China First Capital

TikTok Considers Changes to Distance App From Chinese Roots — Wall Street Journal

Leave a Comment / July 11, 2020

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ByteDance Ltd. is considering changing the corporate structure of its popular short-video app TikTok, as it comes under increasing scrutiny in its biggest markets over its Chinese ties.

Senior executives are discussing options such as creating a new management board for TikTok or establishing a headquarters for the app outside of China to distance the app’s operations from China, said a person familiar with the company’s thinking.

TikTok, which has shot to global fame over the last two years thanks to its catchy dancing and lip-syncing videos, is owned by Beijing-based ByteDance, one of the world’s most valuable technology startups. ByteDance, whose secondary shares have valued the firm at $150 billion in recent weeks, counts big-name U.S. investors such as Coatue Management and Sequoia Capital among its backers.

The app has seen a surge in downloads as the coronavirus kept millions of people locked up in their homes and eager for distractions. About 315 million users downloaded TikTok in the first quarter of the year, the most downloads ever for an app in a single quarter, according to research firm Sensor Tower, bringing its total to more than 2.2 billion world-wide.

But as TikTok grows in popularity—and an increasingly assertive Chinese government raises hackles in foreign capitals—regulatory pressure on the app is intensifying.

Officials in several countries have expressed concerns with the large volumes of user data TikTok collects, with some speculating that ByteDance could be compelled to share it with the Chinese government. TikTok has repeatedly denied receiving Chinese government requests for user data and said it wouldn’t respond if asked.

The U.S. State and Defense departments already prohibit employees from downloading TikTok on government devices. On Tuesday, Secretary of State Mike Pompeo hinted at a possible ban for TikTok and other Chinese apps during an interview with Fox News.

In Australia, the chair of a legislative committee looking into foreign interference through social media named TikTok among the platforms that might be called to appear.

“What’s needed is a really clear understanding from the platforms about their approach to privacy and their approach to content moderation. That’s one of the objectives of this inquiry,” Jenny McAllister, the chairwoman of the committee, told an Australian radio station on Monday.

The government in India, one of TikTok’s largest markets, banned the app over cybersecurity concerns following violent clashes along the two countries’ disputed border.

Most recently, TikTok surprised observers by reacting more strongly than Western tech companies to Beijing’s imposition of mainland-style internet controls in Hong Kong.

Where Twitter Inc., TWTR 0.88% Facebook Inc., FB 0.38% and Alphabet Inc.’s Google said they would pause responses to data requests from Hong Kong police, TikTok pulled out of the city entirely—a move some describe as part of the effort to distance the app from China.

“ByteDance is the first of China’s tech giants to make it big outside China, but the company that is the envy of China’s tech world is finding that success has a higher price perhaps than failure,” said Peter Fuhrman, the chairman of investment advisory firm China First Capital.

ByteDance managed to outperform its more established Chinese peers such as Alibaba Group Holding and Tencent Holdings in their quests to go global despite spending less on investments, he added.

ByteDance’s discussions about changing how TikTok is run are still in their early stages, but setting up an independent TikTok management board would allow a degree of autonomy from the parent company, the person familiar with the firm’s thinking said. This person wasn’t aware of any discussions around a corporate spinoff.

TikTok had also been considering opening a new global headquarters as early as December, The Wall Street Journal reported at the time. Singapore, London and Dublin were considered as possible locations. Recent events accelerated such plans, the person said.

TikTok currently doesn’t have a global headquarters. Recently installed Chief Executive Officer Kevin Mayer is based in Los Angeles.

The hiring in May of Mr. Mayer, a longtime Walt Disney Co. executive, put an American face on the Chinese company, whose website lists offices in 11 cities world-wide—none of them in China. The company says it doesn’t allow Chinese moderators to handle TikTok content.

ByteDance nevertheless has a long way to go to convince its critics. Any change to the corporate structure has to be significant enough to separate TikTok from any entanglements with mainland China, and has to cut off mainland Chinese staff from accessing user data, said Fergus Ryan, an analyst at the Australian Strategic Policy Institute. TikTok’s privacy policy says that user data can be accessed by ByteDance and other affiliate companies.

“Will the new structure be designed so as to remove any leverage Beijing can have over it? I find that hard to imagine,” Mr. Ryan said.

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https://www.wsj.com/articles/tiktok-considers-changes-to-distance-app-from-chinese-roots-11594300718?mod=hp_lead_pos7

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My Salute to China and Shenzhen During the Coronavirus Epidemic

1 Comment / February 24, 2020

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过去四个多星期以来我在热爱的深圳家乡跟中国人民一起度过这个特殊时期。 在疫情当中我特别钦佩中国人民的勇气和同舟共济，以及医务人员的奉献精神, 中国老百姓凭借超乎常人的自律、耐心和意志力，平和且又坚定地忍受着各种生活和工作上的不便，共度时艰。我对中国人民和中国政府壮士断腕般坚定地控制疫情表示衷心的感谢。中国一定会打赢这场关键战役。中国加油!

