consultants. Shanghai beijing
across the Qinghai-Tibet Plateau so that “Who shall we sell the
Price (RMB/m ) 3
Price (RMB/m ) 3
water is taken from the upper reaches diverted water to? At what
of the Yangtze in Tibet and transported price? How can we get 1990 0.18 1991 0.30
to the Yellow River in Inner Mongolia. the money? Shall we pay 1992 0.28 1997 0.70
However, work has been delayed because back the bank loans and 1993 0.40 1999 1.30
of protests from environmentalists in interest? How to man- 1994 0.50 2000 1.60
China and India. age, operate and maintain
2002 1.03 2001 2.00
The eastern and central routes alone all these tunnels and fa-
will pass through seven provinces and re- cilities?” Pan asked. “These 2006 1.20 2003 2.30
quire 300,000 people to be resettled. problems of money are 2007 1.93 2004 3.70
“This issue of water is in the end an even more complicated Source: China Finance online
China Economic Review • May 2008 31
REPORTS
sell Jiannanchun products in the V&S
network,” said Johan Simonsson, general
manager of the V&S joint venture.
In Chinese cities, splashy, high-profile
marketing campaigns for foreign liquors
target the country’s burgeoning nouveau
riche. But it’s still baijiu for official din-
ners and family get-togethers, where large
quantities of liquor are consumed.
“It’s the culture and national identity
behind baijiu. We’d love to try a bit of dif-
ferent taste but it cannot replace [baijiu];
it has been here for thousands of years”
said a government official in Sichuan
province, where the V&S-Shuijingfang
joint venture is based, speaking on condi-
tion of anonymity.
FiERy: Foreign players are
Given the cultural significance of bai-
Phototex
buying into baijiu companies
jiu, there is always a risk that foreign firms
could wander onto dangerous ground and
Pouring a big one arouse nationalist sentiment through an
attempted bid for a local distillery.
Some industry watchers suggest that
the win-win rhetoric may conceal anoth-
Foreign players have developed a taste for China’s er reason for the influx of foreign capital.
A management consultant in Chengdu,
national drink who asked not to be named, said some
distillers might need the cash to finance
management buyouts that were triggered
T
he clear, pungent Chinese grain the sentiment is similar. by a withdrawal of state capital.
alcohol known as baijiu isn’t nor- “[Chinese baijiu makers] want to ex- “It’s time for [baijiu firms’] senior
mally attractive to foreigners. pand into the overseas market through management to pay the debts incurred
With alcohol content ranging from 53% the distribution channels of foreign part- during the buyouts, and they want for-
to 70%, it’s hard to stomach. But several ners,” said Zhang Zongjun, secretary to eign capital to finance the debts,” he said.
deals last year suggest that foreign capi- Quanxing’s board of directors.
tal, at least, is warming up to the stuff. The dominance of baijiu in China’s Payback time
Diageo, the multinational that owns spirits market, and its attractiveness to In 2005, for example, 18 senior manag-
the Smirnoff vodka brand, among others, foreign firms, can’t be denied. Industry ers at Quanxing Group created a new
took a 43% stake in Quanxing Group, revenue is growing at 30% per annum, ac- company called Chengdu Yingsheng In-
which owns part of baijiu maker Shui- cording to Sinolink Securities, while V&S vestment, which paid US$59 million for
jingfang, in January. Four months later, claims that baijiu is the world’s most pop- a 67.7% stake in Quanxing. At the same
France’s LVMH became the majority ular spirit, with an annual sales volume of time the state divested Quanxing equity
shareholder in Wenjun, another distiller. over 520 million nine-liter cases. Vodka, as part of a national privatization drive.
Then Vin and Sprit (V&S), makers of the runner-up, sells 497 million cases. Quanxing renamed itself Swellfun (or
Absolut vodka, formed a joint venture However, baijiu is not so popular Shuijingfang) in September 2006.
with Jiannanchun, widely regarded as abroad. Official statistics show that ex- According to a 2004 research paper by
one of China’s top brands alongside Wu- ports of the liquor in 2005 accounted for UK-based think tank Chatham House, a
liangye and Maotai. V&S itself was ac- just 0.06% of total sales. wave of management buyouts occurred
quired by French conglomerate Pernod “There are no immediate plans to in 2003. The central government and the
Ricard at the end of March. China Securities Regulatory Commis-
sion initially supported this restructuring
it’s all win-win
The strong stuff method but it fell out of favor after it was
The main idea behind the buy-ins was for Baijiu brands by market share viewed as a way for insiders to unfairly
the foreign stakeholder to gain exposure profit off state assets.
to the domestic baijiu market while the Other (5%)
Wuliangye (45%)
With foreign capital now in play,
Chinese partner would get access to in- however, the restructuring of China’s bai-
ternational distribution and knowhow. Shuijingfang
(10%) jiu industry seems to have taken a step in
A V&S press release said the new joint Guojiao 1573 the right direction. Distillers may now
venture would develop a portfolio of pre- (10%) Maotai (30%)
have the impetus to increase efficiency,
mium baijiu brands, like Tianchengxiang, and maybe even begin educating foreign
which it released in March. At Quanxing Source: Tang Jiu Kuai Xu drinkers on baijiu’s pleasures.
32 China Economic Review • May 2008
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special report • PRivatE Equity
The real
deal
I
Despite their gripes about t is fitting that in China’s still youth-
ful private equity market (PE) the
deal size and scope, breakthrough transaction involved a
private equity investors manufacturer of children’s products. The
year was 2006 and Goodbaby Group –
still see China as a land China’s largest producer of baby strollers
of opportunity – was subject to a leveraged buyout (LBO)
by the private equity arm of Hong Kong-
based investor Pacific Alliance Group.
The foreign LBO – a sophisticated
financing technique in which the acqui-
sition is backed by loans secured against
the assets of the target company – had
finally landed in China. The country had
crawled into the private equity arena; now
it was starting to walk.
Or at least this was the plan. Two
years on, there has been no real successor
to the Goodbaby deal. Although China
continues its gradual acceptance of new When the company came into the
financial initiatives, private equity remains picture, Goodbaby had already been priva-
dominated by conventional deals that are tized by its management and restructured
relatively small by global standards. as an offshore investment vehicle and an
“I am somewhat surprised it’s the onshore wholly foreign-owned enterprise
only transaction of its kind,” said Chris (WFOE). Pacific Alliance bought the
Gradel, managing partner and co-found- offshore vehicle for US$122.5 million,
er of Pacific Alliance. with Taiwan’s Fubon Bank providing
“I think the main barrier is the lack US$55 million of this in debt.
of companies you can buy a controlling The leverage was small compared to
stake in. Most private companies are the proportions seen elsewhere because
founded by entrepreneurs who have ma- the bank had no direct claim on Good-
jority control and don’t want to sell up. baby’s China-based assets, just on the off-
assets deployed With state-owned enterprises (SOEs), shore vehicle that owned them.
Capital under management the government generally doesn’t want to “Fubon was comfortable with the
60 give foreigners the equity.” various covenants saying what we could
50 In fact, Pacific Alliance’s bragging and could not do – they were happy we
40 rights could be contested by LBO purists. weren’t just going to disappear into the
US$ billion
30 Foreign exchange controls prevent the night,” said Gradel. “But there was a gap
20 use of assets in China to guarantee a loan between the onshore and offshore parts.”
10 made outside of China, while domes- In this respect, the Goodbaby deal
0
China Hong Kong India Japan Korea Singapore Taiwan
tic banks are generally unwilling to lend – which took three months to complete
2006 2007* money for such deals. This meant Pacific because of the government approvals
* Preliminary
Source: Asian Venture Capital Journal Alliance had to find its leverage offshore. that were required on top of this financial
34 China Economic Review • May 2008
Pure
Mrs. Wang yang’s design exhibition
May 17, 2008 R.S.V.P
China Foto Press
success story: Song Zhenghuan transformed
Goodbaby Group from a town-and-village
enterprise into the subject of China’s first LBO
handiwork – is a reminder that China’s private equity is still very
much a work in progress.
But deals are still being done. New international players are
turning up in their droves, spurred by China’s strong private sec-
tor growth.
“Private equity is increasingly perceived and accepted as an
important alternative to raising funds – it allows firms to diver-
sify their investor base, especially in turbulent capital markets,”
said X.D. Yang, who runs The Carlyle Group’s Asia buyout fund.
“The PE funds are getting larger and their number is increasing
by the day.”
local funds, local currency
Beijing is also putting in place legal structures that enable foreign
funds to operate as yuan-denominated onshore entities as op-
posed to making investments in US dollars through an offshore
holding company (see “A legal bind: Waiting to go local”).
Although the system has yet to be fully tried and tested,
there is already considerable interest. Terry Teng, director of In- Cross Gallery
ternational Financing Services in Tianjin, which acts as a bridge 32A, building 6, No 10 Yan Ping Rd
between private equity firms and the Chinese government, said Jing An District, Shanghai, China
T: 86(0) 21 6217 9223 F: 86(0) 21 6217 9234
that 90% of the 40 or so funds registered with the China Private Annie Summer :0086 136 3657 1118
Info@cross-gallery.com www.cross-gallery.com
Equity Association are yuan-denominated and operated through By appointment only
joint ventures. One prominent early mover was Fang Fen-
China Economic Review • May 2008 35
China Economic Review
Conferences & Events
Corporate Fraud Alert 2008
Cracking down on corporate misconduct in China
May 28, 2008, Shanghai
In today’s corporate governance-driven business world, ethics is an unavoidable buzzword. Failure
to enforce proper business ethics can lead to substantial fraud losses affecting both bottom line
profitability and corporate reputation. Executing business ethics and compliance programs that
embrace every employee is a delicate challenge. Beating corruption and fraud in companies is
imperative. China Economic Review has invited leading businesspeople and market experts to help
decision makers enhance ethics and compliance programs, develop anti-fraud measures and thereby
avoid risks and boost competitive advantage.
