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Shenzhen The World’s Most Active IPO Market So Far in 2010

Leave a Comment / July 28, 2010

Jade object from China First Capital blog post

 

Shenzhen’s Stock Exchange was the world’s busiest and largest IPO market during the first half of 2010. Through the end of June, 161 firms raised $22.6 billion in IPOs on Shenzhen Stock Exchange. The Shanghai Stock Exchange ranked No.4, with 11 firms raising $8.2 billion.

Take a minute to let that sink in. The Shenzhen Stock Exchange, which two years ago wasn’t even among the five largest in Asia, is now host to more new capital-raising transactions than any other stock market, including Nasdaq and NYSE. Even amid the weekly torrent of positive economic statistics from China, this one does stand out. For one thing, Shenzhen’s Stock Exchange is effectively closed to all investors from outside China. So, all those IPO deals, and the capital raised so far in 2010, were done for domestic Chinese companies using money from domestic Chinese investors.

The same goes for IPOs done on Shenzhen’s larger domestic competitor, the Shanghai Stock Exchange. In the first half of 2010, the Shanghai bourse had eleven IPOs, and raised $8.2 billion. That brings the total during the first half of 2010 in China to 172 IPOs, raising $31 billion in capital.

The total for the second half of 2010 is certain to be larger, and Shenzhen will likely lose pole position to Shanghai. The Agricultural Bank of China just completed its IPO and raised $19.2 billion in a dual listing on Shanghai and Hong Kong exchanges. Over $8.5 billion was raised from the Shanghai portion.

One reason for the sudden surge of IPOs in Shenzhen was the opening in October 2009 of a new subsidiary board, the 创业板, or Chinext market. Its purpose is to allow smaller, mainly private companies to access capital markets. Before Chinext, about the only Chinese companies that could IPO in China were ones with some degree of state ownership. Chinext changed that. There is a significant backlog of several hundred companies waiting for approval to go public on Chinext.

So far this year, 57 companies have had IPOs on Chinext. The total market value of all 93 companies listed on Chinext is about Rmb 300 billion, or 5.5% of total market capitalization of the Shenzhen Stock Exchange. On Shenzhen’s two other boards for larger-cap companies, 197 companies had IPOs during the first half of 2010.

The surge in IPO activity in China during the first half of 2010 coincided with the dismal performance overall of shares traded on the Shanghai and Shenzhen stock exchanges. Both markets are down during the first half of the year: Shanghai by over 25%  and Shenzhen by 15%. 

The IPO process in China, both on Shanghai and Shenzhen markets, is very tightly controlled by China’s securities regulator, the CSRC (证监会). It’s the CSRC that decides the number and timing of IPOs in China, not market demand. One factor the CSRC gives significant weight to is the overall performance of China’s stock market. They want to control the supply of new shares, by limiting IPO transactions, to avoid additional downward pressure on share prices overall.

So, presumably, if the Chinese stock markets performed better in the first half of 2010, the number of IPOs would have been even higher. Make no mistake: the locus of the world’s IPO activity is shifting to China.

Reverse Mergers — Knowledgable Comment

Leave a Comment / July 13, 2010

qing calligraphy2

Comments don’t get any better than this one, a detailed assessment of the hazards of reverse mergers. It was added as a comment to an earlier blog post of mine. I’m grateful for the contribution, and humbled by the writer’s knowledge and clear writing style.  Highly recommended.

 

A Reverse Merger (“RM”) is routinely pitched as a cheaper and quicker method of going public than a traditional IPO in China. This may be technically true but the comparison is VERY MISLEADING. 

As you mentioned a few times in your blog, an RM is not a capital raising transaction. No shares are sold for cash in the transaction. It will receive little attention from analysts ! The RM is often coupled with a PIPE financing. However, the amount of PIPE financing that can be raised is very limited. Additionally, PIPE financing is typically expensive relative to other financing options and may contain onerous terms. 

Generally, completing a $50 million IPO will roughly run a company 18% of the offering proceeds, including underwriter discounts, under pricing, and legal, accounting, filing, listing, printing, and registrar fees, or $9 million. 

Conversely, an RM was advocated as “costs only between $100,000 and $400,000 to complete”. This is the most tricky and misleading part, because this cost range does not include the value of the equity stake retained by the shell promoter and its affiliates. And most Chinese company does not understand this. 

Generally when the RM closes, the Chinese Operating Company is issued Shell Company shares only equal to 80% to 90% of Shell Co’s post-merger outstanding shares. The the remaining 10% to 20% of shares are retained by the owner of the Shell Company, the promoter and its affiliates.

Hence, in addition to the $100,000 to $400,000 in cash paid by Chinese Operating Co to complete the RM, the Chinese Operating Co has also “paid” a 10% to 20% stake in its company. If the market capitalization is $50 million post-RM, this stake is worth $5 to $10 million. 

So RM is not cheaper at all ! It is Usually an option for second and third tier companies to obtain financing via a PIPE, and Some PIPE investors may not be long-term investors. An active trading market for stock may not be developed through a RM. Company will probably not qualify to trade on the Nasdaq and will likely end up trading in the pink sheets or the bulletin board. 

Kleiner Perkins in China — Update

Leave a Comment / July 12, 2010

Budai

Congratulations to Kleiner Perkins Caufield & Byers on the successful NASDAQ IPO of its portfolio company AutoNavi, a Chinese mapping company that supplies maps for GPS navigation systems. KP owned 4.3% of the company prior to its recent IPO. At time of IPO, Kleiner owned 6,527,520 ordinary shares of AutoNavi, now worth around $25mn. That equates to a 2.5X rate of return over the four years KP held the investment.

The AutoNavi investment was made by KP’s main office in California, not Kleiner Perkins China, which was set up in 2007 to lead the US firm’s investing activities in China, and is still waiting for its first exit. According to KP China’s website , the AutoNavi investment is managed by KP China.

Two other venture capital firms also held AutoNavi shares at the time of IP, Walden International and Sequoia.

TMK Power Industries – Anatomy of a Reverse Merger

4 Comments / July 4, 2010

lacquer box from China First Capital blog post

Two years back, I met the boss and toured the factory of a Shenzhen-based company called TMK Power Industries. They make rechargeable nickel-metal hydride, or Ni-MH,  batteries, the kind used in a lot of household appliances like electric toothbrushes and razors, portable “Dustbuster” vacuum cleaners, and portable entertainment devices like MP3 players. 

At the time, it seemed to me a good business, not great. Lithium rechargeable batteries are where most of the excitement and investment is these days. But, TMK had built up a nice little pocket of the market for the lower-priced and lower-powered NI-MH variety. 

I just read his company went public earlier this year in the US, through a reverse merger and OTCBB listing. I wish this boss lots of luck. He’ll probably need it.