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I’ve been here in Shenzhen, my adopted hometown, continuously from the start of the Coronavirus epidemic. While this city and the country are still confronting a monumental crisis and short-term economic uncertainty, the worst seems to be behind us. I want to say how grateful and inspired I am by the bravery, collective will and purpose, endurance and resolve of the Chinese people and its government. We fight and we prevail together

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“The Tough Battle to Bring Western Brands to China” the Financial Times

Leave a Comment / August 9, 2020

When John Zhao sealed the £900m takeover of the UK’s PizzaExpress in 2014 he burnished his reputation as a pioneer in China’s private equity industry. Two years later Hony Capital, his buyout firm, ploughed money into WeWork as the New York shared-office provider set its sights on an aggressive expansion in China.


Both deals shared a simple premise: take well-known western brands to China and they will flourish. “We have capital; we have a huge market to give access to,” Mr Zhao said shortly after the capture of PizzaExpress, which set a record for a Chinese buyout deal in the UK.


The acquisition was one of a wave of Chinese private equity investments over the past decade but few firms were as ambitious as Hony in their targets. Spun out of state-backed Legend Holdings in 2003, Hony shot to prominence through a series of restructurings of other state-owned groups. As it grew, so did its appetite for higher-profile, cross-border investments.

However, almost two decades on, Hony’s breezy confidence that China’s increasingly wealthy middle class would be ready-made consumers of all western brands has proved misplaced.


PizzaExpress restaurant openings in China have lagged behind an ambitious goal while local, lowercost competitors have lured customers away. Confidence that middle class would eat up imported names such as PizzaExpress prove misplaced.

This lacklustre start in China, combined with rising costs and a slowing casual dining market in the UK, left PizzaExpress with a £1.1bn debt pile that has set the scene for a restructuring battle between Hony and other bondholders.

After a calamitous 2019 in which WeWork was rescued by Japan’s SoftBank, its biggest backer, the New York-based company has ditched its leasing model in many cities, laid off thousands of staff and struggled with a particularly poor performance in China.

“The ‘can’t-miss’ strategy continues to do just that,” said Peter Fuhrman, chairman and chief executive at Shenzhen-based investment bank China First Capital. “Chinese investors and corporates have mainly fizzled when buying and localising western consumer brands.”

Other Hony investments — including the Beijing-based bike-sharing business Ofo, which collapsed in late 2018 — have soured, causing competitors to rethink importing western brands to China.

Chinese business history is littered with cases of western multinationals making the opposite mistake. UK retailer Marks and Spencer closed its Shanghai stores in 2017 after its combination of clothing and imported food confused local shoppers. US electronics retailer Best Buy retreated from China in 2014 after struggling to compete with cheaper domestic competitors.

But Chinese private equity groups appeared undeterred. They raised $230bn of capital between 2009 and 2014, according to investment bank DC Advisory.

Nanjing-based Sanpower largely flopped with its buyout of high-end retailer House of Fraser in 2014 and its failed attempt to expand the UK retailer across China. Bright Food, the state-owned Chinese group that bought a 60 per cent stake in Weetabix in 2012, failed to make the UK breakfast dish popular in China and eventually had to sell the brand in 2017.

“Four years ago everyone thought [buying foreign brands and bringing them to China] was the best thesis — but a lot of people got burnt,” said Kiki Yang, the partner leading Bain & Co’s Greater China private equity practice. “It’s not easy to bring something with no brand awareness to China. In reality, the success rate is very low.”

People who know Mr Zhao have said he was one of the first serious Chinese investors to have a solid grounding in the way deals were done in the US while also enjoying deep ties to state-owned groups, putting him in an enviable position at the advent of the Chinese private equity industry.

In its early days, that helped Hony become a rare channel connecting investors such as Goldman Sachs and Singapore’s Temasek with lucrative state deals that were otherwise inaccessible to foreign capital.

The PizzaExpress deal was a turning point for Hony and
other investors in the sector.

By 2014, the group had completed several successful cross-border deals, including an investment in Italian concrete producer Cifa. But the takeover of a popular British restaurant chain won instant global attention for Hony and Mr Zhao, who had spent most of the 1990s working at Silicon Valley technology companies such as Vadem and Infolio.

Hony’s investment in PizzaExpress came just as the UK’s casual dining market began to suffer from oversupply. It was also beginning to face stronger competition from local restaurants in China, a sign the UK brand name meant little to many Chinese diners.

PizzaExpress originally intended to open 200 outlets over a five-year period. So far it has launched about a dozen restaurants in the mainland, giving it a total of about 38, according to its website. In its annual results in April, the chain admitted it had “experienced challenges in China as we face intensifying competition from local brands”.

Without the promised growth in China to cushion the decline in the UK market, PizzaExpress has been pushed towards a debt restructuring process, cementing the deal’s position as an emblem of troubled Chinese investments overseas.

 “Every time you say ‘China cross-border’, people think of PizzaExpress,” said one senior Chinese private equity executive. “It’s become a laughing stock — and bad for the reputation of China PE.”

PizzaExpress, Mr Zhao and Hony declined to comment.

As it seeks to resolve PizzaExpress’s problems, WeWork’s near collapse has inflicted further damage on Hony’s reputation. Hony and Legend Holdings led a $430m investment round in WeWork in 2016, and Mr Zhao became a member of WeWork’s board and later a consultant to its China business. SoftBank and Hony led a $500m investment round a year later.