Conference agenda Topics to be addressed:
08:00-09:00 Registration • The key “red flags” of fraud and misconduct within your
09:00-09:05 Opening Remarks company
• How to manage the risks of fraud in your China business
09:05-09:40 Session I: Keynote Speech - Emerging
operations
trends and challenges for corporate fraud in China • How to build and execute a strong compliance program
09:40-10:15 Session II: Managing fraud risks in China • How can ethics and compliance programs save you money
business operations • The laws affecting ethics and compliance programs in
10:15-10:30 Tea Break China
10:30-11:05 Session III: Building and implementing
an effective code of conduct as a solid foundation Expected attendees 100-120:
for a strong compliance program • 60% Executive decision-makers,
Ethics and compliance officers
11:05-11:40 Session IV: International and domestic legal
• 15% Lawyers
and regulatory environment on fraud • 10% Accountants
11:40-12:20 Session V: Panel Discussion and Q&A • 10% Consultants
12:20-12:25 Closing Remarks • 5% Others
Endorser
Organizer: For more information:
Contact: Perry Xiong / Grace TAN
China Economic Review
The most widely read China business magazine by Tel: +86 (0) 21 5187 9633 * 872/ 851 Email: conference@sinomedia.net
decision-makers doing business in China Fax: +86 (0) 21 5385 8953 Website: www.chinaeconomicreview. com/conference
special report • PRivat E Equity
glei, the man behind Goldman Sachs’s
brokerage joint venture in China. Fang is
said to have enlisted backing from Gold-
man Sachs and Temasek, the Singapore
state investment arm, to form the US$2
billion Hopu Fund. He will also set up a
yuan-denominated fund in collaboration
with Suzhou Ventures Group.
This easing in the regulatory environ-
ment is taking place alongside a concert-
ed effort to develop domestic private eq-
uity firms. The move is pioneered by the
Bohai Industrial Investment Fund (see
“Tianjin: A PE breeding ground”).
The Bohai Fund is joined by large
China Foto Press
hard currency: Some foreign PE
SOEs, which have become major players
firms are keen to work in renminbi
through strategic investments in non-
competing companies. Meanwhile, do-
mestic financial institutions have lobbied
A legal bind: Waiting to go local the government to take things further.
Last September, China International
Capital Corp and CITIC Securities be-
A law already in effect and an eagerly antici- Frances Du, who researches private equity in came the first domestic brokerages to re-
pated regulation could make life better for China at consultancy JL McGregor and Co. ceive private equity licenses. China Life
foreign private equity (PE) and venture capi- But the FIPR hasn’t been promulgated, proposed in March that insurers be al-
tal (VC) funds operating in China. despite early predictions in the investment lowed to diversify into private equity.
The first, the Partnership Enterprise community that it would be approved at the
Law, was amended in August 2006 and came end of last year. Additionally, it makes no Below the radar
into effect on June 1 last year. Significantly, mention of key areas of concern for foreign Then there is a rising numbers of infor-
it allowed the formation of limited liability funds, Morrison and Foerster said. mal private equity funds set up by small
partnerships, according to a report by law For most foreign PE players, it is a case groups of wealthy individuals.
firm Morrison and Foerster. of wait-and-see, although some are already “Close friends provide the money.
This put it in line with the typical US keen to set up joint venture funds with local They trust me so all I have to do is give
structure of a VC fund, which provides for firms. According to Maurice Hoo, a partner in them a call,” was how one Shanghai-
general partners, who manage the busi- the Asia private equity group at law firm Paul based deal-maker, who specializes in buy-
ness, and limited partners, who only provide Hastings, there are two forces driving this. ing stakes in firms and guiding them to
capital and take share in the profits. While “First of all, foreigners are much more initial public offerings (IPOs), explained
general partners are personally liable for the comfortable with the idea of holding ren- it to China Economic Review.
partnership’s debts, the liability of limited minbi-denominated assets than they once These “clubs” traditionally operate
partners only covers the capital contributions were,” Hoo said. “[And secondly], there was more like hedge funds, investing in listed
they made. Partnerships are also exempt the change in merger and acquisition rules securities, but there is a growing appe-
from paying income tax. Instead, partners in August 2006, which makes it harder for tite for direct equity investment. Unlike
report their share of profits or losses in the foreigners to invest in Chinese firms through the Western private equity model, these
company on an individual basis. offshore holding entities and then guide funds operate on a deal-by-deal basis and
The Partnership Law, however, only these firms to overseas listings.” are not committed to investing a certain
governs domestic partnerships, although There is also the perception that it is eas- amount within a specified time frame.
Article 108 states that the State Council will ier for onshore funds to get deals approved. “A lot of company owners in China
promulgate measures regulating foreign- However, Hoo notes that there are two kinds have become cash-rich and so an industry
invested partnerships. The Ministry of Com- of onshore fund – those that are purely do- has emerged to take care of these people
merce (MOFCOM) then created a draft of the mestic and those that, although formed under with money,” added Maurice Hoo, a part-
Foreign Investment Partnership Regulations Chinese law, have foreign investors. ner in the Asia private equity group at law
(FIPR) last January. This held out the prom- “Investments by the purely domestic firm Paul Hastings.
ise of allowing foreign firms to use the lim- funds don’t require MOFCOM approval, while The additional capital provided
ited liability model for funds in China. investments by the foreign-invested funds through the expansion of existing sources
“Elsewhere around the world, VC or PE still need approvals as they are still consid- and the introduction of new ones has cre-
funds go with a [limited partnership] model. ered ‘foreign’ in many respects,” Hoo said. ated a much more competitive – and more
If this proposed [rule] finally comes to light, He accepts that, in the long-run, onshore expensive – market for all concerned.
then US investors, VCs, PE players, who are funds may find it easier to get approvals than The aforementioned Shanghai-based
more familiar with the limited partnership their offshore bretheren but argues that it is deal-maker, who asked not to be named,
model can have their way in China,” said still too early to say for sure. recalled striking a deal with the founder
of a silicon company under which he
China Economic Review • May 2008 37
special report • PRivatE Equity
agreed to list the firm at six times its
book value. The founder phoned back a Tianjin: A PE
day later to say that another private equity
firm had come calling and offered to se- breeding ground
cure a valuation of 12 times book value.
“It was a blue sea and now it’s a red
sea,” the deal-maker reflected. “Three Organizers set an attendance target of 100
years ago nobody did this kind of thing funds and 1,500 people for last year’s Tianjin
but now everyone wants to get involved.” Private Equity Forum. They ended up playing
Shelly Singhal, CEO of Crestpac, host to twice the number of funds and upwards
an Asia-focused alternative investment of 5,000 people, according to Terry Teng, direc-
group which currently has 40% of its pri- tor of International Financing Services (IFS),
vate equity pool invested in China, has which acts as a bridge between private equity
also noticed the growing pressure, par- (PE) firms and the Chinese government.
ticularly in major cities. The strong attendance reflects Tianjin’s
“Companies used to have two or three heavyweight status in China’s nascent domes-
private equity firms come talk to them,” tic private equity business. The city is home
Singhal said. “Now it’s more like 30.” to the Bohai Industrial Investment Fund, the
country’s first yuan-denominated fund when
challenging times it was established in 2006 and the likely proto-
Talk of tougher deal-making conditions type for a wave of domestic PE funds.
appears to be borne out by the numbers. “We are trying to make this fund as com-
According to the Asian Venture Capital mercial and market-oriented as possible,” said
Journal (AVCJ), new funds raised for Cui Jindu, vice mayor of Tianjin and the man
investment in China came to US$10.55 responsible for the city’s financial portfolio.
billion last year, up 93.6% on 2006. The He made the remark during a visit to Shang-
average growth for Asia as a whole was hai in March to promote this year’s edition of
23.4%. However, new investments rose the China International Private Equity Forum,
by just 3% to US$10.62 billion compared which again happens in Tianjin.
to 33.3% region-wide. The Bohai Fund is based in the Binhai New tures steel pipes used in building oil pipelines,
“Most of the PE firms raised a lot of Area, which encompasses Tianjin Economic- for US$200 million.
money in 2006 but they did not invest Technological Development Area (TEDA), Tian- Management of the fund is ceded to a third
much last year,” said Andy Xie, an inde- jin Port Free Trade Zone and the Port of Tianjin. party, Bank of China’s investment banking arm,
pendent economist who also participates The fund will run for 15 years and plans to raise but Frances Du, who researches private equity
in small-scale PE investments through a total of US$2.8 billion. Its publicly disclosed at JL McGregor and Co, believes the govern-
his offshore firm Rosetta Stone Capital. acquisitions include a 10% stake in Chengdu ment still provides significant guidance.
It could be argued that the competi- City Commercial Bank for US$135 million and “This fund structure, for them, is consid-
tive environment is exacerbated by the a 20% holding in Tianjin Pipe, which manufac- ered creative,” she said. “However, when they
limited scope of deals on offer.
A total of US$84.32 billion in private
equity money exchanged hands in Asia phenomenon called growth capital.”
last year, the AVCJ claims. Buyouts ac- The growth capital craze is turning
Money put to work counted for US$39.84 billion, or 47.3% the archetypal venture and private equity
New funds raised of this. Growth capital and private invest- models on their heads.
16 ment in public equity each took about
20% with 3.2% for pre-IPO investment. Breaking new ground
14
12
10 In China the balance is very different. Venture capitalists are making bigger and
US$ billion
8
6
Buyouts made up just US$802.8 million, later-state investments in China than
4 or 7.1% of the total pot. The lion’s share they do in the US, pursuing companies
2 of the market was taken by growth capital that usually already have cash flow. This
0
China Hong Kong India Japan Korea Singapore Taiwan and pre-IPO investment, on 41.1% and is happening partly because the trend for
New investments made 20.5% respectively. VCs in China has been to invest outside
18 The prevalence of later-stage, pre-IPO their tech sector comfort zone. Non-tech
16
14
investments make it difficult to establish firms, like a home-shopping network or
12 where the venture capitalists’ territory a renewable energy concern usually need
US$ billion
10
8
ends and that of the private equity players more money than a web start-up.