Things may all work out for TMK. But, at first glance, it looks like the company has spent the last two years committing a form of slow-motion suicide. 

Back when I met the company, we had a quick discussion about how they could raise money to expand. I went through the benefits of raising private equity capital, but it mainly fell on deaf ears. The boss let me know soon after that he’d decided to list his company in the US.

He made it seem like a transaction was imminent, since I know he was in need of equity capital. Two years elapsed, but he eventually got his US listing, on the OTCBB, with a ticket symbol of DFEL. 

Here is a chart of share price performance from date of listing in February. It’s a steep fall, but not an unusual trajectory for Chinese companies listed on the OTCBB. 

 TMK share chart

From the beginning, I guessed his idea was to do some kind of reverse merger and OTCBB transaction. I knew he was working then with a financial advisor in China whose forte was arranging these OTCBB deals. I never met this advisor, but knew him by reputation. He had previously worked with a company that later became a client of mine. 

The advisor had arranged an OTCBB deal for this client whose main features were to first raise $8 million from a US OTCBB stock broker as “expansion capital” for the client. The advisor made sure there wouldn’t be much expanding, except of his own bank account and that of the stock broker that planned to put up the $8mn. 

Here’s how the deal was meant to work: the advisor would keep 17% of the capital raised as his fee, or $1.35mn.  The plan was for the broker to then rush this company through an expensive “Form 10” OTCBB listing where at least another $1.5 mn of the original $8mn money would go to pay fees to advisors, the broker,  lawyers and others. The IPO would raise no money for the company, but instead all proceeds from share sale would go to the advisor and broker. The final piece was a huge grant of warrants to this advisor and the stock broker that would leave them in control of at least 15% of the post-IPO equity. 

If the plan had gone down, it’s possible that the advisor and broker would have made 2-3 times the money they put up, in about six months. The Chinese company, meanwhile, would be left to twist in the wind after the IPO. 

Fortunately for the company, this IPO deal never took place. Instead, I helped the company raise $10mn in private equity from a first class PE firm. The company used the money to build a new factory. It has gone from strength to strength. Its profits this year will likely hit $20mn, four times the level of three years ago when I first met them. They are looking at an IPO next year at an expected market cap of over $500mn, more than 10 times higher than when I raised them PE finance in 2008. 

TMK was not quite so lucky. I’m not sure if this advisor stayed around long enough to work on the IPO. His name is not mentioned in the prospectus. It does look like his kind of deal, though. 

TMK should be ruing the day they agreed to this IPO. The shares briefly hit a high of $2.75, then fell off a cliff. They are now down below $1.50. It’s hard to say the exact price, because the shares barely trade. There is no liquidity.

As the phrase goes, the shares “trade by appointment”. This is a common feature of OTCBB listed companies. Also typical for OTCBB companies, the bid-ask spread is also very wide: $1.10 bid, and $1.30 asked. 

Looking at the company’s underlying performance, however, there is some good news. Revenues have about doubled in last two years to around $50mn. In most recent quarter, revenues rose 50% over the previous quarter. That kind of growth should be a boost to the share price. Instead, it’s been one long slide. One obvious reason: while revenues have been booming, profits have collapsed. Net margin shrunk from 13% in final quarter of 2009 to 0.2% in first quarter of 2010. 

How could this happen? The main culprit seems to be the fact that General and Administrative costs rose six-fold in the quarter from $269,000 to over $1.8mn. There’s no mention of the company hiring Jack Welch as its new CEO, at a salary of $6mn a year. So, it’s hard to fathom why G&A costs hit such a high level. I certainly wouldn’t be very pleased if I were a shareholder. 

TMK filed its first 10Q quarterly report late. That’s not just a bad signal. It’s also yet another unneeded expense. The company likely had to pay a lawyer to file the NT-10Q to the SEC to report it would not file on time. When the 10Q did finally appear, it also sucked money out of the company for lawyers and accountants. 

TMK did not have an IPO, as such. Instead, there was a private placement to raise $6.9mn, and in parallel a sale of over 6 million of the company’s shares by a variety of existing shareholders. The broker who raised the money is called Hudson Securities, an outfit I’ve never heard of. TMK paid Hudson $545,000 in fees for the private placement, and also issued to Hudson for free a packet of shares, and a large chunk of warrants.

Hudson was among the shareholders looking to sell, according to the registration statement filed when the company completed its reverse merger in February. It’s hard to know precisely, but it seems a fair guess that TMK paid out to Hudson in cash and kind over $1mn on this deal. 

The reverse merger itself, not including cost of acquiring the shell, cost another $112,000 in fees. At the end of its most recent quarter, the company had all of $289,000 in the bank. 

These reverse merger and OTCBB deals involving Chinese companies happen all the time. Over the last four years, there’s been an average of about six such deals a month.

This is the first time – and with luck it will be the only time – I actually met a company before they went through the process. Most of these reverse merger deals leave the companies worse off. Not so brokers and advisors. 

Given the dismal record of these deals, the phrase 美国反向收购 or “US reverse merger” , should be the most feared in the Chinese financial lexicon. Sadly, that’s not the case.


 

Bad Policy, Bad Advice and Bad Reporting from the US on Dollar-Renminbi Exchange Rate

2 Comments / June 27, 2010

Yaozhou bowl in China First Capital blog post
I don’t know the direction of the dollar-renmibi exchange rate. But, I do know most of the American press, led by the New York Times and Washington Post, got snowed by the announcement last weekend that China would introduce new “flexibility” in its exchange rate.

The immediate media reaction – and that of the Obama administration – was one of hosannas and smug approval. The tone of most coverage was along the lines, “the Chinese have finally seen the error in their mercantilist ways and will now allow their currency to appreciate strongly against the dollar, leading to a new golden age of manufacturing employment in the US.”

A week has gone by and the renminbi has appreciated by exactly 0.5%.  So, a $100 item made in China that previously cost Rmb682 will now cost an importer Rmb685, or $100.50. Factory managers in the US may be waiting for awhile yet before the flood of orders arrives from China.  The President’s union buddies will also not soon see much of an uptick in their membership rolls.

For those without short-term memory impairment, this is, of course, the second time in two months that US press and the Obama administration loudly predicted the imminent upward revaluation of the renminbi. In April, a flurry of reporting, loudest and strongest from the New York Times,  announced the Chinese government was at last ready to accede to US demands and let the renminbi rise.

That time, the press articles were timed to coincide with a visit by the US Secretary of Treasury, Timothy Geithner, to Beijing. He was there, if the Administration and its media allies were to be believed, to talk tough and get the Chinese to fall in line with American wishes. Discernible results? Zero.