With Mr Zhao acting as a consultant, WeWork expanded aggressively across the country, buying Chinese rival Naked Hub for $480m in cash and stock in 2018. Yet demand for office space fell in 2019, leaving some of its new areas of business virtually empty.

For example, in the western Chinese city of Xi’an, nearly 80 per cent of its desks were vacant, the FT reported in October. In the bustling start-up hub of Shenzhen in southern China, 65 per cent of its 8,000 desks were vacant.

WeWork declined to comment.

The poor performance of the business in China has left investors questioning how one of China’s private equity superstars could lead the group so far off course, according to people familiar with the matter.

“My impression is that Hony is not doing well these days,” said Liu Jing, a professor of accounting and finance at Cheung Kong Graduate School of Business in Beijing. “The economy has shifted to technology and they have lost their edge.”

https://www.ft.com/content/f735c956-15b6-11ea-9ee4-11f260415385


Adviser Banks Forced to Hold Stakes in IPOs on China Startup Board — Nikkei Asian Review

Leave a Comment / August 9, 2020

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 Investment banks bringing companies to list on China’s new board for technology startups are facing an unusual requirement: they will have to keep some of the shares for themselves.

The Shanghai Science and Technology Innovation Board marks a major experiment in the reform of China’s capital markets.

Chinese President Xi Jinping announced plans in November for a Nasdaq-style board for young tech startups, and it is expected to be operational later this year. It aims to attract young companies with fewer regulations and reporting requirements and, unlike China’s main markets, there are to be no limits on pricing and first-day trading movements.

Also unlike the country’s existing boards in Shanghai and Shenzhen, companies that list do not have to be profitable. In some cases, the tech board will not even require companies to have generated revenue.

The board signifies the realization of long-discussed plans to move from a system where Chinese regulators carefully review every applicant and maintain tight control over the flow of listings — leading to a backlog of hundreds of companies waiting years for an official nod — to a more market-driven system like that of major foreign exchanges.

The requirement that underwriters take a stake in initial public offerings, first flagged by officials last month, is an indicator of the authorities’ caution; members of the Chinese financial community say the stakeholding requirement is intended to insure underwriters bring only the companies in which they have confidence to market.

“Having lowered profitability requirements, it further makes sense to have sponsors with skin in the game,” said Brock Silvers, managing director of investment company Kaiyuan Capital in Shanghai.

Executives with two Chinese financial companies said the minimum stake will be “a low single-digit” percentage of the IPO. A lock up rule will block the underwriters from selling their shares within two years of the IPO. The rules have yet to be formally issued.

Victor Wang, executive director of financial sector research at China International Capital Corp., the country’s largest investment bank, said it is still unclear how the stakeholding requirement will be shared among different investment banks involved in an IPO. But the logic is, “if you don’t focus on quality and recommend some low-quality companies, you own money will be lost,” he
said.

China Merchants Securities, which is sponsoring two companies preparing to list on the new board, declined to comment about the new rule. However, a local broker, who had not heard of it before, said he was not surprised at the requirement.

“China’s financial legal framework is not flawless and officials at the China Securities Regulatory Commission cannot completely trust sponsors’ due diligence work,” he said. “After all, there have been IPO frauds before. It is no surprise if regulators want some level of assurance by having brokers to share risks.”

Some market observers are wary of the consequences, however.

“The intention is a good one but once again investors are not being forced to make their own decisions and analysis,” said Fraser Howie, a veteran broker and co-author of three books on Chinese financial markets. “By forcing the (investment bank) to come in on every deal, it effectively tells investors, ‘Don’t worry. You don’t need to think for yourselves’.”

Howie also sees the rule as problematic for the banks. “The investment bank’s job is to bring a company fairly to market,” he said. “I think this (rule) conflicts with this. To me, they are creating a needless conflict of interest and additional risk for the bank.”

The burden of the requirement will favor larger investment banks, in the view of Yang Yingfei, a partner handling IPOs at Baker McKenzie FenXun Joint Operation Office in Beijing.

“Sponsors that are relatively stronger overall will become more competitive, whereas small and medium-sized securities firms may gradually lose the ability to sponsor tech board enterprises,” she said. “The effect of concentration in the sector will become conspicuous.”

Though the Innovation Board’s approach is unusual, other market regulators have also been wrestling with the question of how to ensure that underwriters take responsibility for companies they bring to market.

Last month, the Securities and Futures Commission of Hong Kong reprimanded and fined UBS, Merrill Lynch, Morgan Stanley and the securities arm of Standard Chartered Bank over their handling of IPOs.

UBS received the heaviest penalty, a fine of 375 million Hong Kong dollars ($47.78 million) and a one-year suspension from sponsoring listings on the Hong Kong market. The SFC said the bank had failed to confirm the existence of key claimed assets and customers of China Forestry Holdings before bringing it to market in 2009 and found problems with its work on two other IPOs.

China Forestry raised $216 million in its IPO but its shares stopped trading in 2011 after its auditor reported the discovery of accounting irregularities.

Preparations for the Shanghai Innovation Board have moved unusually quickly since it was first mooted in November. The authorities are keen to have “unicorns” — unlisted startups valued at $1 billion or more — list on domestic markets rather than offshore. After several abortive efforts, they are hoping they have created an attractive alternative at last.