6 begins. “In the US, for example, it’s pretty “Everybody used to focus on TMT
4
2 clear what a PE [firm] does and what a (technology, media and telecom); today,
0
China Hong Kong India Japan Korea Singapore Taiwan VC does,” said Andrew Qian, managing everybody would like to emphasize that
2006 2007*
director at investment advisory firm New they focus on non-TMT plays, such as
* Preliminary
Source: Asian Venture Capital Journal Access Capital. “But in China there is a cleantech, consumer-related,” Qian said.
38 China Economic Review • May 2008
vate entrepreneurs willing to give up their the buy-out differential
majority stakes, the PE players are driven Investment by stage - China
into smaller, earlier-stage investments.
Start-up (15.9%)
The big question is whether the mar- PIPE financing
(12.7%)
Restructuring (1.5%)
ket is sustainable at current price levels. Buy-outs (MBO/
Martin Haemmig, who lectures on Pre-IPO (20.5%)
MBI/LBO) (7.1%)
global venture capital trends, analyzed
Growth capital
the investment returns on VC-backed Franchise funding
(41.1%)
firms that went public in China, the US, (1.1%)
Europe and Israel. He divided the com-
panies’ valuations before stock began Investment by stage - Asia
trading by the amount of venture capital PIPE financing Start-up (7.6%)
invested, coming up with an “exit ratio.” (20.1%) Restructuring (1.1%)
The companies were ranked by their exit
Pre-IPO (3.2%)
Bridge loan (0.1%)
ratios in quartiles. Franchise funding
(0.2%)
Haemmig found that Chinese firms Buy-outs (MBO/MBI/
LBO) (47.3%)
in the bottom quartile provided better Growth capital
rates of return than top-quartile com- (20.3%)
panies in the US from 2004 to 2007. Source: Asian Venture Capital Journal
Meanwhile, top-quartile Chinese firms
provided the best rate of return globally, na as fertile ground for private equity. The
giving VCs 30-60 times what they had recent correction in the public markets
originally invested. is expected to have a knock-on effect on
Market conditions have deteriorated private equity, but this will not dampen
since Haemmig made his calculations the sense of opportunity in a country that
and this will affect future valuations. still has far to go in terms of diversifying
tianjin pipe: The Bohai However, he notes that, even if Chinese its sources of corporate funding.
Phototex
Fund’s first investment target companies’ exit ratios were halved in fu- “Domestic companies require vast
ture, they would still outperform invest- amounts of capital to support their
make investment decisions, the government ments made in other countries. growth, and I don’t think private equity
is still highly involved, that’s what I heard will have nearly enough
from [an official with knowledge concerning the difficult present money to satisfy these
the matter].” In the current climate, the danger is that needs,” said Carlyle’s
Regardless of where the power really private equity firms’ profligacy will come Yang. “The chal-
lies, Tianjin is bullish about developing its in- back to haunt them. They have raised lenge for private
vestment environment. A further 10 venture huge amounts of money on the back of equity is examin-
capital and private equity funds are thought bullish growth projections and are com- ing investment
likely, with a total capital of US$2.6 billion. mitted to spending it within a certain proposals in a dis-
time frame. Under pressure to find deals ciplined way. We
in a pricey market, fund managers may be turn down a lot of
“For these kinds of non-TMT deals, [the forced to settle for lower returns. opportunities very,
investments] tend to be bigger in size.” “[The funds] raise too much money very early.”
There is also the greed factor. On top and overpay for the deals they make – it
of the routine management fees, VCs happens every 10 years and people are still
earn a “carry fee” – typically 20% – when surprised by it,” said Singhal of Crestpac.
they cash out. The bigger the exit, the big- “They decide to deploy US$200 million
ger the carry fee – which means there is a but end up getting US$1 billion. The dis-
strong incentive to make large bets. Later- ciplined thing to do is say you just want
stage investments are less risky and VCs US$200 million but this never happens.”
can recoup their money more quickly. The Asia head of a global top 10 pri-
“Growth capital gives investors [good vate equity firm, who asked to remain
returns] with much more certainty, so anonymous, was even more damning of
they are considered the low-hanging the market as it stands, branding inves-
fruit,” said Tina Ju, a founding partner tors “fashion victims” for getting swept up
at venture firm Kleiner Perkins Caulfield by a gold-rush mentality.
and Byers in China. “Some people have started to look at
Private equity funds, meanwhile, are private equity guys as masters of the uni-
behaving more passively than they do verse and they are not,” he said.
elsewhere. Denied the opportunity to Although scathing in his assessment
participate in many buyouts due to gov- of short-term perceptions, this executive
ernment restrictions or the paucity of pri- – like his counterparts – still regards Chi-
Review • May opportunity:
China Economic an eye for 2008 39
X.D. Yang of The Carlyle Group
special report • PRivatE Equity
Kleiner comes to China success, but I think true venture capital-
ists pride themselves on discovering
the company early, having significant
ownership and being a partner from
tina Ju of KPCB on rising Chinese consumption and zero all the way to IPO. The fact that
a lot of venture capitalists do invest in
venture capital growth capital is a reflection of the fact
that growth-stage companies offer great
opportunities.
K
leiner Perkins Caulfield and ists again? I think that’s going to apply
Byers is best known for an
investment track record that
includes Google, Electronic Arts and
to not just the stage [of the invest-
ment], but also the sector. Q : PE funds in China tend to invest
in growth capital too. Is there more
competition for VCs as a result?
Amazon. Last April the Silicon Valley
firm picked China as the site of its first
overseas office. The China office was
Q : Are VCs in China lazy because
they are in later-stage deals?
A : We get invited to do a lot of
private equity investments. [But]
essentially run by the three founders of
TDF Capital, a homegrown venture
firm that has backed Alibaba, Baidu
A : I wouldn’t say they are lazy. The
way I look at it, growth capital
gives investors high ROI (return on
we are more valuation sensitive, we like
entrepreneurs who are disciplined, who
take on the right amount of capital, and
and Focus Media. But it’s kept a low investment), with much more certainty. not just take on a lot of capital for its
profile since then. Tina Ju, a manag- So [growth capital investments] are own sake. So our belief and the private
ing partner at Kleiner in China, spoke considered, in our view, to be the low- equity belief are sometimes different.
to China Economic Review about hanging fruit. It’s easier to have “quick” They want to deploy capital; so if a
Kleiner’s China strategy, the sectors company needs US$10 million, they are
they’re watching, and the country’s more than happy to give them US$30
investment landscape. million. We’re not [like that], so we end
up being less competitive in that regard.
Q : Where’s the line between private
equity (PE) and venture capital
(VC) funds in China? Q : How do you classify Kleiner in
China?
A : I think the line is blurry. It was
very clear in the beginning and
it has blurred over the course of the
A : As our fund size increases, we
continue to see ourselves as venture
capitalists. We continue to like to bet
last three years. It’s driven by a few on early-stage companies with big
things: One is increasing capital and innovation, either with technology risk
record [amounts of ] capital flowing or business-model risk, which we tend
into China. The second thing is VCs’ to take more often in China. We like
ability to expand beyond just TMT companies that have a huge, creative
(technology, media and telecoms) business model, but at the same time
investments. Once you start we understand that there are going to
moving into traditional busi-
nesses, whether it’s consumer,
healthcare or cleantech, you
start dealing with companies We will look at our
at a later stage, so venture strategies and ask
capitalists are becoming PE
investors, growth capital ourselves are we going
investors. I think at the end
of the day, as more capital to continue being
comes from the buyout hybrid, Vc-plus-
funds, the venture funds, the
PE funds, the hedge funds, growth-capital
most of the venture firms will investors, or do we
look at our strategies and ask
ourselves are we [going to] focus and become
continue being hybrid, VC-plus-
growth-capital investors, or do we
venture capitalists
focus and become venture capital- again?
40 China Economic Review • May 2008
be a lot of great companies that you
don’t discover when they are just
founded. So we would love to be
associated with great industry leaders
– even if it’s at a later stage – be-
cause we think it helps our strategic
positioning to better understand the
industry.
Q : VCs in China are moving away
from traditional tech plays. You
invested in a company that sells dia-
monds online. Can you tell us more?
A : 9Diamond.com is actually a
hybrid model, a combination of
online and offline. We were actually
an investor in [online jeweler] Blue
Building Bridges: PE investors need to
Nile in the US, which turned out to
Phototex
have faith in a target firm’s management
be a success. I think in the long run,
9Diamond is trying to become the
More than just money
Blue Nile of China. The business
model is slightly different, because in
China you do need to combine both
your online and offline businesses.
Foreign private equity firms must offer something
Q : What’s the macro trend that
you’re tapping into with invest-
ments like 9Diamond?
extra to secure deals in the competitive China market
A : The macro trend is consumer
I
spending. All the PE investors t is 10pm in a remote part of Shanxi judged the man in charge. They agitated
are capturing that. [The] restaurant province and a computer screen flick- for change at the top but none came.
business – how many people went ers to life – the chairman of a local “We were able to work out a mutually
into that? Educational services – we hydropower company has got mail. The satisfactory solution – which involved us
actually recently made an investment message is from the Hong Kong office of leaving,” said Singhal. “Once broken, re-
in that sector. We think that the a private equity firm that has invested in lationships don’t really get back together.
consumer is becoming more sophis- the hydropower company. Its contents are You have to spend time with [the entre-
ticated and diamonds are a reflection fairly mundane: An inquiry about the lat- preneurs] and make sure you both look at
of that – it’s a high-end product. est power output figures. the world in the same way.”