This time around, the reporting coincides with the G-20 Summit meeting in Toronto, where we are told, President Obama will use his intelligence and oratorical brilliance to persuade Chinese leader Hu Jintao to do his part for the sagging US economy. Likely results? We’ll see, but the signs are that China will continue to make policy decisions with its own interests to the fore.

There is much both wrong and economically illiterate about all this US pressure to revalue the renminbi. Start with the fact the Chinese currency is not significantly undervalued. Yes, it is tied to the dollar. So are many other currencies with which the US trades, including Mexico, Taiwan, Russia, Singapore, Thailand, Saudi Arabia. The renminbi’s formal peg with the dollar ended in July 2005. It is true that the renminbi, if it were fully convertible and freely floating, would likely appreciate against the dollar. But, by enough to really make an impact on US manufacturing employment? Hardly.

The biggest benefit to China of letting the renminbi rise against the dollar would be to lower the renminbi cost of China’s huge imports of oil, iron ore and other core dollar-denominated raw materials. Weighing against this would be falling margins at many of China’s exporters, which would ultimately have an impact on manufacturing employment.

Creating and maintaining jobs is a paramount concern for a country whose labor force grows by millions every year, and where there is no “social safety net” as in the US.  Fact: every year, six million more Chinese join the migrant labor force, according to recent report by China’s National Population and Family Planning Commission.

It’s a mistake shared by many Americans that at the current exchange rate, China is some kind of low-cost paradise for people with dollars. I live here. Prices here are not low. In fact, most things in China, with exception of fresh vegetables and public transportation, are either on par with US prices or higher.

Most fruit is generally more expensive here, even at the proletarian outdoor market where I do a lot of my shopping. Same goes for beef, chicken and most everything else you fill up a supermarket cart with. Gas, automobiles, computers, TVs, brand-name products are all higher in China than in the US.

I’m writing this in my local Starbucks in Shenzhen. And while this is hardly a perfect bellwether, the cheapest cup of regular brewed coffee here costs Rmb 15, or $2.20. A cappuccino? Rmb 25, or $3.65.  The place is jammed, as it always is, from noon to midnight. Not a seat in the house. Starbucks has over 350 stores in China and growing fast.

Not that long ago, the renminbi was pegged at 8.2 to the dollar. Has this 17% appreciation done anything to impact the decline of manufacturing employment in the US, a decline that began over 30 years ago? No. Will another 17% appreciation of the dollar reverse this trend? I very much doubt it.  Instead, what will likely happen is prices for many products in the US will rise sharply, since so much of what America likes buying is made here.  This will lead to higher unemployment, lower growth and hit hardest the poorer Americans President Obama claims to champion.

Make no mistake: if Chinese prices rise, this will not create huge new opportunities either for US manufacturers to reconquer the domestic market or allow lower wage countries like Bangladesh, Nigeria, India, the Dominican Republic or Peru to increase dramatically their exports to the US. Those countries can’t now, nor will they ever in my view, manufacture products to match the quality at the same price of those made in China, even if the cost of Chinese made products rises 15%-20% or more.

True, an economics professor’s models would argue otherwise, and President Obama is surrounded by economics professors. The models are plain wrong. Some textile imports from places other than China will rise. Not much else.

So, the real world result of the “strong renminbi” policy: greater economic hardship in the US.  But, won’t ordinary Chinese benefit from lower import prices? Perhaps a little, but not in any way that will create the desired outcome of much higher manufacturing employment and exports in the US. Maybe the Washington state apples and cherries in my supermarket will become a little cheaper, and become only twice as expensive as they are in the US. Again, not overly likely.

China’s current currency policy has its benefits and drawbacks. The benefit is mainly greater predictability for exporters, which has been somewhat helpful during the economic crisis of the last two years in China’s largest export markets of the US and Europe. Even with the stable exchange rate, a lot of exporters in China went bankrupt over this period, because of a collapse in orders from the US and Europe.

The biggest drawback of current exchange rate policy: $3 trillion in foreign exchange reserves accumulated to soak up all the dollars still pouring into the country. This money is not being put to any direct productive use to improve China’s economy. A higher renminbi will not alter that calculus much, if at all.

I’m troubled in many ways by the direction of American international financial policy. The Obama Administration finds it far easier to scapegoat China’s exchange rate than put their focus on the deepest source of American economic malaise: runaway spending and budget deficits in Washington, with the inevitability of large tax increases to follow.

It’s not likely to happen, but here’s what I’d most like to see is the next time the US media starts braying for a higher renminbi. Chinese newspapers respond with articles, quoting unnamed Chinese government officials,  pleading with the Obama Administration to cut spending, deficits and taxes, and so put more money in the pockets of American consumers. They will certainly choose to spend some of this cash on Chinese-made products and so help boost employment, wages and living standards across China.

As panaceas go, this one would be a lot more effective and all-around helpful than anything the American government and its media allies are peddling.

Train Travel in China Retains Its Special Magic

2 Comments / June 14, 2012

for train

Finally, I’ve found an aspect of modern-day China that has changed little, if at all, from my first time in China almost 30 years ago as a graduate student. Long-distance train travel.

As I write this, I’m occupying a hard-to-come by seat in the dining car of a Beijing-Shenzhen train that left the capital about 30 hours ago. I boarded the train in Ganzhou, a lovely small city in southern Jiangxi, a six hour train trip to Shenzhen.

It was not my plan to take the train. I got to Ganzhou on the plane, and expected to return to Shenzhen the same way. But, the tickets on today’s one daily flight were all sold out, so I rushed with little time to spare to the Ganzhou train station.  A helpful policeman let me slip through a locked door. I joined a mobile throng of other passengers boarding in Ganzhou, during the train’s ten minute stopover.

It was a stroke of good luck. This is the first time I’ve been on a long-distance train in China in a decade. The few times I get to take the train these days it’s always on the new high-speed rail lines that connect more and more of the big cities in China. For example, the new high-speed trains connecting Guangzhou and Shenzhen, as well as Shanghai and Hangzhou,  have airline type seats, no proper dining car, and large antiseptic toilets. These trains travel at around 200mph on specially-designed and newly-laid tracks.

The traditional long-distance trains, by contrast, rumble along at about one-quarter that speed, on rail lines that often were first carved through China by the British, in the 19th century. The toilets are cramped and consist of a perch above a four-inch diameter hole in the floor.

Then and now, most of the cars of the train are what are called “yingwo”, (硬卧）meaning “hard berth”. Each “yingwo” car has 45 narrow bunks, stacked three-high. At the end of each car is a furnace with boiling water for tea.

It was mid-afternoon.  Passengers in the “yingwo” cars were mainly lounging around, or snoozing in their bunks. The sound inside was as I remembered it: of quiet conversation punctuated by the occasional “snap” of a watermelon seed being cracked open.