As of yet, the country’s most valuable companies, online services companies Alibaba Group Holding and Tencent
Holdings, are listed in New York and Hong Kong, respectively.

“There are certainly signals that the tech board’s IPO procedures will be more market-driven, with a less onerous process of CSRC approval and monitoring,” said Peter Fuhrman, chairman of investment bank China First Capital in Shenzhen. “That should be a positive development.”

Nine companies are set to launch on the new board as soon as June, but none are unicorns; combined, they are expected to raise only about $1.6 billion. Financiers say bigger startups are waiting for the board to work through its initial launch pains before moving forward themselves.

One Hong Kong-based banker who works with mainland Chinese companies said “a lot” of his clients were waiting in the wings.


https://asia.nikkei.com/Business/Markets/Adviser-banks-forced-to-hold-stakes-in-IPOs-on-China-startup-board


Chinese Education Startup Puts Western Teachers on Notice — Wall Street Journal

Leave a Comment / August 10, 2020

A Chinese education company backed by U.S. investors including Kobe Bryant is cracking down on how its Western teachers cover politically fraught topics.

VIPKid, one of China’s most valuable online education startups, has put hundreds of its mostly American teachers on notice for using certain maps in their classes with Chinese students, and has severed two teachers’ contracts for discussing Taiwan
and Tiananmen Square in ways at odds with Chinese government preferences,people familiar with the company say. Since last fall, teachers’ contracts state that discussing “politically contentious” topics could be cause for dismissal, according to one reviewed by The Wall Street Journal.

The moves highlight the balance a Chinese company must strike in fulfilling global aspirations while toeing Beijing’s line. Five-year-old VIPKid is currently in talks to raise as much as $500 million in new funding from U.S. and other investors that could value the company at roughly $6 billion, people familiar with the fundraising said.

 “A company must keep good relations with the government and ideology,” said Peter Fuhrman, chief executive of investment firm China First Capital . “But that can cause friction when you’re also courting foreign investors, expanding business overseas and employing a large American workforce.”

Beijing-based VIPKid says it has more than 60,000 teachers in the U.S. and Canada who teach English to more than 500,000 children ages 4 through 15, who live mostly in China. Teachers work as independent contractors and can earn between $14 and
$22 an hour. They must have a bachelor’s degree, at least one year of teaching experience and eligibility to work in the U.S. or Canada.

Curricula are provided, and teachers give English-language instruction, sometimes using geography or historical figures. VIPKid’s approach is consistent with maps and materials in the Chinese education curriculum, which calls Taiwan a part of China. Textbooks don’t mention the military’s suppression of the Tiananmen Square pro-democracy demonstrators in 1989, and discussion of it is forbidden.

A spokesman said VIPKid has “an elevated level of responsibility to protect the safety and emotional development of the young children on our platform.” The company expects teachers to understand cultural expectations, he said, adding it had to “make a difficult decision” to terminate the contracts of “an exceptionally small number of teachers” who “decided to ignore the needs of their students” and “the preference of their parents.”

Western companies including Gap Inc. and hotel giant Marriott International Inc. have been forced to apologize in the past for
online communications, websites or merchandise that angered Beijing or Chinese consumers on issues including Taiwan and Tibet.

Chinese education technology attracted $5.3 billion in investment last year, double the amount a year earlier, according to Dow Jones VentureSource data. VIPKid’s investors include U.S. hedge-fund firm Coatue Management LLC, venture-capital firm Sequoia Capital, Chinese social giant Tencent Holdings Ltd. and a venture fund co-launched by retired NBA star Kobe Bryant.

The company’s actions have rankled some teachers. Typically, these instructors have displayed maps of the world, including China, that they found on their own. Starting last fall, hundreds began receiving emails or calls from VIPKid stating their maps weren’t aligned with Chinese education standards, people familiar with the matter said. Teachers who refuse to adhere to the map standards could have their contracts terminated, after conversations with VIPKid. Map-related dismissals haven’t happened, said a person familiar with the company.

Will Rodgers, a 26-year-old American teacher based in Thailand, said he discussed Tiananmen Square twice during VIPKid lessons about famous Chinese landmarks. First, he told a 12-year-old student “the Chinese government jailed and killed
many people just for protesting.” He then showed a 15-year-old student photos and video footage of the protest, and his contract was terminated. Mr. Rodgers said he doesn’t agree with VIPKid’s stance, but doesn’t blame the company for ending his contract.

Another American teacher’s contract was terminated earlier this year after he told students that Taiwan was a separate country, according to people familiar with his case. A third teacher received a call from VIPKid after telling a student that Tibet, an autonomous region in China with a history of separatist activity, is a country, during a lesson on China’s neighbors, according to a
person familiar with the matter. He was told on the call he should refer to Tibet as part of China.

People familiar with VIPKid say it monitors classes for missteps over political content. Another person familiar with the matter said the company uses artificial intelligence to determine material students find engaging and to protect them from inappropriate behavior.

Some teachers and VIPKid investors say that education from foreign teachers, even if it is screened, can benefit students because they get exposed to other cultures. Rob Hutter, a founder and managing partner of Learn Capital, an early investor in VIPKid, said the company is trying to take a common-sense approach by teaching uncontroversial content.