This is an issue that could have been For private equity investors, a lack of
Q : What else are you looking at? addressed during office hours, but that’s
not the point. The PE firm is testing the
chairman – finding out how closely he
confidence in the management of a tar-
get company can be a deal breaker. This
is particularly true in China’s less mature
A : I think we will probably make a
couple more investments in the
consumer space. We have also been
keeps tabs on the company he founded.
“The best way to find out how com-
mitted they are is to send an email at
private sector, where the entrepreneur
who got the ball rolling is still at the helm
and in possession of a majority stake.
very aggressive in the cleantech area. 10pm and see how long it takes for them According to Chris Gradel, manag-
Between TDF and KPCB, in the to respond,” said Shelly Singhal, CEO ing partner and co-founder of Pacific
last year-and-a-half we have made of Crestpac, an Asia-focused alternative Alliance Group, pricing aside, poor man-
six investments in the cleantech area. investment group which has 40% of its agement is the main reason why he would
Healthcare is another area. We want private equity pool invested in China. walk away from a transaction.
to leverage our US partners’ expertise Singhal went on to describe one in- These sentiments are echoed by X.D.
because we’re one of the strongest stance in which a company chairman Yang, managing director of The Carlyle
VCs in healthcare in the US. I would failed this test. The firm in question made Group’s Asia Partners fund, which cur-
say we will continue to be very strong rollers for laser printers and plastic com- rently has US$2.55 billion under manage-
in TMT, that it will continue to be ponents for iPhones. As a business mod- ment in the region. Asked to name what
our core business. We still love com- el, it had potential and the chairman was appears on this checklist when examin-
panies with innovation. likeable. It wasn’t long, though, before the ing a potential deal, Yang highlighted
Crestpac people realized they had mis- three areas: The existing management
China Economic Review • May 2008 41
special report • PRivatE Equity
investment from within China.”
Companies have different require-
ments and that will lead them to differ-
ent private equity investors. The common
ground is the sectors they target. The con-
sumer segment is regularly flagged up as
a play on rising Chinese incomes. Pacific
Alliance focuses almost exclusively on
this area with investments in Goodbaby,
a children’s products manufacturer, and
Jiadeli Supermarket, among others.
There is also considerable interest in
alternative energy and the environment.
This is unsurprising, as such investments
are very much in keeping with current
government policy. Carlyle has stakes in
recycling and biodiesel companies while
Pacific Alliance is backer of wind turbine
maker Goldwind Science.
“China’s economy is becoming more
diversified and this creates new oppor-
Phototex
tunities, particularly for environment-re-
consuMption play: Jiadeli Supermarket appears in the Pacific Alliance portfolio lated businesses and alternative energy,”
Carlyle’s Yang said.
and whether he can work with them; tional financing platform because we
the nature of the industry and the target always knew we would list overseas,” the the X factor
firm’s market position, and what the tar- Honghua spokesman said. “Carlyle is a Competition to invest in these high-
get firm wants from the investment. well-known PE investor and Honghua growth sectors is intensifying. Foreign
“The personality factor is very im- wants to create an image of itself as an money is vying with emerging domestic
portant,” Yang said. “We generally agree influential multinational company.” funds for deals that occupy a relatively
on a set of actions or goals for the com- The Honghua story is shared by other narrow area also popular with venture
pany and we make sure they welcome our Chinese companies planning to tap for- capitalists. Foreign funds must do more
input. We want to invest in companies eign markets. Shanghai Anxin, a producer than just wave their international creden-
where we think we can add value to the of solid-wood floors, has received US$30 tials to stand out from the crowd.
business through our global platform.” million in investment from Carlyle since “The lack of opportunities for large-
2006 and used the funds to set up a joint scale buyouts, together with the sheer
international exposure venture, A&W Woods, which then ac- volume of dollars chasing these deals,
Access to international markets and man- quired assets from its parent. Risecomm means that people are looking for ways to
agement expertise is the big selling point Microelectronics manufactures semicon- invest in which they bring more than just
for foreign private equity firms in China. ductors that can be used to control power money,” said Stephen Scott, managing di-
A Chinese company that produces medi- lines, and counts SAIF among its inves- rector of Alvarez & Marsal Asia, a group
cal devices, for example, might see a po- tors. Both firms said they took foreign that specializes in improving underper-
tential business opportunity in bringing money with an overseas listing in mind. forming assets acquired by PE firms.
on board a foreign investor that owns a “We think a foreign fund will help us Scott believes the focus should be on
chain of hospitals in Europe. to go public after several rounds of fund- “operational investing,” (see “Check-up
Honghua is China’s largest manu- ing,” said Jian Gu, chief technology offi- time: Taking a close look”) which involves
facturer of onshore drilling equipment. cer at Shenzhen-based Risecomm. “But identifying areas in which the target firm
Overseas sales account for 80% of its we don’t want to go public in the Chinese can eradicate inefficiencies and unlock
total business. The Sichuan-based out- market and that’s why we reject a lot of value. In this way, a fund can illustrate
fit opted for Carlyle as an in- exactly where and how it can
vestor largely based on the chasing value make a difference.
company’s reputation. In late This value-added element
China private equity investment by sector
2006, Carlyle took a 7% stake becomes very important when
in Honghua for US$22 mil- 2,000
the target is a state-owned en-
lion, a spokesman for the Chi- 1,600
terprise (SOE) or if one of the
nese firm said. Then in March, 1,200 selling parties is government-
US$ million
Honghua raised US$410 mil- 800 controlled. Restructuring SOEs
lion through a share offering in 400 is the biggest opportunity for
Hong Kong. Carlyle still owns 0
foreign private equity players
about 5% in the company. Financial
services
Heavy Transportation/
manufacturing distribution
Travel/
hospitality
Retail/
wholesale
Information
technology
Medical Non-financial Consumer
services products/services in China, according to Seung
“We wanted an interna- Source: Asian Venture Capital Journal Chong, a partner at law firm
42 China Economic Review • May 2008
special report • PRivatE Equity
Check-up time:
Taking a close look
It’s no secret that private equity firms
are drawn to high-growth companies.
However, doing this in China can involve
walking into an organizational night-
mare. Operational inefficiency does
spell opportunity for investors but there
is a lot of clearing up to do first.
“As a general rule, the finances are
not reliable,” said Stephen Scott, manag-
ing director with Alvarez & Marsal (A&M)
Asia, a group that specializes in improv-
ing underperforming assets acquired by
China Foto Press
private equity firms. “It’s not always the
case that there has been rampant fraud. neW partners: Carlyle co-founder David
Rather, the business has grown faster Rubenstein at the China Pacific signing ceremony
than the infrastructure supporting it.”
The likes of A&M are routinely White & Case. But transferring state nancial to gain a toehold investment in
called in to make sense of the accounts. assets to private – and particularly foreign China,” said Yang. “They can be involved
This may be prior to the investment be- – ownership can be tricky. but do not have to commit a lot of capital
ing made or as some kind of post-acqui- The most visible recent example of this or human resources. It was a good situa-
sition interim management team. was Carlyle’s proposed US$375 million tion for them, us, and China Pacific.”
“First of all, we make sure that we acquisition of an 85% stake in Xugong, Market watchers expect to see more
have reliable financial data,” said Stew- a construction equipment manufacturer of this kind of transaction, not least be-
art Winspear, a senior director at A&M owned by the city government of Xuzhou cause of China’s desire to mine interna-
and previously CFO of IBM Asia Pacific. in Jiangsu province. It led to the launch of tional expertise to boost domestic indus-
“Then it is a matter of establishing a a nationalistic internet campaign by the try. However, this model only works when
system to manage the information and head of Xugong’s rival, Sany Heavy In- target companies value foreign strategic
provide visibility to the investors through dustry, who said he would pay a premium investors over purely financial ones. Bei-
key performance indicators.” to keep Xugong in Chinese hands. jing’s recent moves to promote outbound
This involves scrutinizing a wide Suddenly the deal was at the heart of a investment and corporate expansion sug-
range of functions within an organiza- political debate about foreign investment gest that priorities may be changing.
tion from IT infrastructure to human and regulators held back on approving it. The largest foreign PE investment in
resources management. In the latter Carlyle offered to reduce the size of its China last year was Blackstone’s US$600
category, Winspear finds there are often stake, but the deal, first tabled three years million purchase of a 20% stake in state-
aspects that can be improved. ago, appears to be locked in stasis. run chemical firm China National Blue-
“Compensation and benefits are “You always run into obstacles when star. It was also Blackstone’s first deal in
sometimes not aligned with corporate the [target] company is very large,” said China since it sold a US$3 billion holding
objectives. Incentive structures need to Carlyle’s Yang. “Private equity is still rela- to the country’s sovereign wealth fund.
be tied to key performance metrics.” tively new in China and it’s a process of Two months later, Blackstone teamed
As part of pre-investment research, educating people.” up with Bluestar’s parent, China Na-
background checks on the target com- tional Chemical, in a US$2.6 billion bid
pany’s management team are typically third party expertise for Nufarm, the Australian agricultural
required. In China, this includes a risk Despite the trouble over Xugong, Carlyle chemicals maker. China National had the
assessment based on senior figures’ can still claim one of China’s largest ever money and the strategic objective; Black-
political connections, Scott said. PE investments – and it was in a state- stone had the investment savvy. Although
Chris Gradel, managing partner and run company. In December 2005, it paid the deal fell through, it could mark the
co-founder of Pacific Alliance Group, US$410 million for 24.9% of Shanghai- beginning of a growing trend for Chi-
believes these background checks are based China Pacific Insurance, the coun- nese-led international acquisitions.
vital. “It may be a good business but a try’s third-largest life insurer. In order to “There has been a lot of talk about
bit messy with too many third-party ensure its investment came with a value- how investment in China is difficult, the
transactions,” he said. “When the man- added element, Carlyle brought in US regulatory environment too complicated
agement has multiple businesses and is insurer Prudential Financial as a minority and the deals too small, too few and too
not focused on what it is supposed to be investor tasked with passing industry ex- expensive,” said Scott of Alvarez & Mar-
doing, that’s when we lose interest.” pertise to China Pacific. sal. “Now there is more talk of investment
“This was a way for Prudential Fi- with China rather than in China.”