There was one first class “ruanwo” （软卧） or “soft sleeper” car, as there was when I was took a train from Guangzhou to Beijing in 1981. It was fully occupied by passengers who had boarded the day  before in Beijing. I walked by slowly, remembering that first trip – the snuggly warmth of the cotton duvet, and the anti-macassars on the back of the seats.

The soft sleeper car has lost none of its special allure for me. In the years since that first train trip in China, I’ve traveled on Mediterranean yachts, private jets and first-class trains across Europe. But, they just don’t compare to the “soft sleeper” car in China, There is no other transport quite as cozy and rejuvenating.

The dining car has twelve tables a meter long, each of which sits 4 people, shoulder-to-shoulder. Food prices, at around Rmb35 per serving,  are certainly a lot higher than when I first started riding the rail in China in 1981. Back then, you could eat a whole meal and get change back from a one yuan note.

The food isn’t quite as good as I remember it. It was all pre-cooked and served lukewarm. But, it still remains one of the world’s singular travel experiences, dining on proper cuisine at a proper table, as a train trundles gently through China.

Ticket prices remain a bargain. The fare for the six-hour trip from Ganzhou to Shenzhen: Rmb75 ($11). That is about one-tenth the price of the one-way air ticket. The plane is obviously much faster. But, the total time, door-to-door, is not all that different, once you factor in the trip to and from the airport, the 90 minutes spent checking in and waiting for flight departure, and the hour flying time.

Today’s train is right on schedule.  That too, hasn’t changed much. For generations, trains were the primary form of long-distance travel in China, and the trains tracks were the principal meridians along which the country’s population flowed.

These days, long-distance trains are losing out to planes and private cars. But, for me, the chance today to ride the train is a precious and vivid reminder of my own first days in China, and the awesome changes China has undergone during that time.

The most noticeable change on the train, compared to 30 years ago, are staff uniforms. Conductors wear snappy form-fitting dark blue uniforms. In 1981,  train staff and passengers of both sexes mainly wore green and blue Mao jackets.

Back then, railroad workers had a reputation for being rather curt and uninterested in passengers’ comfort. On that front too, not all that much has changed, judging from this one trip. Passengers, for the most part, are treated with a mix of lethargy, disdain and mild despotism.  Trains are perhaps the last place in China where the proletariat still does any dictating.


http://wikitravel.org/en/Ganzhou

The Reverse Merger Minefield

3 Comments / June 8, 2010

Song porcelain from China First Capital blog post

Since 2005, 380 Chinese companies have executed reverse mergers in the US. They did so, in almost all cases, as a first step towards getting listed on a major US exchange, most often the NASDAQ. Yet, as of today, according to a recent article in Dow Jones Investment Banker, only 15% of those Chinese companies successfully “uplisted” to NASDAQ. That’s a failure rate of 85%. 

That’s a rather stunning indictment of the advisers and bankers who promote, organize and profit from these transactions. The Chinese companies are left, overwhelmingly, far worse off than when they started. Their shares are stuck trading on the OTCBB or Pink Sheets, with no liquidity,  steep annual listing and compliance fees, often pathetically low valuations,  and no hope of ever raising additional capital. 

The advisors, on the other hand, are coining it. At a guess, Chinese companies have paid out to advisors, accountants, lawyers and Investor Relations firms roughly $700 million in fees for these US reverse mergers. As a way to lower America’s balance of payments deficit with China, this one is about the most despicable. 

You would think that anyone selling a high-priced service with an 85% failure rate would have a hard time finding customers. Sadly, that isn’t the case. This is an industry that quite literally thrives on failure. The US firms specializing in reverse mergers are a constant, conspicuous presence as sponsors at corporate finance conferences around China, touting their services to Chinese companies.

I was at one this past week in Shenzhen, with over 1,000 participants, and a session on reverse mergers sponsored by one of the more prominent US brokerage houses that does these deals. The pitch is always the same: “we can get your company listed on NASDAQ”. 

I have no doubt these firms know that 85% of the reverse mergers could be classified as expensive failures, because the companies never migrate to NASDAQ.  Equally, I have no doubt they never disclose this fact to the Chinese companies they are soliciting. I know a few “laoban” (Chinese for “company boss”)  who’ve been pitched by the US reverse merger firms. They are told a reverse merger is all but a  “sure thing”. I’ve seen one US reverse merger firm’s Powerpoint presentation for Chinese clients that contained doctored numbers on performance of firms it brought public on OTCBB.  

Accurate disclosure is the single most important component of financial market regulation. Yet, as far as I’ve been able to determine, the financial firms pushing reverse mergers offer clients little to no disclosure of their own. No other IPO process has such a high rate of failure, with such a high price tag attached. 

Of course, the Chinese companies are often also culpable. They fail to do adequate due diligence on their own. Chinese bosses are often too fixated on getting a quick IPO, rather than waiting two to three years, at a minimum, to IPO in China. There’s little Chinese-language material available on the dangers of reverse mergers. These kinds of reverse mergers cannot be done on China’s own stock exchanges. Overall knowledge about the US capital markets is limited. 

These are the points cited by the reverse merger firms to justify what they’re doing. But, these justifications ring false. Just because someone wants a vacation house in Florida doesn’t make it OK to sell them swampland in the Everglades. 

The reverse mergers cost China dear. Good Chinese SME are often bled to death. That hurts China’s overall economy. China’s government probably can’t outlaw the process, since it’s subject to US, not Chinese, securities laws. But, I’d like to see the Chinese Securities Regulatory Commission (中国证监会), China’s version of the SEC, publish empirical data about US reverse mergers, SPACs, OTCBB listings. 

There is not much that can be done for the 325 Chinese companies that have already completed a US reverse merger and failed to get uplisted to NASDAQ. They will continue to waste millions of dollars a year in fees just to remain listed on the OTCBB or Pink Sheets, with no realistic prospect of ever moving to the NASDAQ market.

For these companies, the US reverse merger is the capital markets’ version of 凌迟, or “death by a thousand slices”.

Meet China’s Newest — and Maybe Most Deserving — Billionaire

1 Comment / June 2, 2010

Aisidi

According to the most recent calculation by Forbes Magazine, there are about 800 dollar billionaires in the world. As of last week, there may be one more, Huang Shaowu.  And he’s a friend of mine.

On Friday, trading began on the Shenzhen Stock Exchange of mobile phone distributor and retailer Aisidi (爱施德) (Ticker: 002416) The IPO raised over RMB1.8 billion for the company, at a price-earnings multiple of 50. It leaves Shaowu’s holding company still in control of about 70% of the shares, now worth a little over $2 billion.