“No matter what nation you’re teaching in, there are going to be things that we need to be thoughtful about,” he said. “Even in American classrooms, there are things you cannot discuss.”

“No matter what nation you’re teaching in, there are going to be things that we need to be thoughtful about,” he said. “Even in American classrooms, there are things you cannot discuss.”


https://www.wsj.com/articles/chinese-education-startup-puts-western-teachers-on-notice-11553160602?mod=hp_lista_pos3


Are US and China Decoupling? Guest Lecture at University of Michigan Ross School of Business

Leave a Comment / February 21, 2019

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I was honored and delighted to teach a class via video lecture at the University of Michigan Ross School of Business for third year, this time on the potential decoupling between the US and China, the competitive realignments as well as investment opportunities.

The lecture’s title: “Chimerica No More: Are China and the US Decoupling? How Will This Alter World Economics and Commerce?”

Thanks to Professor David Brophy and his class on Global Private Equity for the invitation an incisive questions.

This is a video link to the presentation. (Click here.)

This is a video link to the full two hour class. (Click here.)

This is the PDF of the presentation — without the animations. (Click here.)

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China Merchants Steams in to Compete with SoftBank’s Vision Fund — Financial Times

Leave a Comment / August 9, 2020

 

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China Merchants Group has been adopting new technology to resist foreign competitors for nearly 150 years. Founded in the 19th century, the company brought steam shipping to China so it could compete with western traders.

Now an arm of the Chinese state, CMG has been enlisted once again to buy up technology at a time when global private equity is vying for a share of China’s burgeoning tech market.

The country’s largest and oldest state-owned enterprise, CMG said this month it would partner with a London-based firm to raise a Rmb100bn ($15bn) fund mainly focused on investing in Chinese start-ups.

The China New Era Technology Fund will be launched into direct competition with the likes of SoftBank’s $100bn Vision Fund, as well as other huge investment vehicles raised by top global private equity houses such as Sequoia Capital, Carlyle, KKR and Hillhouse Capital Management.

“They have been very important to China in the past, especially in reform,” said Li Wei, a professor of economics at Cheung Kong Graduate School of Business in Beijing. “But you haven’t heard much about them in technology . . . It’s not too surprising to see them moving into this area, upgrading themselves once again.”

CMG is already one of the world’s largest investors. Since the start of 2015 its investment arm China Merchants Capital, which will oversee the New Era fund, has launched 31 funds aiming to raise a combined total of at least $52bn, according to publicly disclosed information.

But experts say little is known about the returns of those funds, most of which have been launched in co-operation with other local governments or state companies.

Before New Era, China Merchants Capital’s largest fund was a Rmb60bn vehicle launched with China Construction Bank in 2016. While almost no information is available on its investment activity, the fund said it would focus on high-tech, manufacturing and medical tech.

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CMG’s experience investing directly into Chinese tech groups is limited, although it has taken part in the fundraising of several high-profile companies. In 2015 China Merchants Bank joined Apple, Tencent and Ant Financial to invest a combined $2.5bn into ride-hailing service Didi Chuxing, a company that now touts an $80bn valuation. It also invested in ecommerce logistics provider SF Express in 2013.

Success in Chinese tech investing is set to become increasingly difficult as more capital pours into the sector.

“Fifteen billion dollars can seem like a droplet in China,” said Peter Fuhrman, chairman and chief executive of tech-focused investment banking group China First Capital, based in Shenzhen. “We’re all bobbing in an ocean of risk capital. Still, one can’t but wonder, given the quite so-so cash returns from China high-tech investing, if all this money will find investable opportunities, and if there weren’t more productive uses for at least some of all this bounty.”

CMG, however, has always set itself apart from the rest of the country’s state groups. It is unlike any other company under the control of the Chinese government as it was founded before the Chinese Communist party and is based in Hong Kong, outside mainland China. Recommended Banks China Merchants Bank accused of US discrimination

The business was launched in 1872 as China Merchants Steam Navigation Company, a logistics and shipping joint-stock company formed between Chinese merchants based in China’s bustling port cities and the Qing dynasty court.

Mirroring its New Era fund today, it was designed to compete for technology with foreign rivals. At that time it was focused on obtaining steam transport technology to “counter the inroads of western steam shipping in Chinese coastal trade”, according to research by University of Queensland professor Chi-Kong Lai.

Nearly a century later, after falling under the control of the Chinese government, CMG became the single most important company in the early development of the city of Shenzhen, China’s so-called “window to the world” as it opened to the west.

Then led by former intelligence officer and guerrilla soldier Yuan Geng, the company used its base in Hong Kong to attract some of the first investors from the British-controlled city into the small Chinese town of Shenzhen, which has since grown into one of the world’s largest manufacturing hubs.

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Its work in opening China to global investment gained CMG and Yuan, who led the company until the early 1990s, status as leading figures in the country’s reform era.

Today the company is a sprawling state conglomerate with $1.1tn in assets and holdings in real estate, ports, shipping, banking, asset management, toll roads and even healthcare. The company has 46 ports in 18 countries, according to the state-run People’s Daily, with deals last year in the sector including the controversial takeover of the Hambantota terminal in Sri Lanka and the $924m acquisition of Brazilian operator TCP Participações.