44 China Economic Review • May 2008
nEthERlanDs
sPotlight
China Foto Press
Niche banking
F
Why Dutch financial inancial institutions from the Neth- investment banking and retail. They have
erlands, one of the EU’s smaller earned a reputation for excellence in the
institutions punch markets, have proven imaginative wholesale and corporate loan business as
above their and nimble in China’s notoriously chal- well as in project finance.
lenging financial service sector. Though “Dutch banks were relatively early
weight in China no Dutch financial firm is able to match into the [Chinese] market,” said Piter de
the presence of Citibank or HSBC in Jong, general manager of ING’s Shanghai
China, the country’s energetic approach bank branch.
to overseas banking has its benefits.
“The services [Dutch banks] provide financial pioneer
and the way they present their products The banks moved to China when Neth-
are both unique and innovative here in erlands-based conglomerates like Philips
China,” said Helene Rekkers, economic arrived in the country. ABN AMRO was
affairs counselor at the Dutch embassy in one of the first to put down roots, open-
Beijing. ing a representative office in Beijing in
Or, as Orlando Wang, general man- 1985. It was a pioneer as foreign financial
ager of Rabobank’s Shanghai branch, put institutions began marketing their wealth
it: “We each have our own niches.” management products to China’s rich.
Dutch banks offer a wide variety of In October of last year, ABN AMRO
products spread across asset management, was acquired by a consortium com-
China Economic Review • May 2008 45
sPotlight nE thERlanDs
Going Dutch this connecting traffic. For example,
if you need to fly from Hangzhou
to Amsterdam, you check in and fly
domestic to Beijing or Chengdu, pick
Mark arxhoek of KlM on the challenges Chinese up your luggage and check in again
for the direct international flight to
airlines face as they look abroad Amsterdam.
Q : How balanced are traffic flows
I Q
n late March, KLM became the : What challenges has that between the Netherlands and
first European carrier to of- brought about? China?
fer twice-daily flights between
Shanghai and Europe. Yet, as more
and more Chinese people embrace
air travel, KLM is doing what it can
A : Understanding one another’s
commercial policies and priorities
and also the background and culture
A : Generally speaking, the major-
ity of the passengers come from
Europe, but the share of Chinese
to think domestically as well. Mark of the company. Staff exchanges be- passengers is growing year by year.
Arxhoek, commercial director for tween KLM and CSA have undoubt- Moreover, new direct routes, such
Air France-KLM in Greater China, edly reduced these challenges. Two as Chengdu-Amsterdam, have been
talked to China Economic Review KLM staff are stationed in Guang- adopted earlier by the Chinese market
about the prospects for the Chinese zhou at CSA headquarters and two than by the European market.
airline industry. CSA staff are stationed in Amsterdam
Q : What have KLM’s experiences
at KLM headquarters.
Q : What patterns among Chinese
travelers has your hub in Amster-
been with Chinese carriers?
Q : What other partnerships does
Air France-KLM have planned in
dam seen?
A : In 2001, KLM started its coop-
eration with China Southern Air-
China?
A : Due to the tremendous growth
of KLM services to China, the
lines (CSA). We initially exchanged
seats on our Beijing-Amsterdam
flight under a block space agreement,
A : As CSA has now also joined
Skyteam [an international code-
sharing alliance], it is logical to expect
share of Chinese customers has
significantly outnumbered the share
of Japanese customers in the last few
and then extended it to code-sharing more cooperation between CSA, years. The same is true for expenditure
flights beyond our hubs. CSA got ac- KLM and other Skyteam partners. amounts of Chinese customers in the
cess to destinations in Europe through Air France also has a fruitful partner- tax-free shops at Schiphol airport.
KLM’s hub in Amsterdam and KLM ship with China Eastern and is also The trend that we see is that more
got access to destinations in China working to develop code-share routes and more Chinese customers are so
through Beijing. In beyond our hubs. When KLM started experienced in traveling abroad that
2006, KLM and its Chengdu operations in May 2006, they do not feel the need to go around
CSA formed a we developed, with Sichuan Airlines, in groups.
joint venture, an initial set of six codeshare routes to
which included
cost and rev-
enue sharing,
destinations in China not being served
by CSA. We have since expanded that
to 19 codeshare routes in addition to
Q : How else has KLM sought to
increase its presence in China?
but also staff
exchanges
the 26 we have with CSA.
A : KLM Club China is a new
form of community for business
and aligning
commercial
policies.
Q : What challenges do Chinese
airlines face as they international-
ize in the coming years?
travelers conducting business in and
with China. Club China members will
be able to see who is traveling where,
and share useful tips and hands-on
A : I think Chinese airlines still
have major challenges ahead of
them. Securing the right aircraft mix,
commercial experiences with each
other. The online platform allows our
members to create their own business
landing rights and slots, but also the network and share valuable contact
internal challenge of recruitment of information. It also offers relevant
pilots [are all issues]. More important information on China and gives im-
is the need to create international mediate access to a range of useful
hubs that are fed by domestic flights. services – from finding translators and
This is probably the biggest chal- legal advisors to arranging hotel ac-
lenge. Chinese airports do not offer commodation and transportation, and
the proper transfer facilities to boost setting up meetings.
46 China Economic Review • May 2008
sPotlight nE thERlanDs
sound inVestMent: ING Group pocketed US$100 million from
the Bank of Beijing’s US$2 billion IPO in Shanghai last September
prising Fortis, Royal Bank of Scotland and Santander in Oc-
tober 2007. This has caused a shakeup in the landscape of Dutch
banks operating in China, with ABN AMRO’s local operations
due to be taken over by Royal Bank of Scotland.
“ABN AMRO was particularly strong in payment and cash
management services,” said de Jong. “[But] a lot of its Dutch
clients were scared by the takeover and are now turning to other
Dutch banks covering China.”
One of those banks, ING, relies on its extensive presence
across Asia as well as a China operation that covers a host of
financial services: insurance, fund management and real estate as
well as retail, wholesale and private banking.
double insurance
ING is in the unusual position of having two insurance joint
ventures in China. ING Capital Life, a partnership with Beijing
Capital Group, started in 2002, while Pacific Antai Life, which
is run in collaboration with China Pacific Insurance, came under
ING’s control through its acquisition of Aetna in 2000.
In addition to insurance products, ING is amassing local ex-
perience at the corporate level. A key development was ING’s
acquisition of Asia-focused investment bank Barings. Suddenly,
the Dutch bank had access to Barings’s valuable corporate cus-
tomers and, more importantly, its extensive connections to local
government around China
This paid off handsomely as ING’s lobbying for Belgian-
based Interbrew helped the multinational brewer buy its way to
the second-largest share of China’s beer market. ING also ar-
ranged loans for Interbrew’s Chinese acquisitions and has been
keen to offer similar services to China’s blue chip corporations.
So far, the bank has secured work as a bookrunner and arranger
of loans for the likes of Air China and Sinopec.
ING’s 19.9% stake in Bank of Beijing, the country’s second-
largest city commercial lender, allows it to distribute insurance
and wealth management products while getting a foothold in
48 China Economic Review • May 2008
sPotlight
EMG is the leading international marketing
communications & media relations consultancy with a
strong B2B focus. We enable companies to communicate
more effectively in their markets, thereby contributing to
business growth and development.
What’s the next step?
Communication builds the bridge
Phototex
the local retail banking scene. ING has helped Bank of Beijing
improve its risk management and retail banking products.
De Jong describes the Bank of Beijing buy-in as “great invest-
ment.” He claims the stake has doubled or tripled in value since
ING purchased it, and future investments are in the works.
“Every foreign bank in China would like to take the maxi-
mum allowable stakes [in two local banks],” de Jong said.
Rabobank, meanwhile, has entered the local market by lever-
aging its traditional strengths in the agribusiness sector. Rather
than buy into city commercial banks, its exposure to the Chinese
retail banking market comes through stakes in rural lenders.
A 10% stake in the United Rural Cooperative Bank of
Hangzhou has proven profitable, said Rabobank’s Wang, adding
that the lender’s 2007 financial results beat forecasts. Rabobank
has also signed memorandums of understanding with banks in
Tianjin and Liaoning to set up similar ventures and is consider-
ing local incorporation in China.
Despite this focus on rural cooperatives, Wang insists that
corporate customers do not go neglected. To this end, Rabobank
• Marketing & Communications Strategy
attaches great importance to its research capacity. A four-strong
• Media Relations
team in Shanghai churns out reports on 20 areas of China’s agri-
• Advertising
business sector which are popular among investors following the
• In-Company Communications
global commodity markets.
• Marketing Services
“If you want to be successful in China, you have to be a
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getting a foot in the door
Foreign lenders’ share of the Chinese banking market, 2006 EMG China
60
Jacky Cheng jcheng@emgchina.com
50
+86 21 5887 8007 www.emgchina.com
40
30
%
20
10
0
RMB deposits Foreign currency deposits RMB lending Foreign currency lending Intermediary business
Source: MoneyChina
China Economic Review • May 2008 49
sPotlight nE thERlanDs
firm lacks the management skills and so-
phisticated products that Fortis offers.