I was at the party to celebrate the IPO at the Hyatt in Shenzhen, along with about 300 others. The last time I saw Shaowu was about three weeks ago, after traveling around Shandong together for four days. Shaowu is a modest and sincerely warm man. He would never brag about his business. But make no mistake, he has a lot to brag about.

Aisidi is a leading distributor and retailer of mobile phones and Apple products in China. Its 2009 revenues were Rmb 8.75 billion (USD$1. 28bn), while net income reached Rmb875mn ($128mn). In the first quarter of 2010 net income rose by 70% over first quarter of 2009.

Aisidi got its start back in 1998, at a time when the mobile phone market in China was a fraction of its current size. That year, China Mobile had 25 million subscribers. As of now, they have over 700 million. In 1998, China was still then considered a poorer, developing nation. Shaowu took a big gamble back then, to begin distributing only brand-name mobile phones, and sell them at full market price. Shaowu saw more clearly than most the direction China’s mobile phone industry would take.

Aisidi’s business has grown enormously since 1998.  It acts as the trusted distributor for many of the top mobile phone brands, including Samsung, Sony Ericsson as well as Apple’s iPhone. It also has partnerships with China Mobile, China Telecom, China Unicom.

Aisidi doesn’t distribute, sell or otherwise transact in any way with shanzhai manufacturers. Only the genuine articles. Aisidi is also the key part of Apple’s retail strategy in China, with a market share of 45% of all Apple products sold in China.

The boss of Apple China was at Aisidi’s IPO party last week. I chatted with him, and for those who are wondering, there is still no timetable for when Apple’s new iPad will go on sale in China. When it does, it is certain to add significantly to Aisidi’s revenues and profits.

Way ahead of the pack, Shaowu saw that there was a market – and it turns out a truly enormous one – serving the Chinese who would pay top-dollar for phones they knew came straight from manufacturers, and would be repaired professionally and promptly if anything went wrong.

Shaowu built Aisidi to have the products and prices that allowed it to make money from the start and to become one of the larger private corporate tax-payers in China. Now as a public company, Aisidi has the resources to grow into one of China’s biggest entrepreneur-founded companies.

Shaowu  made his money doing something that took guts and insight. It was a real joy helping him celebrate Aisidi’s IPO. His success is deserved. He is both a nice guy and a helluva businessman.


The Sweet Smell of Success — One Chinese County’s Dominant Role in Global Garlic Industry

1 Comment / June 10, 2010

Ming dynasty bowl from China First Capital blog post

Anyone who has enjoyed Chinese food in China will discover, by aroma as well as by taste, that garlic is the most widely-used flavoring agent of all, after salt. It’s detectable – in fact visible – in just about every stir-fried or stewed dish, in such large quantities to leave most outsiders breathless. Which, of course, is just as well. 

A simple stir-fried dish will often have 3-4 whole cloves of chopped or sliced garlic. Many dishes have far more. One of my favorites, Lazi Jiding, is a Sichuan dish of small chunks of chicken, chili peppers, and often several heads’ worth of garlic cloves all deep-fried together.

Garlic turns up everywhere, at all times of the day. This morning at the breakfast buffet of the hotel where I was staying in Fujian, there was a dish of simple stir-fried cabbage that had at least 25 cloves of garlic in it. I stopped counting long enough to spoon some onto my plate, and move onto the next garlic-laced Chinese breakfast treat.  

I lived a lot in Italy,  the other country famed for its use of garlic. There, adding more than one clove to a dish is usually considered excessive, even uncouth. You will likely eat more garlic in a day in China than a month spent eating in Italy. 

In the US, garlic has become a far more common part of the diet than when I was a child.  I began noticing several years ago that all the garlic I bought in LA was imported from China. That always struck me as odd, since very little fresh food is imported from China, and California has a town, Gilroy, that’s famed as one of the world’s largest producers of garlic. 

The Made-in-China garlic I’ve bought is always fresh, crisp and cheap – usually no more than a dollar a pound. I never figured out how anyone could make any money shipping it from so far and selling it for so cheap. 

I assumed that the US’s ever-increasing appetite for garlic was emptying China of its favorite flavoring. Since moving to China, however, I’ve seen that wasn’t the case, that there was more than enough to satisfy China’s far larger appetite. So, then my question became: where is all this garlic being produced? From all the garlic in circulation, you’d think half of China’s arable land must be used to cultivate it. Yet, I’ve never seen any in the ground. I’ve asked friends, farmers, chefs, but never got a clear answer to where all this garlic was coming from. 

Now I know at least one place. Jinxiang County in Shandong Province is the largest garlic-producing area in China. This little-known area in Shandong’s southwest corner is not far from Qufu, Confucius’s birthplace. Jinxiang  is also now one of the centers of worldwide commodity speculation. The price of Jinxiang-grown garlic has spiked recently, rising more than fifty-fold from its low a year ago. As the China Daily reports, “Garlic trading has created a handful of new millionaires overnight in Jinxiang county.” 

I couldn’t find a figure for Jinxiang’s total garlic output. But, last year Jinxiang produced 70% of China’s garlic for export, over one million tons last year. That means that Jinxiang produced half all the garlic eaten outside China. At current pace and current export price of around $1,000 a ton, Shandong will export over $1 billion of garlic in next 12 months. 

China has no strong natural advantage in garlic-production. It’s not particularly labor-intensive, nor does it grow best in climate like China’s. Garlic, after all, is a member of the onion family, and so grows pretty well all over the world. Jinxiang must be the world’s leading garlic producer for other reasons that highlight a part of China’s economic strength that is often not emphasized: regions with intensive focus on particular industries (in this case, growing garlic for home and export market)  and a developed infrastructure to move goods quickly and efficiently to market. 

China has one other advantage that helps explain its dominance in global garlic-production. The whole plant can be sold for good money, not just the bulb. Chinese also eat prodigious quantities of the green garlic shoots that grow above ground. This vegetable, called jiu cai （韭菜）in Chinese, is served on its own, as a stir-fried dish, or added to many other staples, including dumplings. Like a skilful butcher carving a hog,  garlic farmers in Jinxiang know how to extract every morsel of profit, and leave nothing to waste. 

I’m determined now to go to Jinxiang. Partly, it’s because I love garlic. But, I also want to see (and smell) this region for myself, how farms are organized, what else is grown or manufactured there. I want to find out more how one place became so big and so successful selling one agricultural product that (unlike, say, tobacco or ginseng) grows just about anywhere. 

My company is lucky enough to have two clients in Shandong. I’ve already worked out how far these companies are from Jinxiang, and will go there at first opportunity.  I’m pretty certain over the last 20 years, to satiate my love of garlic, more of my money has ended up in Jinxiang than just about anywhere else in China.  