CMG did not respond to requests for comment. But one person who has advised it on overseas investments said the Chinese government was using it in the same way the company opened up Shenzhen to the outside world, helping “unlock foreign markets”.

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https://www.ft.com/content/e7e81928-7f57-11e8-bc55-50daf11b720d


 

-phttps://www.ft.com/content/e7e81928-7f57-11e8-bc55-50daf11b720ds://www.ft.com/content/e7e81928-7f57-11e8-bc55-50daf11b720d

 


University of Michigan Ross School of Business — Guest Lecture on China Investment, the Perils & Attractions

Leave a Comment / August 22, 2018

 

 

I was in Ann Arbor this past week to guest lecture at the University of Michigan Ross Business School. The full video can be accessed by clicking here.

I was invited to speak at the business school by Professor David Brophy, who introduces me at the start. Professor Brophy teaches a winter semester class in Global Private Equity. He began researching and teaching PE at Michigan in the mid-1970s, not long after the field was invented by firms like KKR.

Along with speaking in person to students at the school, my talk was also streamed live to the Michigan Venture Capital Association.

 

Maurice Greenberg, Wall Street Journal.

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In Today’s China, Paradoxes Still Abound. But So Do Opportunities — Site Selection Magazine

Leave a Comment / November 21, 2017

 

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In September, China First Capital Chairman and CEO Peter Fuhrman, familiar to attendees at the World Forum for FDI in Shanghai last year, delivered a talk from China to Harvard Business School alumni. Here, with Mr. Fuhrman’s permission, we present excerpts from his remarks.

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GDP growth has never and will never absolutely correlate with investment returns.

Any questions? No? Great. Thanks for your time.

Of course I’m joking. But that key reality of successful investing is all too often overlooked, and China has provided all of us over these last 30-some-odd years with a vivid reminder that IRR and GDP are by no means the same animal.

China is, was and will likely long remain a phenomenal economy. The growth that’s taken place here since I first set foot in China in 1981 has been something almost beyond human reckoning. Since I first came to China as a postgrad in 1981, per-capita GDP (PPP) has risen 43X, from $352 to $15,417. China achieved so much more than anyone dare hope, a billion people lifted out of poverty, freed to pursue their dreams, to make and spend a bundle.

China this year will add about $1 trillion of new GDP. Just to put that in context, $1 trillion is not a lot less than the entire GDP of Russia. So who is making all this newly minted money? And how can any of us hope to get a piece of it? Another question: Why, if China is such a great economy, has it proved such a disaster area for so many of the world’s largest, most sophisticated global institutional investors, private equity firms and Fortune 500s?

Turning Inward

Let’s start with the fact that China is a part of the World Trade Organization, but not entirely of it — not fully subscribed in any way to the notion that reciprocity, openness, free trade, level playing fields and equal treatment are positive ends unto themselves. As China has gotten richer it has seen even less and less need to attract foreign capital and foreign investment. That’s a tendency we see in other countries, including obviously some of the rhetoric we now hear in the U.S. — that more of the gains of the national economy should belong to its citizens. But China’s way is different.

The renminbi is a closed non-tradable currency, so getting US dollars into and out of China has always been difficult. China now has the world’s second-largest stock and bond markets, but those markets are largely closed to any investors other than Chinese domestic ones. But China also continues to provide companies going public with by far the highest multiples anywhere in the world.

When I first came to China 36 years ago China was a 100-percent state-owned economy. Twenty years ago the first rules were put in place to allow a private sector to function. Today, according to anyone’s best estimate, it’s about 70 percent private and 30 percent state, and most of the value creation is being provided by that private-sector economy. So in theory there should be very interesting M&A opportunities. But it’s been exceedingly difficult to get successful transactions done. One of the core reasons is that by and large all private-sector companies in China, large and small, are family-owned.

The other thing important to consider is a Mandarin term: guifan. It’s the Chinese way of explaining the extent to which a company in China is abiding by all the rules of the road — the taxes you should pay, the environmental and labor laws you should follow. It’s not at all uncommon that successful private-sector companies in China are successful by virtue of having negotiated to pay little or no corporate tax on profits.

For foreign-owned companies in China it’s an entirely different story. They are by and large 100-percent compliant with the written rules. This has an enormous impact on the operating performance of any company, so you can imagine how potentially skewed the competitive environment becomes. And keep in mind that corporate taxation in China in the aggregate is, if not the highest in the developed world, then among the highest, and the environmental and labor laws are every bit as difficult, rigorous, tough and expensive to implement as they are in the U.S.

China is a country where local government officials are scored on the measurable success of their time in office, and success is overwhelmingly attributed to GDP growth. So it should be no surprise if what they’re trying to do is optimize GDP growth, the percentage of a company’s income that goes back to the government in taxation can have an adverse effect on that. Instead the government will continue to urge its local companies to take the money and, rather than pay tax, continue to invest, expand and therefore build local GDP.

The Hum of Consumerism

The reasons to stay engaged and find a viable investment angle include GDP growth. China’s GDP is likely to continue to grow by at least 6 percent a year. Second, across my 25 years of involvement in China, every one of the predictions of imminent collapse — financial catastrophe, local government debt, bad bank loans, real estate bubbles — have proved to be false. It appears China has some resiliency, and it’s certainly the case that the government has the tools and financial resources to ride out most challenges.