For Fortis, it was first and foremost
an injection of capital, which was much
needed in the wake of the group’s joint
acquisition of ABN AMRO’s Dutch op-
erations. However, Fortis also saw it as
an opportunity to expand its business in
China through tapping Ping An’s strong
domestic distribution network.
patience pays off
Beijing’s cautious approach to overseas
involvement in the domestic financial
international intentions: Ping An has
sector means that foreign firms must be
patient in trying to break new ground.
Phototex
built up a strong financial interest in Fortis
In this respect, the memorandum
of understanding signed by the China
universal bank,” explained Wang. An Investment Management. Banking Regulatory Commission and
More recently, Dutch investment in- The deal made perfect sense, accord- the Dutch Central Bank in January rep-
terest in China’s financial sector has been ing to Maaike Steinebach, manager of resents a significant step forward. It sug-
counterbalanced by Chinese firms look- Fortis’s Shanghai branch. Keen to become gests that China recognizes the unique
ing for opportunities in the Netherlands. a major international player, Ping An can contribution the Netherlands is making
Late last year, Ping An Insurance re- use Fortis as a platform from which to to the financial sector and welcomes the
cently took a 4.9% stake in Belgo-Dutch build its portfolio of overseas stocks un- chance to deepen ties between their re-
giant Fortis. The Chinese firm deepened der the Qualified Domestic Institutional spective financial institutions.
its involvement in March through the Investor scheme. Although larger than “Dutch financial institutions’ experi-
purchase of 50% of Fortis’s investment Fortis – Ping An’s market capitalization ence in financial markets has contributed
management arm for US$2.1 billion. The is US$76 billion compared to Fortis’s a lot to China’s emerging market,” said
unit has since been renamed Fortis Ping US$56 billion – the Shenzhen-based Rekkers of the Dutch embassy.
Company index
9Diamond 41 China National Bluestar 44 Huaxia Bank 14 Royal Bank of Scotland 48
A&W Woods 42 China National Chemical 44 IBM 44 Royal Dutch Shell 18
ABN AMRO 21,45,48,50 China Netcom 18 ING 45,48,49 SAFE 15
Air China 48 China Pacific Insurance 44,48 ING Capital Life 48 SAIF 42
Air France 46 China Southern Airlines (CSA) 46 Insight Research 27 San Diego Padres 28
Air France-KLM 46 China Telecom 18,27 Interbrew 48 Santander 48
Alcoa 15 China Unicom 18,66 International Financing Services (IFS) 38 Sany Heavy Industry 44
Alibaba 40 Chinalco 15 IOI Corporation 22,24 Shanghai Anxin 42
Alvarez & Marsal Asia 42, 44 CIMB 22 Jaguar 20 Shanghai Automotive Industry Corp (SAIC) 14
Amazon 40 Citibank 45 JC Flowers 16 Shanghai Media Group 27
Asian Development Bank (ADB) 18 CITIC Securities 37 Jiadeli Supermarkets 42 Shanghai VW 14
Asian Venture CapitalJournal (AVCJ) 38 Citigroup 11 Jiannanchun 32 Shell 53
Automotive Engineering International 30 CLSA 22, 23 JL McGregor and Co 37,38 Shougang 15
Automotive Resources Asia 30 CNOOC 18 Kleiner 40 Shuijingfang 32
Baidu 8,9,40 CNPC 15 Kleiner Perkins Caulfield & Byers (KPCB) 39,40,41 Silicon Valley 40
Bank of Beijing 48,49 Credit Suisse 22, 23 KLM 46 Silk Road Advisors 12
Bank of China 16,38 Crestpac 38, 39, 41 Land Rover 20 Sime Darby 24
Bank of China International 7 Daiwa 28 Lebanese Auto Agencies 28 Sinolink Securities 32
Bank of Communications 16 Deloitte 53 Loders-Kroklan 24 Sinopec 48
Baoshan Iron and Steel 15 Deutsche Bank 14 LVMH 32 Sinosure 18
Barclays 21 Diageo 32 Marbridge Consulting 27 Smith College 6
Barings 48 DTZ 12 McKinsey Global Institute 8 Sogou 8,9
Baxter International 8 Dutch Central Bank 50 MLB 26,27,28 Sohu 8
Bear Stearns 21 Electronic Arts 40 Moody’s 11 Suzhou Ventures Group 37
Beijing Agribusiness 23,24 Ericsson 18 Morgan Stanley 14, 21 Swellfun 32
Beijing Capital Group 48 ESPN Star Sports 27 Morrison Foerster 37 Tata Motors 20
Beijing United Family Hospitals and Clinics 51 Fiat 14 Mount Gibson Iron 15 TDF 41
BHP Billiton 15 Fitch Ratings 22 Nanjing Fiat 14 TDF Capital 40
Blackstone 21,44 Focus Media 40 New Access Capital 38 Temasek 37
Blue Nile 41 Fortis 14,21,48,50 Novell 27 Then Vin and Sprit (V&S) 32
Bohai Fund 37,38 Fortis Ping An Investment Management 50 Nufarm 44 Tianjin Pipe 38
British Petroleum 15 Freshtel 27 Octagon 26 Times of India 20
Caliper 12 Fubon Bank 34 Pacific Alliance 34,41,42,44 Tingyi 24
Cargill 24 G7 16 Paul Hastings 37 TNS Sport/CSM Media Research 26
Carlyle Group 35,41,42,44 Geely Automobile Holdings 28,30 Peking University 7 Total 15
CCID Consulting 27 General Electric 16 PeopleÅfs Daily 9 U21 Global 12
Chatham House 32 Global Resources International 12 Pernod Ricard 32 UBS 11
Chengdu City Commercial Bank 38 Goldman Sachs 37 PetroChina 15,18,66 United Rural Cooperative Bank of Hangzhou 49
Chengdu Yingsheng Investment 32 Goldwind Science 42 Philips 45 Visa 15
Chery 28 Goodbaby Group 34,42 Ping An Insurance 14,21,50 Volkswagen 14
China Citic Bank 16 Google 40 Prudential Financial 44 Wal-Mart 8,10
China Coal Energy 16 GSN Property Management 52 Qatar Petroleum 18 Washington University-Fudan University EMBA 12
China Daily 21 Hamilton College 57 Qinghai Salt Lake Potash 66 Wenjun 32
China Development Bank 21 Hewlett-Packard 53 Quanxing Group 32 White & Case 44
China Eastern 46 Hines 52,53 Rabobank 45, 49 Wilmar 24
China International Capital Corp (CICC) 14,37 Hong Kong University 57 Repsol YPF 15 Xugong 44
China Investment Corp (CIC) 15,16,21 Honghua 42 Rio Tinto 15
China Life 15,21,37 Hopu Fund 37 Risecomm 42
China Merchants Bank 16 HSBC 45 Risecomm Microelectronics 42
China Mobile 18 Huaneng Group 18 Rosetta Stone Capital 38
50 China Economic Review • May 2008
Co-PuBlishED aRtiClE
BEiJing unitED Fa Mily hosPital
United against pain
M
ild headaches are common in the work- Of this total, US$8 billion was lost as a direct
Beijing’s first place and can be triggered by a number result of missed workdays. The National Headache
international of factors, including eyestrain, stress and Foundation estimates that 157 million workdays
even dehydration. As such, they are often written are lost annually in the US due to migraine-related
standard off as an annoyance and a regrettable consequence symptoms.
hospital has of office life. Severe, chronic headaches, however, Information related to sensations from the
can cause more than just minor irritation – in cer- head and face is processed in the nucleus of the
an innovative tain cases they can put a worker out of commission trigeminal nerve. Pharmaceutical and neurosur-
approach for days at a time. gical interventions aimed at migraines and other
As a veteran chiropractor and researcher in spi- headaches target this nerve.
to treating nal anatomy and clinical studies, Dr Roger Hin- “In regards to headaches, the business end of
son, chair of integrative medicine at Beijing United this nerve, an area referred to as the subnucleus
a common Family Hospitals and Clinics (BJU), is well-versed caudalis, is found in the top two centimeters or so
office affliction in both the causes and treatment of headaches, in- of the spinal cord,” Hinson said. “Mechanical dis-
cluding migraines. tortion of these trigeminal fibers in the upper cer-
“Migraines are by far the most painful of the vical spine may predispose people to many types of
common headaches,” Hinson said. “They are often headaches, including migraines.”
accompanied by photophobia, nausea, and numb- The spinal joints closest to the trigeminal cau-
ness or tingling sensations. Migraines are debili- dalis are responsible for the movement of the head
tating and can last from four hours to seven days.” on the neck. They are the smallest, most mobile
articulations of the spine. Due to their tiny size
the statistics and extreme mobility, however, these joints are
Migraines are three to four times more common uniquely predisposed to displacement or misalign-
in females than in males, with 18-20% of women ment. This misalignment can put mechanical stress
expected to suffer from migraines this year, com- on the upper spine where the trigeminal caudalis
pared to 7% of men, according to Hinson. is located.
Migraines not only take their toll on the indi- Furthermore, poor posture in the office can ei-
vidual sufferer, but also on the enterprises that em- ther cause or aggravate misalignments in the upper
This article was written ploy them. They cost American businesses about cervical spine, making office workers prime candi-
by Kyle Bueschlen of US$13 billion per year due to missed work and dates for headaches.
Beijing United Family impaired function, according to a study published “Office workers are predisposed to headaches,”
Hospital & Clinics by the Archives of Internal Medicine. Hinson said. “Slouching and sitting hunched over
a computer can put stress on the upper cervical
spine. It’s especially bad for habitual notebook
computer users.”
the solution
While medical management of migraines involves
blocking specific pain receptors in the trigeminal
nerve, BJU approaches the problem from a me-
chanical perspective.
“We measure displacement of the upper cervi-
cal joints with X-rays, and then apply a very low
force along a precalculated vector with an instru-
ment to correct the misalignment,” Hinson said.