No, I’m not blowing bull

Leave a Comment / May 22, 2010

Jade cow from China First Capital blog post

As far as linguistics experts are concerned, there is no direct relationship between English and Chinese. The world’s two most-commonly spoken languages emerged independently, not from some common root in the way, say, Sanskrit is a basis for many of the world’s other European and Asian languages. 

Any examples of common syntax in English and Chinese are rare, and a source of fascination for me.  I always liked, for example, the fact that both English and Chinese have at least one metaphorical saying that is nearly identical, word-for-word, in both languages. In English, we say “speak of the devil” when a person we are talking about unexpectedly arrives. In Chinese, the phrase is “说鬼子鬼子来” and while less common than the English counterpart, it’s meaning and word choice is basically the same. 

As far as anyone knows, neither language borrowed this phrase from the other one. It likely arose independently in both English and Chinese. 

I’ve now found another, even more pleasing example of this parallelism in English and Chinese.  In English, we use the verb “to bullshit” in two different senses. It can mean to chat amiably with a friend, and can also be used to describe someone exaggerating, lying or intentionally deceiving, as in “you are bullshitting me”. 

In China, a similar phrase is used to capture both meanings. It is 吹牛，chuiniu (CH-WAY NEE-YO), or, literally, “blow the bull”. It also has both meanings, of having a friendly chat, and also as an accusation when someone is talking nonsense, or deliberately trying to deceive. So you can say, “let’s get together and qiuniu”, and also say to someone who you believe is trying to con or mislead you, “you are chuiniu-ing me”. 

While I was excited to discover this similarity in syntax, my CFC colleague Ryan arrived at the even more pertinent point. As he put it, “what is about bulls? Why does anyone use this animal to describe these kinds of behaviors.” 

Of course, as anyone who knows even a little Chinese can attest, there is another, more commonly used phrase using “niu”. Note, though, this same Chinese word, “niu”, is used for both bulls and cows. 

This other phrase is 牛逼 “niubi”, which is the word for cow genitalia. In Chinese, “niubi” is commonly used to describe something as being truly outstanding, of the highest quality, as in “that movie we saw is niubi.”

I can’t hear that phase “niubi” without laughing, and without wondering how this particular body part of this particular animal has become a form of high praise and approbation. 

And no, I’m not “chuiniu-ing” you.

“Coincidence is God’s way of remaining anonymous” – Albert Einstein

Leave a Comment / May 18, 2010

Longquan vase from China First Capital blog post

Just about everyone has experienced a miraculous coincidence at least once in their lifetime, a chance encounter with a friend at a place and time where neither side would ever have expected to meet. I’ve had a few in my life. The most memorable was running into Giovanna, an old girlfriend of mine from when I was a graduate student at the Chinese University of Hong Kong. I literally bumped into her, eight years after losing touch (this was in the pre-email era) one morning at the bustlingly gorgeous Campo de’ Fiori vegetable market in the center of Rome.

We quickly got reacquainted, and she juggled me and her then-current boyfriend for awhile. I was a foreign correspondent for Forbes based in London. She was living in Rome, close to the market, one of my favorite spots in one of my favorite and most-visited cities in the world.

There was a high degree of improbability about that meeting in Rome. But, it wasn’t completely unfathomable, since she was an Italian, and even when I knew her, interested in film-making. Rome is the center of that industry in Italy. Giovanna had studied in China, spoke good Chinese and had landed a small job helping Bernardo Bertolucci shoot scenes in China for “The Last Emperor”.  She parlayed that into a friendship with the director and the producer of Last Emperor, and then found other work in the film business.

In Chengdu recently, I had an even more remarkable coincidental meeting than that one in Campo de’ Fiori. At a large and fancy restaurant there, a friend of mine from work, Nick Shao, who is a Managing Director of PE firm Carlyle in Shanghai, came up and greeted me as I sat down at a table with two people I only just met.

My brain circuitry is not what it used to be. It probably took me two to three seconds to actually figure out who Nick was and how I knew him. Then it clicked, of course, and I started burbling in my bad Chinese about how remarkable the whole thing was – why was he there? Doing what? Was the food any good?

Running into Nick was remarkable for a lot of reasons, including the fact I know a comparatively small number of people in China, had not been in Chengdu in 28 years, and was in a restaurant that seats at least 800 people. To end up at a table nearby to someone I knew, in a city of 11 million that neither of us have any connection to, in a country with the largest population in the world, that’s a level of unlikelihood that I can’t even begin to quantify. I’d be hard-pressed to find one of my own family members in that restaurant, it’s that large and crowded.

As I found out, Nick was in Chengdu for an EMBA course he’s taking. This also left me a little nonplussed, since I knew Nick already had an MBA from Columbia. Why would anyone need two? Why was his Shanghai university convening its class at a not-especially famous restaurant in Chengdu? I still don’t have solid answers to either of these questions, even after exchanging emails with Nick later that day.

For my part, I was in Chengdu to participate in a PE conference organized by the Sichuan government. I skipped the official lunch to meet some friends-of-friends. It would not be stretching things to say the last place I’d expect to meet someone I know would be that restaurant, in that city, in that country, at that date and time.

I had a great three days in Chengdu,  eating, chatting and walking around China’s most relaxed, pleasant and livable major city. Meeting Nick made it very much more memorable, just as I continue to remember, when I think of Rome, that meeting, over 20 years ago, in Campo de’ Fiori.

For me, at least, this coincidental meeting spurred a lot of what little I can muster in terms of philosophical reflection. It’s all hackneyed stuff, of course, but our lives really are created by the miracle of birth, and punctuated thereafter by occasional miracles, large and small. The world is, in its most benign state, the motive force for the coming true of every sort of wonderful, unexpected but thoroughly delightful possibility. Dreams come true. Happy coincidences occur.


Going home again – Back at Forbes, this time in 中文

Leave a Comment / May 11, 2010

Forbes China website Peter Fuhrman column

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My career has come full circle. I’m back at Forbes Magazine. Only this time, I’m published in the magazine’s Chinese website, as an occasional columnist.

Have a look here: http://www.forbeschina.com/review/201005/0000757.shtml 

I was at Forbes for almost ten years, and left in 1995, after writing I’d guess around 120 articles, first in New York, and then in Europe, based in London.  I had a splendidly enjoyable career at Forbes, traveling farther and wider than I ever dreamed possible, while writing about companies, ideas and events that seized my interest, and that of my editors at Forbes. I had the great good fortune to be at Forbes while it was edited by Jim Michaels, perhaps the finest ever editor of a business publication.  Read about him by clicking here. 

After leaving Forbes, I always told friends I was much happier outside journalism. I never looked back, never hankered for even a day to get back into journalism. There’s some truth, at least when applied to me, that it’s more rewarding to try to make a little history, rather than to write about those who do. 