Third has been how effortlessly it’s made the transition that still bedevils lots of Europe, from a smokestack economy to a consumer-spending paradise. At this moment every major consumer market in China is booming both online and offline. Alibaba, Baidu and Tencent are now operating as three of the most profitable companies in the world.

How does China have a robust, booming consumer economy and an enormous appetite for luxury brands, yet on average salary levels that are still one-fifth or one-sixth the levels in the US? The simple answer is that almost all the Chinese now living in urban China — about half the population, compared to about 15 percent when I first got here — owns at least a single apartment if not multiple, which is more and more common. The single best-performing asset in history has probably been Chinese urban real estate over the last 30 years. It’s fair to say the average appreciation over the last 10 years is at least 300 percent.

Though China has a population whose incomes on paper look like those of people flipping burgers at McDonald’s, they seem to have the spending power and love of luxury goods like the people summering in East Hampton. Even Apple itself has no idea how big its market is here in China. It’s likely that at least 100 million iPhone 8s will be sold to Chinese over the next year. The retail price here in China is at least 30 to 40 percent higher than in the US, with most phones bought for cash, without a carrier subsidy.

‘You’ll Be Older Too’

So where is it possible to make money in China? One message above all: Active investing beats passive investing every time. What you need to do is either be the owner-operator or be a close strategic partner with one, and stay actively engaged.

There are four major areas of opportunity: Tech, health-care services, leisure and education (see graphic below). The potential for building out a chronic care business in China is enormous. Looking ahead 25 to 30 years, sadly China will likely suffer a demographic disaster. This country will become a very old society very quickly. That’s the inevitable product of 30 years of a one-child-per-family policy. By 2040 or 2050, 25 percent of China will be over the age of 65.

The overall rate of GDP growth is unlikely to ever rival that of a few years ago at 10 to 12 percent a year, but overall what we have is higher-quality growth. People in China are living well. Things should continue to motor along very smoothly at least for one more generation — a generation whose members are better educated, more skilled, ambitious and globalized than their parents.

There’s no denying the reality of what a better, happier, freer, richer country China has become since I first set foot here. I marvel every day at the China that I now live in, even while I occasionally curse some of the unwanted byproducts like heavy pollution in most parts of the country, overcrowding at tourist attractions, bad traffic, and a pushy culture that’s lost touch with some of China’s ancient glories.

China will continue to amaze, inspire and stupefy the world. The Chinese have done very well and will do better. At the same time, those of us investing in China may do a little better in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.

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China’s Soccer Push Puts a Storied Team Under Murky Ownership — The New York Times

Leave a Comment / August 11, 2020

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By SUI-LEE WEE, RYAN McMORROW and TARIQ PANJA

NOV. 16,    2017

Li Yonghong in April with David Han Li, left, of Rossoneri Sport Investment, part of A.C. Milan’s new ownership group, and Marco Fassone, the club’s chief executive.

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BEIJING — When the Chinese businessman Li Yonghong bought A.C. Milan, the world-famous Italian soccer club, virtually nobody in Italy had heard of him.

Virtually nobody in China had, either.

Mr. Li had never been named to one of China’s lists of the country’s richest people. The mining empire he described to Italian soccer officials was hardly known even in mining circles.

Nevertheless, Mr. Li seemed to have what mattered most: money. He bought the club in April for $860 million from Silvio Berlusconi, the former Italian prime minister, to clinch China’s biggest-ever soccer deal.

Today, Mr. Li’s acquisition of A.C. Milan appears to be emblematic of a string of troubled Chinese deals.

The soccer club, bleeding money after a spending spree on star players, is seeking new investors or a refinancing of the high-interest loan that Mr. Li took to buy the club. That loan comes due in a year.

Chinese corporate records show that — on paper, at least — someone else owns his mining empire. That company’s offices were empty on a recent visit, and a sign on the door from the landlord cited unpaid rent. A spokesman for A.C. Milan said Mr. Li’s control of the mining business had been verified by lawyers and banks involved in the transaction.

Chinese records also show a series of business disputes and run-ins between Mr. Li and Chinese regulators.

China’s emergence as a world economic power came with a ready checkbook for major brand names. Chinese owners now control the Waldorf Astoria hotel in New York, AMC theaters, the Hollywood production company Legendary Entertainment and A.C. Milan.

Then Chinese officials began to worry that the spending was simply part of an exodus of money from China so vast that it once threatened to destabilize the country’s economy, the world’s second largest. This summer, the government ordered its banks to scrutinize lending to some of the country’s biggest deal makers.

Outside China, some of the deals led regulators to ask questions about the tycoons behind them. Some wealthy people in China list their holdings under the names of relatives or associates to avoid scrutiny, a practice that has attracted criticism inside and outside the country.

In the case of Mr. Li, the mines that he told A.C. Milan he controlled have been owned by four different people since last year, according to Chinese corporate records. The business changed hands twice for no money, the documents show.

Mr. Li declined an interview request through A.C. Milan. The club spokesman defended Mr. Li on his business disputes, saying that sometimes he was a victim and that sometimes he was not aware of complicated rules. The spokesman also said the club was evaluating several refinancing proposals and was confident it could cover the loan.

