Month: October 2010

A Nominee For A PE Medal of Honor


If they gave medals for valor and distinguished service to the PE industry, SAIF’s Ben Ng surely earned one this past week. In a twelve hour stretch, he met with the laoban (Chinese for “boss”) of four different Chinese SME, at four different company headquarters, and probed each on the merits of their particular business.

The companies were at four different stages, from start-up to a 14-year-old company with a household name in much of southern China, and from four very different industries, from robotic manufacturing to a major fast-food chain, from agriculture to e-commerce.

Ben never wavered, never tired, never lost his genuine enthusiasm for hearing great entrepreneurs talk about what makes their businesses special, while explaining a little about his own company. As I found out later, Ben left a deep imprint with each entrepreneur, and in his understated way, showed each of them why SAIF is such an outstanding success in the PE industry in China, SAIF has backed more than 80 companies during its 10 year history, with $3.5 billion under management, and some of the more illustrious Limited Partners of any PE firm in the world.

By the end of the day, Ben was still full of life, mind sharp and mood upbeat. I, on the other hand, had a case of “PE battle fatigue”. I got home and almost immediately crawled into bed, trying to recall, without much success, which laoban had said what, and which business model belonged to whom. I’ve met a lot of company bosses in my 25-year career. But, I can’t recall ever having so many meetings at this high level in one day. Ben, on the other hand, mentioned he has days like this quite often, as he travels around China.

Ben is a partner at SAIF, with long experience in both high-technology and PE investing. He’s one of the professionals I most like and respect in the PE industry in China. I wanted these four laoban to meet him, and learn for themselves what top PE firms look for, how they evaluate companies, and how they work with entrepreneurs to accelerate the growth and improve the performance of their portfolio companies up to the time of an IPO, and often beyond.

Every great company needs a great investor. That about sums up the purpose and goal of my work in China.

I’d met these four laoban before and knew their businesses fairly well. In my view, each has a realistic chance to become the clear leader in their industry in China, and within a few years, assuming they get PE capital to expand, a publicly-traded company with market cap above $1 billion.  If so, they will earn the PE investor a very significant return – most likely, in excess of 500%. In other words, in my view,  a PE firm could be quite lucky to invest in these companies.

Will SAIF invest in any of the four? Hard to say. They look at hundreds of companies every year, and because of their track record, can choose from some of the very best SME in China. SAIF has as good a record as any of the top PE firms in China. According to one of Ben’s partners at SAIF, the firm has an 80% compounded annual rate of return.

That’s about as good as they get in the PE industry. SAIF’s investors might consider nominating the firm for a medal as well.


The indispensable economy? — The Economist


Economist logo

The indispensable economy?

China may not matter quite as much as you think


THE town of Alpha in Queensland, Australia, has only 400 residents, including one part-time ambulance driver and a lone policeman, according to Mark Imber of Waratah Coal, an exploration firm. But over the next few years it should quintuple in size, thanks to an A$7.5 billion ($7.3 billion) investment by his company and the Metallurgical Corporation of China, a state-owned firm that serves China’s mining and metals industry. This will build Australia’s biggest coal mine, as well as a 490km (300-mile) railway to carry the black stuff to the coast, and thence to China’s ravenous industrial maw.

It is hard to exaggerate the Chinese economy’s far-reaching impact on the world, from small towns to big markets. It accounted for about 46% of global coal consumption in 2009, according to the World Coal Institute, an industry body, and consumes a similar share of the world’s zinc and aluminium. In 2009 it got through twice as much crude steel as the European Union, America and Japan combined. It bought more cars than America last year and this year looks set to buy more mobile phones than the rest of the world put together, according to China First Capital, an investment bank.

In China growth of 9.6% (recorded in the year to the third quarter) represents a slowdown. China will account for almost a fifth of world growth this year, according to the IMF; at purchasing-power parity, it will account for just over a quarter.

For the first 25 years of its rise, China’s influence was most visible on the bottom line of corporate results, as it allowed firms to cut costs. More recently it has become conspicuous on the top line. Audi, a luxury German carmaker, sold more cars in China (including Hong Kong) than at home in the first quarter. Komatsu of Japan has just won an order for 44 “super-large dump trucks” from China’s biggest coal miner.