All the same, it’s a special feeling to see my byline on the Forbes Chinese website. I accepted immediately when the magazine called to see if they could publish Chinese versions of my blog posts. I’m not all that sure how successful, if at all, Forbes is in China. So, my columns may have a smaller readership than some of the Chinese-language SMS messages I send. 

This time around at Forbes, my writing won’t go under the knife of a sharp team of editors and wordsmiths. Back then, I railed frequently, and impotently, against what I saw to be the boneheaded or misguided changes imposed from above.

Now, well, I have to acknowledge my work could probably benefit from some editing and intervention. Chinese is not a language I speak with much skill. Writing it far harder still. I rely on lots of assistance from my smart co-workers to transubstantiate my hot air  into solid Chinese. 


CFC’s latest research report: 2010 will be record-setting year in China Private Equity

2 Comments / May 8, 2010

China First Capital 2010 research report, from blog post

 

China’s private equity industry is on track to break all records in 2010 for number of deals, number of successful PE-backed IPOs, capital raised and capital invested. This record-setting performance comes at a time when the PE and VC industries are still locked in a long skid in the US and Europe.

According to my firms’s latest research report, (see front cover above)  the best days are still ahead for China’s PE industry. The Chinese-language report has just been published. It can be downloaded by clicking this link: China First Capital 2010 Report on Private Equity in China

We prepare these research reports primarily for our clients and partners in China. There is no English version.

A few of the takeaway points are:

  • China’s continued strong economic growth is only one factor providing fuel for the growth of  private equity in China. Another key factor that sets China apart and makes it the most dynamic and attractive market for PE investing in the world: the rise of world-class private SME. These Chinese SME are already profitable and market leaders in China’s domestic market. Even more important, they are owned and managed by some of the most talented entrepreneurs in the world. As these SME grow, they need additional capital to expand even faster in the future. Private Equity capital is often the best choice
  • As long as the IPO window stays open for Chinese SME, rates of return of 300%-500% will remain common for private equity investors. It’s the kind of return some US PE firms were able to earn during the good years, but only by using a lot of bank debt on top of smaller amounts of equity. That type of private equity deal, relying on bank leverage, is for the most part prohibited in China
  • PE in China got its start ten years ago. The founding era is now drawing to a close.  The result will be a fundamental realignment in the way private equity operates in China. It’s a change few of the original PE firms in China anticipated, or can cope with. What’s changed? These PE firms grew large and successful raising and investing US dollars,  and then taking Chinese companies public in Hong Kong or New York. This worked beautifully for a long time, in large part because China’s own capital markets were relatively underdeveloped. Now, the best profit opportunities are for PE investors using renminbi and exiting on China’s domestic stock markets. Many of the first generation PE firms are stuck holding an inferior currency, and an inferior path to IPO

Our goal is to be a thought leader in our industry, as well as providing the highest-quality information and analysis in Chinese for private entrepreneurs and the investors who finance them.


Kleiner Perkins Adrift in China

1 Comment / May 13, 2010

Gold ornament from China First Capital blog post

No firm in the venture capital industry can match the reputation, global influence and swagger of Kleiner Perkins Caufield & Byers (“KP”). KP is accustomed to outsized success and glory  – which makes the lackluster performance of KP’s China operation all the more baffling. For all its Midas-touch reputation in Silicon Valley, KP’s China operation looks more like 100% pyrite. It seems beset by some poor investment choices, setbacks and even rancor among its partners and team. The firm’s Chinese-language website even manages to misspell the Kleiner Perkins name. (See below.)

Two years ago, Joe Zhou, one of the founding managing partners of KP in China left the firm to set up a rival VC shop, Keytone Ventures. Two other KP partners in China have also left. Losing so many of its partners in such a short time is an unprecedented occurrence at KP — even more so that two of these partners left KP to set up rival VC firms in China.

A partnership at KP is considered among the ultimate achievements in the business world. Al Gore took up a partnership at KP in 2007, after serving as Vice President for eight years and then losing the presidential election in 2000. Colin Powell also later joined the firm, as a “Strategic Limited Partner”.

Joe Zhou left KP just 13 months after joining. When he left, he also took some of the senior KP staff in China with him. Zhou also negotiated to buy out the portfolio of China investments he and his team had overseen at KP China. They paid cost, according to someone directly involved in the transaction. In other words, KP sold its positions in these investments at a 0% gain. Factor in the cost of that capital, and the portfolio was offloaded at a loss.

This isn’t going to endear KP to the Limited Partners whose money it invests.  It also signals how little confidence KP had in the future value of these China investments the firm made. Other top VCs and PEs are earning compounded annual rates of return of +50% in China.

There was every reason to believe that KP would achieve great success when it opened in China in 2007. Indeed, when KP opened its China office, it issued a celebratory press release, titled “Kleiner Perkins Caufield & Byers Goes Global;Joe Zhou and Tina Ju to Launch KPCB China”.

Along with having the most respected brand in the VC industry, KP arguably has more accumulated and referenceable knowledge than any other VC firm on where to invest, how best to nurture young companies into global leaders. It’s roster of successful investments includes many of the most successful technology companies in history, including: Amazon, AOL, Sun, Genentech, Electronic Arts, Intuit, Macromedia and Google.

Opening in China was KP’s first major move outside the US – indeed, its first move outside its base in Silicon Valley. KP has only three offices in total, one in Menlo Park , California and one each in Shanghai and Beijing.  On its website, the firm’s China operations receive very prominent position. Two of the firm’s most renowned and respected partners, John Doerr and Ted Schlein, apparently played an active part in KP’s entry into China. Along with the high-level backing, KP also raised over $300mn in new capital especially for its China operations. One can assume KP has already taken over $15mn in management fees for itself out of that capital.

Beyond the capital and high-level backing, KP also prides itself on being better than all others in the VC world at building successful companies. So, it’s more than a little surprising that KP’s own business in China has so far failed to excel, failed even to make much of an imprint. Physician heal thyself?

I’m in no way privy to what’s going on at KP in China, and thus far have not had any direct dealings with them. I’ve always admired the firm, and fully expect the China operation to flourish eventually. For one thing, great entrepreneurs and good investment opportunities in China are just too numerous. A firm with KP’s deal flow, capital and experience should find abundant opportunities to make significant returns investing in IPO-bound businesses.

From the beginning, KP’s operation was  a kind of outsourced operation. Rather than sending over partners from KP in the US, the firm instead hired away from other firms partners at other China-based VCs. While this meant KP could ramp up in China more quickly, it also put the firm’s stellar reputation, as well as its capital, in the hands of people with no direct experience working at the firm.

The KP website lists 14 companies in the China portfolio. The portfolio is very heavily weighted towards biotech, cleantech and computer technology, mirroring KP’s focus in the US. Other tech—focused VCs in China have run into trouble, and are now shifting much of their investment activity towards established Chinese SME in more traditional industries. In the best cases, these SME have strong brands and very robust sales growth in China’s domestic market.