“There is no neck twisting or ‘cracking’ noise. The
patient feels only a light tap below the ear.”
The precision and minimal force involved in
this type of chiropractic adjustment means the
risks are significantly lower than with more force-
ful manipulative treatments. In fact, there have
been no reports of serious side effects associated
with this type of precision upper cervical adjust-
ment since its development in the late 1940s, ac-
cording to Hinson.
“Patients see side benefits instead of side risks,”
under pressure: Headaches can harm worker productivity he said.
China Economic Review • May 2008 51
Co-PuBlishED aRtiClE RivER housE
Rising river
W
hines’s latest property hen Hines, a privately-owned,
international real estate de-
is raising the bar for real velopment and management
estate in shanghai firm, purchased a building on the south
bank of Shanghai’s Suzhou Creek, it
knew it had the key to something differ-
ent. Shanghai’s increasingly sophisticated
property market has no lack of quality of-
ferings, but most properties exhibit a cer-
tain sameness and lack a sense of place.
The building Hines purchased, how-
ever, gave the company a unique oppor-
tunity to create serviced apartments that
incorporate, rather than distance them-
selves from, the surrounding space.
“We thought it was interesting, be-
cause with the water feature we could
do something very special,” explains Ju-
lia Fan, sales and marketing manager at haVen in the city: River House offers
Hines’s Shanghai office. residents a combination of comfortable
The result of a rebuilt façade and ex- furnishings, tasteful décor and some
tensive renovations is River House, a 26- spectacular views of Shanghai
story commercial building featuring 307
luxurious apartment-style units. Hines natural light levels in low, north-facing
calls it a “haven in the city.” units, they have been designed to maxi-
mize available light. With high, 4.5-
rooms with a view meter ceilings and light-colored walls
Located on South Suzhou Road near and furnishings, these loft apartments
the corner of Xizang Road, River House are refreshingly bright and airy. Units
is an elegant, modern edifice set near a on higher floors, with more exposure to
string of protected old Shanghai neigh- natural light, make use of wooden sur-
borhoods. Inside, a range of units differ faces and warmer hues.
in layout and design, but share a visible As serviced apartments, all but the
attention to quality and detail. largest units are fully furnished. With
Most immediately striking, however, simple, contemporary designs, residents
are the views. South-facing apartments can easily modify their apartments to suit
overlook nearby People’s Square through their particular tastes. And with man-
floor-to-ceiling windows, while other agement provided by German property
units face Suzhou Creek and Pudong’s service provider GSN Property Man-
Lujiazui financial district to the north agement, buyers can be confident in
and east respectively. the standard of the building’s concierge,
The view of the river and the protect- housekeeping and other services.
ed neighborhoods along its banks have But Fan emphasizes that some of
proven to be a big draw for buyers. River House’s best qualities are more
“Most people in China usually go for subtle.
south-facing units,” said Fan. “But in our “We put in a lot of details with very
project, the north-facing units are much high standards where people won’t see
more popular.” them,” she said. “We’re putting a lot un-
Similarly, lower-level apartments are derneath the ground and in between the
typically not much in-demand in high- walls rather than what’s on the surface.”
rise-dominated Shanghai. But in River An example of this is windows that
House, Fan said, lower units facing the use efficient, three-layer “Low-E” glass,
river at a close distance have been the frequently seen in high-grade office
most sought-after. buildings, but a rarity for apartment units.
Those lower-floor units also bring This glass, transparent to visible light,
out Hines’s attention to place and de- nevertheless blocks heat, vastly improv-
tail. To compensate for typically lower ing insulation – something to be thankful
52 China Economic Review • april 2008
Co-PuBlishED aRtiClE
for during the winter.
Under foot, River House’s floors com-
prise four wood layers to reduce noise.
And, uncommonly for Shanghai, water
pipes feeding the modern bathroom fix-
tures and appliances are stainless steel.
“Five years from now, we want people
to see the quality is still there,” Fan said.
Quality has been a hallmark of Hines
properties since the company was found-
ed in 1957. Beginning in Houston, Texas,
Hines has expanded worldwide with a
focus on grade A commercial and retail
developments. Among its properties are
the headquarters for Deloitte, Shell and
Hewlett-Packard.
capital success
Coming to China in 1996, Hines moved
into the residential space with a Beijing
project called Embassy House. Today,
Embassy House, located near the Dong-
zhimen embassy district, remains one of
the capital’s most exclusive residential ad-
dresses. It is home to numerous ambas-
sadors and managing directors of multi-
national enterprises.
Hines translated the success of Em-
bassy House into two other Beijing
projects: Park Avenue, a community of
mid- and high-rise condominiums near
Chaoyang Park and Hyundai Motor
Tower, a grade A office building located
on the Capital Airport Expressway near
the Third Ring Road.
In Shanghai, Hines is involved in two
projects in addition to River House. Cali-
fornia Place, in fast-growing Yangpu dis-
trict near Fudan University, is a 45-acre
mixed-use development for an 80,000-
person community. In Lujiazui, Pudong,
21st Century Tower will contain over
41,480 square meters of grade A office
space and is the future home of Shang-
hai’s Four Seasons hotel.
But River House’s location sets it
apart from those projects and anchors it
firmly in one of the most vibrant parts of
Shanghai’s urban landscape. Furthermore,
as the authorities implement a program
to revitalize Suzhou Creek and create a
public green belt along its banks, the area
around River House will become increas-
ingly dynamic.
By embracing its unique location and
implementing its usual high standards of
quality, Hines has introduced a distinc-
tive new property to Shanghai in River
House.
“We don’t think there’s anything like
it in the market,” said Fan.
China Economic Review • april 2008 53
culture • 晏子 t RavE ls to thE WE st
VALLEYS IN BLOOM
I
Graham Earnshaw t was the Qingming Festival when
the Chinese honor their ancestors,
walks from shanghai to but there was little sign of it in the
tibet when he has the Yangtze gorges. The traditions of the
past seem to have disappeared faster here
time, always starting than in other regions.
from the last place he My walk in southern Anhui at the
same time two years before was a proces-
stopped. this month sion of streamer-covered graves and
fireworks as people covered the territory
we find him east of the and paid their respects. Not here. I saw
river town of Wushan in a little action in a public ceremony, and
the grave sites along the road looked
Chongqing municipality untended and forgotten. Strange.
But another part of the Qingming
period tradition was in full swing – the
bright yellow rapeseed carpets thrown
over every mountain slope and spare
piece of ground. The yellow flowers
bloom for a short period that absolutely
lights up the country. They look from
a distance like a child’s daubs. In this
part of the gorges region – the extreme
eastern end of Chongqing municipality
– the earth is mostly a bright purple red
East of Wushan City, Chongqing Municipality color. This provides a fabulous palate of
Coordinates views at every turn – yellow, pink, purple,
110.07.03 East green and brown, topped by blue skies.
31.12.24 North I bumped into some school kids
Distance from Shanghai - 1,180 km walking to school. It was Sunday af-
Distance from Lhasa - 1,800 km ternoon, and they were walking the 10
kilometers or so along the dirt track to
the closest town. From there, they take
a mini-van to the school and stay in a
dormitory through the week, returning
to their farms on Friday afternoon.
“Good afternoon,” said one girl in
English, although it was morning. A
good effort, nevertheless.
There were four of them, all aged 14
or 15, all from different families, and not
one of them was an only child. I asked
them about their plans for the future.
They will all graduate from junior high
school in two years, and they said there
was little chance they would get into
senior high school. It is not a matter of
intelligence. Simple farm kids are just
not programmed to do well in exams.
I asked them where they thought
they would be in five years’ time. The
two girls had no answer, which was in
itself an answer. The two boys said they
would be far away, the implication being
no Money no honey: Putting
that they would be migrant workers in
bees firmly in their place
the coastal cities. My guess is the girls
54 China Economic Review • May 2008
will go too in spite of their indecision. used by the farmers. Not so easy in the
I gave them all name cards, as I always leather-soled boots I always wear. But I
do, and told them to call me when they am pretty sure-footed, largely because I
get to Shanghai. I spoke later to another know I am so imbalanced.
guy aged 23, who did go to high school The terraces were all buttressed with
but did not graduate. He said that 80% rock walls, and when I reached the next
of his classmates had left the Wushan level of road, I of course walked the
region for allegedly greener pastures. wrong way, and had to be corrected by a
I asked the farm kids about the pink farmer digging vegetables who answered
earth, and whether it was good or bad my query as to the right direction in
for farming. One of the boys said, “It is perfectly accented Mandarin.
of average quality,” and I laughed. “That’s
A
a very professional reply,” I said. man gave me some help in find-
They walked slowly, and took rests ing my way, and we talked for
regularly along the way. They were in no some time. In a Chinese way, he
hurry, and I ended up walking on ahead. knew he had built up some credit with
The road came to a series of hair pin me and that it was possible to ask for
bends down the mountain, and I decided some favor as a payback. I could feel it
to short circuit a couple of the curves. I coming, and when he mentioned Shang-
took a path straight down through the hai, I was sure he would ask me to find a
vertical fields of vegetables and rapeseed, job for him. But I was wrong.
slipping and sliding on the rough path “My father,” he said, “is a farmer,
China Economic Review • May 2008 55
culture • 晏子 t RavE ls to thE WE st
and he is immensely strong and also honey with around 40% of the global good and most of their honey is sold to
an expert in a special form of the martial market, and I have met maybe 20 mobile Traditional Chinese Medicine factories.
arts. Is there any chance you could help honey farms on my journey so far. It As I paid, I thought of the old Wan-
him find a job as a bodyguard? Knives is always the same. A couple of dozen chai line. In this case, it really was “no
and even bullets do not harm him. wooden hives ranged along the road, money, no honey.” Then suddenly, one of
He would be really good at protecting flanked by a tent in which lives the the bees mistook me for a peach blossom
someone.” honey gypsy. They move regularly, to give and attached itself to my hair. Its buzz
“Wow,” I replied. “He sounds like their bees fresh pastures. Inside the tent was deafening, and I danced around try-
one of the Boxers in the Boxer Rebel- is a bed and a vat full of honey. I always ing to brush it off.