The Economist has constructed a “Sinodependency index”, comprising 22 members of America’s S&P 500 stockmarket index with a high proportion of revenues in China. The index is weighted by the firms’ market capitalisation and the share of their revenues they get from China. It includes Intel and Qualcomm, both chipmakers; Yum! Brands, which owns KFC and other restaurant chains; Boeing, which makes aircraft; and Corning, a glassmaker. The index outperformed the broader S&P 500 by 10% in 2009, when China’s economy outpaced America’s by over 11 percentage points. But it reconverged in April, as the Chinese government grappled with a nascent housing bubble.

China is, in itself, a big and dynamic part of the world economy. For that reason alone it will make a sizeable contribution to world growth this year. The harder question is whether it can make a big contribution to the rest of the world’s growth.

China is now the biggest export market for countries as far afield as Brazil (accounting for 12.5% of Brazilian exports in 2009), South Africa (10.3%), Japan (18.9%) and Australia (21.8%). But exports are only one component of GDP. In most economies of any size, domestic spending matters more. Thus exports to China are only 3.4% of GDP in Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil (see map).


Export earnings can, of course, have a ripple effect throughout an economy. In Alpha, the prospect of selling coal to China is stimulating investment in mines, railways and probably even policing. But these “multipliers” are rarely higher than 1.5 or 2, which is to say, they rarely do more than double the contribution to GDP. Moreover, just as expanding exports add to growth, burgeoning imports subtract from it. Most countries outside East Asia suffered a deteriorating trade balance with China from 2001 to 2008. By the simple arithmetic of growth, trade with China made a (small) negative contribution, not a positive one.

China plays a larger role in the economies of its immediate neighbours. Exports to China accounted for over 14% of Taiwan’s GDP last year, and over 10% of South Korea’s. But according to a number of studies, roughly half of East Asia’s exports to China are components, such as semiconductors and hard drives, for goods that are ultimately exported elsewhere. In these industries, China is not so much an engine of demand as a transmission belt for demand originating elsewhere.

The share of parts and components in its imports is, however, falling. From almost 40% a decade ago, it fell to 27% in 2008, according to a recent paper by Soyoung Kim of Seoul National University, as well as Jong-Wha Lee and Cyn-Young Park of the Asian Development Bank. This reflects China’s gradual “transformation from being the world’s factory, toward increasingly being the world’s consumer,” they write. Gabor Pula and Tuomas Peltonen of the European Central Bank calculate that the Philippine, South Korean and Taiwanese economies now depend more on Chinese demand than American.

Trade is not the only way that China’s ups and downs can spill over to the rest of the world. Its purchases of foreign assets keep the cost of capital down and its appetite for raw materials keeps their price up, to the benefit of commodity producers wherever they sell their wares. Its success can boost confidence and productivity. One attempt to measure these broad spillovers is a paper by Vivek Arora and Athanasios Vamvakidis of the IMF. According to their estimates, if China’s growth quickened by 1 percentage point for a year, it would boost the rest of the world’s GDP by 0.4% (about $290 billion) after five years.

Since the crisis, China has shown that its economy can grow even when America’s shrinks. It is not entirely dependent on the world’s biggest economy. But that does not mean it can substitute for it. In April the Bank Credit Analyst, an independent research firm, asked what would happen if China suffered a “hard landing”. Its answer to this “apocalyptic” question was quite “benign”. As it pointed out, Japan at the start of the 1990s accounted for a bigger share of GDP than China does today. Its growth slowed from about 5% to 1% in the first half of the 1990s without any discernible effect on global trends. It is hard to exaggerate China’s weight in the world economy. But not impossible.

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China’s Economy: From Red Light to Highlights

Cinnabar Enamel snuff bottle from China First Capital blog post

After 30 years of economic progress unparalleled in human history, China can rewrite the rules on which leading economic indicators are most important to track.  I want to nominate a new one: the rate at which brothels are converted to beauty parlors.

At least in my Shenzhen neighborhood, this indicator is certainly at an all-time high. In the last four months, two rather seedy massage and KTV parlors have undergone very lavish renovation and reopened as large, expensive, multi-floored hair-dressing salons.

The clear implication: you can make more money in China these days selling perms and dye jobs than selling sex. This is an economic change in China of historic, if under-appreciated, importance.