In my view, investing in these SME offers the best risk-adjusted return of any PE or VC investing in the world right now. KP has yet to make the shift. I wish KP nothing but success, and hope for opportunities in the future to work with them. Its technology bets in China may pay off big-time, in due course. But, meantime, KP is in the very unaccustomed position of laggard, rather than leader, here in China.

_________________________

 

It’s surely embarrassing, if not emblematic, that the home page of the Chinese-language version of KP’s own website manages to misspell the company’s name.  Check out the top-most bar on the page, where the firm is named “Kliener,  Perkins, Caufield and Buyers” .

Kleiner Perkins China website


Update: as of May 11, 2010, the Chinese version of Kleiner Perkins’ home page has been corrected.

 



Yiwu: China’s Little Known Capital of Commerce

2 Comments / April 26, 2010

Lacquer box, from China First Capital blog post

 

What is the most international city in China? Shanghai? Beijing? Surely, it must be Hong Kong? No, the most international city in China is one most people outside China have never heard of: Yiwu, in Zhejiang Province. 

Yiwu is about three hours southwest of Shanghai, with no sites of any importance, and a somewhat rundown city center. Few international tourists will ever set foot there. And yet, at this very moment, there are more foreigners thronging there than anywhere else in China. 

Yiwu, you see, is where the Third World comes to shop. In the last ten years, it’s become the nexus of a large, complicated global trade route, the main supply depot for tens of thousands of shops all across the world. Yiwu’s streets and hotels are filled everyday with thousands of traders from Africa, Russia and the Middle East. They come there to make money, which they do by buying goods by the container load in Yiwu to ship back and sell in their home countries.  

This is petty capitalism on a grand scale: thousands of foreign small businessmen buying from thousands of Yiwu merchants, who rent stalls in the huge market centers spread across the center of Yiwu. At a guess, there must be over 15,000 stalls in these market centers, each staffed by a local, each catering mainly to the foreigners who spend most of their days bargain hunting. 

Mainly, the stuff for sale caters to the taste of this foreign market. Little if any of it would find buyers in US, Western Europe or, increasingly, China itself. Indeed, from what I could tell, more of the world’s hideous clothing ends up for sale in Yiwu than anywhere else. There is enough polyester and other petrochemical-derived materials on display to power the world’s ocean shipping fleet for generations.

Besides clothing, there are a large number of stalls selling other basics of poorer economies, like printed plastic bags, cheap carpets, plastic jewelry, lighting and other house wares. If you wanted to know how people dress and furnish their homes in Isfahan, Aleppo, Izmir, Rostock or Accra, you could get a decent impression by walking through the market centers of Yiwu. 

How and why Yiwu became the center of this multi-billion dollar trade remains a mystery to me. Yiwu has no natural advantages of any kind: it’s far from main transports hubs, hemmed in by mountains, and never developed much of an industrial base. The main export ports of Ningbo and Shanghai are both over three hours away by truck.

Clearly, there was no central government diktat saying Yiwu would be China’s “window on the Third World”. It seems to have happened spontaneously. To accommodate all the foreign traders, basic English is much more widely spoken than anywhere else in China. Even the lady at the ticket booth in the Yiwu bus station can use English to sell a one-way bus ticket to Guangzhou to an African on his way home. 

The English is not always correct. Outside one of the many shops selling sex toys, I saw a sign reading  “Aduit uppiies”. I assume, from the customer base inside, they got the Arabic version correct on the sign. 

By the standards of other successful Chinese cities, Yiwu is more down-and-dirty. There are none of the showpiece infrastructure projects like new expressways and elaborate modern skyscrapers that proliferate in other Chinese cities. While clearly all this trade has made many in Yiwu very rich, the city looks like the China of twenty years ago. Its market stalls are not the kind of place where most Chinese care to shop these days. Chinese, especially urban-dwellers, like well-designed brand-name chain stores with higher-quality merchandise and slick packaging. 

Walking around Yiwu, you get the sense that at least 10% of the population is foreign. Nowhere else in China even comes close. The foreigners are mainly Arabs and Persians, but there are also many Africans and Russians crowding the streets, markets, restaurants and hotels. 

Yiwu has more “foreign food” restaurants than anywhere else in China. Most offer Arab and Turkish food. Indeed, much of downtown Yiwu has the feel of a Middle Eastern bazaar, with clutches of men sitting around smoking hookahs and fingering prayer beads.

You are as likely to hear “Salaam Alekum” as “ni hao” walking the streets of Yiwu. All kinds of services have sprung up in Yiwu to cater to the Middle Easterners. There are halal butchers, coffee shops selling Turkish coffee, manufacturers of the long Arab thawb worn by men. Less delightfully, a Chinese street portrait artist displays drawings of Barack Obama, Mahmoud Ahmadinejad and Osama Bin-Laden. 

I like Arab food, and have eaten a lot of it, both in the Middle East in London. Yiwu’s version was actually quite authentic and tasty. Inside the restaurant I went to, the loudspeakers were playing a recitation of the Koran. Arab and African men sat eating their lunch. There are few Arab women to be seen. 

African women, on the other hand, are thick on the ground, fulfilling their reputation as some of the most talented of all the world’s market traders. I spoke to one lady from Ghana, who comes to Yiwu three times a year, and buys enough each time to fill up a 40-foot container – kids and adult clothes, shoes, carpets, blankets. The profit margins are good. After deducting the $2,000 airfare, the $300 for a Chinese visa, food and lodging in China, plus the shipping costs back to Ghana (and the bribes needed to get the goods out of Ghanaian Customs) she still earns a tidy profit on each trip.

Her capitalist Odyssey, repeated thousands of times a week, with containers bound for the world’s most glamourless spots,  is what keeps Yiwu booming. There is nothing petty about the petty traders of Yiwu. 

It’s fair to say that Yiwu has built its wealth, to some extent, on the misfortune of others. The traders who make the long trip to Yiwu do so, mainly because their countries are criminally mismanaged. In these countries of the Middle East and Africa, there are no local manufacturers making goods at a price and quality that can match that of China, even when you factor in the high transport costs to get people and merchandise to and from Yiwu and the bribes and other levies that must be paid to make sure the items reach local store shelves. Prices in Yiwu are not particularly low, more “retail” than “wholesale”. The traders buy in relatively small quantities, meaning Yiwu merchants can charge higher prices and earn fatter margins for themselves.

 This sad and persistent reality of corruption, economic mismanagement and political tyranny in countries of the Middle East and Africa guarantees that Yiwu will continue to thrive for many years. Yiwu’s market economy was built by catering to places with no real market economy of their own.


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