lion. But they were fake. They died when buy a water bottle of the stuff, and they “Stop! Stand still!” the woman
they were shot.” always say their honey will be sold to shouted. “You’re just making it worse.” I
“Well, I’ve seen him and it’s true,” middlemen and funneled through to the stopped and she deftly picked the bee off
insisted my friend. I said I did not know world markets. Amazing. my head, crushed it and let it fall onto
anyone who needed a bodyguard, but This was only the second honey pro- the road. I stomped on it as well, just in
would let him know if I chanced upon duction facility I had seen in the Yangtze case the bee had missed the point.
an opportunity for his father. gorges. But this was the peak season. The
pink peach blossoms were breaking out,
I
walked on through the hot spring the yellow rapeseed flowers were in full the china reading project donates
day. There were butterflies playing in bloom. And the bees, drunk on spring, books to schools in rural areas of China.
the rapeseed by the road as it headed were everywhere, working for the global Donations are tax-deductible. Payments can
up and up, the wall above the river. In economy. be remitted to The China Reading Project,
one day, I walked from 650 meters above I chatted with the wife about the Xinhua Finance Library Foundation Limited,
sea level down to 220, and then back up state of business as she ladled honey into HSBC Hong Kong account 809-215064-838,
to 1,200. Yet the tortured winding way a standard water bottle. Price RMB30 SWIFT code: HSBCHKHHHKH, HSBC Cause-
of the road meant that in two days and (US$4.30). Unusually, the couple came way Bay Branch.
more than 30 kilometers of walking, from the gorges region, which is very rare
I progressed westwards by only three for China’s honey gatherers, who gener- Visit www.chinareadingproject.com for
minutes of longitude. ally travel far and wide looking for fields details. For more Travels articles, see visit
I ran into a honey gypsy and his wife. of flowers to gorge their flocks. Business www.chinaeconomicreview.com/travels.
China is the world’s largest producer of is good, she said, the honey quality is
56 China Economic Review • May 2008
Book re Vie W • China into thE FutuRE
Forward looking
H
ere’s a fun based consultancy, while Enright is a professor at
fact: During Hong Kong University’s school of business. The
one of the essays are written by some of the most famous
many purges in China’s names in the China-watching business and are,
ongoing efforts to without a doubt, erudite and well informed.
battle avian flu, the Eight essays deal with various topics like
authorities injected live globalization, socio-political issues, banking
poultry with a vaccine and politics. The authors don’t shy away from
intended for humans. outlining future scenarios and playing mix and
Nobody really knows match with the many variables to create plausible
the consequences this prognostications of what China will be like in the
may have or whether, as next few decades.
a result, a more sturdy Like most books in the same vein, China Into
strain of the dreaded The Future is not entirely light reading. It is more
disease will emerge and of a book for the person with a stake in China
wreak havoc. who wants to hedge a bet. And it often reads
Here’s another: like a report or a strategy paper from an invest-
China’s population ment bank. In fairness, it is a book with a heavy
is getting older. No academic bent.
surprise there. The
problem is the lack of Western voices
social services and the Perhaps most interesting of all is the fact that this
fact that a great many book of essays on the future of China contains a
of those people had single piece of writing by a Chinese person – and
only one child. That he (Li Cheng of Hamilton College in New York
child was doted on by State) has been a US resident since 1985. This is,
six pockets (two parents however, a common occurrence. The number of
and four grandparents) Asian voices writing (in English) about Asia is
china into the future: but when the child is older he may be the single tiny compared to the number of pundits with top-
Making sense of pocket looking after two elderly people. notch degrees and often decades of experience in
the World’s Most One final one: There are a lot of single men in the country.
dynamic economy China and not enough women. Some put a future It’s not that these people don’t understand
Edited by W. John figure of these “bare branches” at 100 million. China or its people. Without a doubt they do –
Hoffman and Michael J. Single men tend to be rowdier and, when poor the writers of these essays have centuries of China
Enright; John Wiley & and destitute, more prone to violence. They could experience between them. Still, a bias remains.
Sons, US$29.95 create marauding gangs that create social unrest There is an underlining judgment of threat or fear
throughout the countryside. implied in the commentary, subtle as it may be. It
These facts are all tackled in China into the Fu- would be interesting, for once, to get the view of a
ture a collection of essays edited by W. John Hoff- true insider.
mann and Michael Enright and published earlier
this year. Hoffman is the co-founder of a China- Alfred romAnn
Excerpt: Socio-political issues
The Summer Olympic Games will be in Beijing in 2008. in terms of integrating with international norms. If the
How the games come off will be crucial for China’s fu- leadership put security to the forefront because of their
ture development and for how the international com- fears of unrest or actions by groups such as Falungong,
munity views China. How the games are managed is the Olympics will be a public relations disaster for China
entirely in the hands of Hu and Wen, and the approach and will set back reforms and damage its international
China takes will reflect their attitudes and predisposi- prestige. If China is able to provide a secure but relaxed
tion. While China wants to use the games to build na- environment for the games where the international
tional pride and to show off its new international status press enjoys a hospitable environment, it will bode well
to the world, hosting the games contains many risks for further reforms. At the moment the betting is on the
and will reveal much about just how far China has come former.
China Economic Review • May 2008 57
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China Economic Review • May 2008 65
Market • RED DRagon F un D
Beware the speculators
I
Mutual funds are chasing t was a brief but bloody battle. On The fund managers are certainly
April 18, a group of diehard Petro- bringing about change but we struggle to
short-term speculative China (601857) shareholders tried see it in a positive light. At the moment
gains. it is retail investors to prevent the stock slipping below the they are taking their money in and out of
RMB16.70 initial public offering price. the market with all the sophistication of a
who pay the price It was a brave stand but ultimately they novice retail investor.
were overcome by a surge in selling. Rather than subscribe to the views
PetroChina, which has the greatest of Yao Gang, we have much more time
petrochina 601857 index weighting, was one of a number for those Andy Xie, the Shanghai-based
40 of blue chips to suffer that day as the independent economist. Xie has been
35 Shanghai Composite Index (SCI) fell 4% scathing of those who, having talked up
30
to close at 3,094.67 points. This is 49% the market in the face of rising valuations,
– and seemingly a world away – from its now call on the government to help indi-
RMB
25
peak of 6,092.06 on October 16. vidual investors reclaim their savings.
20
Unsurprisingly, the mass exodus from Institutional investors and compa-
15
Nov07 Dec07 Jan08 Feb08 Mar08 Apr08
the blue chips was initiated by fund man- nies have both been irresponsible: the
agers who have been unwinding their former in their attitude towards risk and
positions for some weeks. Fund manag- the latter in their failure to fully disclose
china unicom 600050 ers who bought so boisterously as the the contribution of stock market gains in
14 SCI hovered around 5,000 points were what now appear to be deceptively high
13
the first to sell out once the index slipped earnings figures.
12
11
below 3,500. Now they are using this re- Investigate those involved, root out
deemed capital for speculative purposes. the wrong-doers and use any cash seized
RMB
10
9 to compensate the retail investors who
8 incessant speculation got caught up in all this hype is Xie’s rec-
7
Nov07 Dec07 Jan08 Feb08 Mar08 Apr08
According to the official statistics, there ommendation.
were seven funds with a stock velocity Questions are already being asked
over 1,000% in 2007, with the highest of Qinghai Salt Lake Potash (000792)
red dragon fund vs the sci reaching an astonishing 1,572%. And this where officials and relatives of officials
was before the recent turmoil that has from the Ministry of Housing and Ur-
400
seen speculation reach a new peak. Are ban-Rural Construction are alleged to
300 there any other mutual funds in the world have participated in insider trading.
where the managers exhibit such a manic
% growth
200
obsession with short-term trading? Back in the game
100 “Institutional investors are changing Meanwhile, the Red Dragon Fund has
0
the structure of the market; they will be become active once again – but this was
Nov07 Dec07 Jan08
Shanghai Composite Index
Feb08 Mar08
Red Dragon Fund
Apr08 a market stabilizer as well as a key player not mere speculation.
in promoting corporate governance and China Unicom (600050) was intro-
In August 2005, chinA economic review enhancing competition and efficiency of duced to our portfolio in mid-April in
decided to invest RMB10,000 in A-shares. the financial system,” Yao Gang, deputy anticipation of the imminent restructur-
And so the Red Dragon Fund was born... chairman of the China Securities Regu- ing of the country’s telecom industry.
latory Commission, said in February. Unicom is set to benefit from the changes
and the stock valuation is quite favorable.
The other new addition is PetroChina.
red dragon fund holdings as of March 18 and april 17 The stock was acquired three weeks be-
fore mid-April’s mass sell-off as the funds
Mar 18 trading details apr 17
and then the retail investors got cold feet.
no. of
price Value
Buy/
date price
no. of
price Value
As a result, our holding has lost value in
shares sell shares recent weeks, but we remain optimistic.
petrochina 601857
Buy 500 Mar 25 18.96 500 16.87 8,435 Analysts have said RMB16.00-20.00 is
Buy 300 Mar 27 17.56 300 16.87 5,061
reasonable trading range for PetroChina.
china unicom 600050 Buy 800 Apr 14 8.03 800 8.15 6,520 Also, we believe the fund managers’
decision to dump the stock is principally
cash 28,042 6,870 a ploy to buy back in at a lower level from
retail investors who exit the company
fund total 28,042 20,016 – and perhaps the market as a whole – in
a disillusioned state.
66 China Economic Review • May 2008