Shenzhen has long had a reputation as one of the red light capitals of China. Some of the reasons: proximity to Hong Kong, a transient population made up largely of economic migrants, a local government with more of a laissez-faire attitude than elsewhere in China.

I can’t imagine anyone but the local police are keeping count, but I’d guess there must be thousands of places in the city offering sex for cash. These range from tiny storefronts with five to ten girls in folding chairs, to all manner of sauna, massage and KTV joints, most, but not all of which, augment their more legitimate offerings with the paid option to take one of the hostesses home with you, or do a little groping on the premises.

Or so I’m told. I know it may sound either prudish or disingenuous, but I’ve never been a customer of one of these places. I do, however, marvel at the variety and number of places selling sex here. The five-minute walk from my house to the local supermarket takes me past two big neon-lit places, called 会所, or “clubs” with touts out front and some heavily made-up ladies within. Down two smaller alleys are small storefront brothels.

In the building where I live, one of the fancier ones in my neighborhood, business cards are slipped under my door most every night offering “home delivery services”. They stress the a variety of women available, including  nurses, college students, migrants, mistresses, foreigners.

This is the part of Shenzhen’s sex trade I most deeply object to. The cards are put under every door. The photos on the card are of naked women.  My next-door neighbors include Chinese families with young kids. It’s unseemly, and I’ve complained numerous times to the doormen, but they claim not to know who is responsible for distributing the cards. My guess is they are paid to look the other way.

The economics of hair-dressing are certainly more favorable than the economics of prostitution. It’s not unusual for a woman to spend Rmb200-300 or more on a haircut and shampoo. Get your hair colored and the price can double. Though there are already dozens of hair salons in my neighborhood, they all seem to be jam-packed at all hours of the day. That never looks to be the case of the places selling sex. They always seem empty, over-staffed and under-patronized.

One thing hairdressers and brothels have in common,  the busiest time is 9pm-1am. Hairdressers, most of whom are men, earn a pretty good living, making around USD$1,000 a month. But, they work long hours, usually 12 hours a day. Most of the customers are women, but these places also cater to men. I pay Rmb 50 for a haircut and no shampoo. That’s a little less than the cost of a haircut at the joint I used to go to in LA’s Koreatown.

Every new beauty parlor that opens is confirmation of some larger economic trends in China.  Women have more disposable income, and more of an inclination to spend it on fashion, cosmetics, or a new hairstyle.  Prices are quickly reaching levels similar to those in the US. In Shenzhen, a young woman can now easily earn as much every month sitting at a desk in an office as sitting in a storefront brothel. That is probably a change from a few years ago.

China’s economy is changing quickly from export-dependence to a reliance on the domestic market, from dominance of manufacturing to the rise of the service sector. In my part of Shenzhen, what’s changing most quickly: who is serving what to whom for how much.

How One Million People Spent a Perfect Autumn Day in Shanghai


The most crowded place in the world today is a few miles from where I’m now sitting. More than 1 million people poured into the Shanghai Expo today, on a beautiful autumn afternoon, with bright blue skies and 70-degree temperatures.

It was almost certainly the busiest day of the Expo, beating yesterday’s record.  Once today’s final visitor count is in, the crowd will certainly set some kind of record for most people paying on a single day to visit a single attraction.

If today’s visitors all lined up in an orderly queue (which they almost certainly did not do), today’s crowd of Expo visitors would stretch for about 500 miles, or about halfway to Beijing.

Even with a typical daily crowd one-third that large, the lines inside the Expo often stretched beyond the patience of many. Waits of two to three hours to enter the most popular pavilions were not uncommon. With a crowd twice as big as usual, my guess is that the other record broken today was for most people waiting the longest, on some of the longest lines, displaying the greatest patience.

Besides the perfect weather, the other reason for today’s enormous crowd is that today is the next-to-last Sunday before the Expo closes to the public. It opened almost six months ago, on May 1.

I was in Shanghai today for a finance conference. As I rode the metro in mid-afternoon through the center of the city near the Expo, it seemed like the +1 million visitors were all trying to jam their way onto my subway car. In almost 30 years of visiting the city, I’ve never seen it so thoroughly and prodigiously congested.

At Rmb100 per head, the Expo’s ticket income today should approach $20 million. Drinks, food and souvenirs should lift the daily take above $50 million. That’s probably about 0.1% of the total cost of staging the event, including all the new urban infrastructure built to support it, including six new subway lines and a major new airport terminal. It seems money well spent.

On a day like today, Shanghai is an old city exquisitely renewed, a perfect playground for the millions who are converging on the Expo, or strolling its main shopping streets and colonial-era alleyways.

Big Economy, Small Cash

100 yuan notes


How’s this for a monetary paradox: the world’s fastest-growing major economy, the second-largest economy in the world, with more billionaires than any country except the US, has a currency whose highest denominated bill is worth less than that of any developed country in the world, as well as many of the poorest ones. 

We’re talking, of course, about China. The largest denominated bill is the red 100 yuan note. At today’s exchange rate, it’s worth about $15. It’s been the largest bill in circulation for the last eleven years. During that time, China’s economy has more than tripled in size. ATM machines have become pervasive. Prices for many things have reached American levels. 

Credit cards are still rare. Chinese do most of their buying, even of big ticket items, in cash. It’s not uncommon, for example, to pay for cars and houses completely in cash – using enough cash to fill either the car trunk, or a kitchen refrigerator. Because hospitals in China take cash and demand upfront payment before any treatment, most Chinese keep a stash of emergency cash at home of many thousands of renminbi.

Among the affluent Chinese bosses I know, it’s common to carry both a wallet and a kind of “guy purse” where they keep Rmb30,000-Rmb50,000 in cash.  It’s like carrying around a small brick  — and just as obvious. 

Next door to me in Hong Kong, the highest bill is circulation is HKD1,000, worth over eight times the 100 yuan note. In Taiwan, the biggest bill in circulation is NTD2,000, worth five times more than the 100 yuan note. In Singapore, it’s a $10,000 note. To use renminbi to get one, you’d need 500 of the 100 yuan notes. 

For lots of reasons, macro and micro, China urgently needs larger denominated currency. Yet, it’s very unlikely to get it anytime soon. 

A main reason, as far as I can determine, is a justifiable fear of mass counterfeiting. In China, counterfeit bills are already rife. Before moving to China, I never knowingly handled a counterfeit note. Here, I’ve already twice been given counterfeit bills as change, and then got stuck with them. 

You’d think, of course, that most of the counterfeit Chinese bills would be the 100 yuan note. In fact, most of the fakes in circulation are 10 and 20 yuan notes, each worth so little it’s hardly worth the expense and risk of producing the forgeries. 

What’s going on here? Though it’s the highest denominated bill, the 100 yuan note has a very unusual pattern of circulation. It’s never given as change, since it’s the largest bill. As a result, individuals get their 100 yuan notes almost exclusively direct from the bank, either an ATM or at the counter. These bills are usually new, or nearly new, and all are checked to make sure they are genuine. 

When you then use the notes, they are usually checked again by the receiver to be sure they are not counterfeit. Since they can’t be used as change, whoever got the 100 yuan as payment will almost certainly return them to the bank. Any bills that are not in perfect condition get scrapped. This is particularly true in larger cities. One result is every time I go to withdraw money from an ATM, I’ll get only brand-new bills. Even in the rare cases when I’ve been given a lot of 100 yuan notes by someone, usually as repayment, they are also almost always in mint condition. 

If China ever did introduce a 500 yuan note (worth about $65), then the 100 yuan notes would start to be used as change. Counterfeiting would almost certainly explode. The incentives, compared to today, would be overwhelming. The logistics needed to combat it almost incomprehensible. Most stores, even small ones, have machines at every cash register to detect counterfeits. But, lots of commerce in China is still hand-to-hand, in wholesale and retail markets as well as street vendors. 

There’s no realistic way to protect these tens of  millions of small businesses and traders from the punishing risks of getting stuck with phony bills.  When the cost of wrongly accepting a single fake bill, as now, is usually 10 yuan ($1.50), it’s unfortunate, but manageable. If it becomes $15, it’s easy to foresee that these tens of millions of businesses would refuse to accept 100 yuan notes from customers. The result: lots of disruption to established patterns of trade across all of China. 

At its current pace, China’s economy will double again in the next seven years. Will the 100 yuan note still be the largest in circulation then? My money says it will be.