Chinese spending on soccer totaled $1.8 billion over the past five years, according to Dealogic, a data provider, but Chinese officials are putting a stop to the spree amid concerns about the flight of money abroad.

“There’s a lot of ways to invest in football and the sports industry for much less money,” said Mark Dreyer, who tracks Chinese soccer investments on his website, China Sports Insider. “People were basically using the government’s previous push for sports as a way to diversify into different industries and get their money out of China.”

Mr. Li had plenty of reasons to buy A.C. Milan. President Xi Jinping had professed his love for soccer and wanted China to be a superpower in the sport by 2050. The Chinese government had laid out a plan for increasing sports investment.

An acquisition of A.C. Milan would be a marquee deal. A decade ago, the club was home to some of soccer’s biggest talents, including Ricardo Izecson dos Santos Leite, who is known as Kaká, and Andrea Pirlo. It was a seven-time European champion.

But it has not won an Italian championship for six years or a European title for 10. Fans welcomed Mr. Li’s arrival as a potential catalyst. This summer, A.C. Milan began to spend on new players in a way that seemed to signal a desire to compete again.

Still, Mr. Li and Mr. Berlusconi struck the deal at a difficult time. Beijing, spooked by the unprecedented capital outflows and a weakening currency, had imposed restrictions on overseas investment at the end of last year.

Mr. Li set up companies in the British Virgin Islands and Luxembourg that would put the club’s legal ownership outside China, according to Marco Fassone, A.C. Milan’s chief executive officer. Mr. Li also borrowed about $354 million from the hedge fund firm Elliott Management, a loan he must pay back by October 2018. A spokeswoman for Elliott declined to comment.

A.C. Milan remains debt laden and unprofitable, and could have trouble repaying what it owes on its own. It spent about $274 million to sign 11 players this summer, according to the club spokesman, making it among the biggest spenders in European soccer.

In August, A.C. Milan had to wait for the transfer of two players it had signed from other teams because it had not deposited the required bank bonds. The club blamed a timing issue for the delay, and the transfers were eventually completed. The team is in seventh place but, with more than two-thirds of the season left to play, must finish among the top four to earn a spot in European soccer’s elite Champions League next season. The team could lose valuable television revenue if it fails to reach that level.

It is unclear how much Mr. Li’s wealth might help the club address its troubles.

He was initially unknown to the deal makers trying to sell the club, the people involved in the transaction said. He was originally part of a group that included Sonny Wu, a well-known investor who is chairman of the private equity firm GSR Capital, these people said. But Mr. Wu pulled out of the deal.

In an email, Mr. Wu said he had not talked to bankers about Mr. Li or his consortium. Rothschild & Company, the investment bank that advised Mr. Li, declined to comment.

Mr. Li told A.C. Milan that his holdings included phosphate mining operations in the city of Fuquan in Guizhou Province.

But Chinese corporate filings show that the mines are owned by another party: Guangdong Lion Asset Management, an investment company. And Guangdong Lion has had a complicated ownership record over the past two years, involving a number of people with similar family names. (One court proceeding suggests Mr. Li has a relationship with Guangdong Lion, although it is not clear what kind.)

Originally, Guangdong Lion was ultimately owned by two investors, Li Shangbing and Li Shangsong, according to filings. Like Li Yonghong, the two men come from the same area of Maoming, a city on China’s southern coast, according to the documents. But in a phone interview, Li Shangbing said he did not know Li Yonghong.

Li Shangsong, who declined to comment, sold his interest in Guangdong Lion in 2015 to a person named Li Qianru, according to the documents. The documents did not include personal information about Li Qianru, who could not be reached for comment.

In May 2016, according to the filings, Li Shangbing and Li Qianru, sold Guangdong Lion to yet another Li: Li Yalu. The sale price: $0. The filings do not provide personal information about Li Yalu.

Three weeks later, Li Yalu sold a half stake in Guangdong Lion to a similarly obscure investor, Zhang Zhiling. The price: $0. Neither could be reached for comment.

Li is a common surname in China, and the relationships among the various Lis are unclear. The A.C. Milan spokesman declined to comment.

Li Yonghong, the A.C. Milan owner, and Li Shangbing have two things in common.

The first is a relationship with Guangdong Lion. A Chinese court cited Li Yonghong and Guangdong Lion in April for failing to resolve a loan dispute with another Chinese company, saying both parties had disappeared. The court did not specify the relationship. The A.C. Milan spokesman said that Li Yonghong had merely guaranteed the loan and that “he is a victim in this case.”

The second is an interest in investing in European sports.

In May 2016, a day before Li Shangbing sold Guangdong Lion for no money, he started a company called Sino-Europe Sports Asset Management Changxing Company, according to China’s corporate database.

Two days after he registered the Sino-Europe firm, another person registered a new company with a strikingly similar name: Sino-Europe Sports Investment Management Changxing Company. The two companies’ headquarters were in the same building in the city of Huzhou.

Sino-Europe Sports Investment owns a stake in A.C. Milan as a result of its role as a shareholder in Rossoneri Sport Investment, a Chinese company that is part of the group led by Li Yonghong that owns the soccer club.

In the phone interview, Li Shangbing denied setting up either Sino-Europe company and said he did not own any part of A.C. Milan. He declined to answer further questions. A.C. Milan declined to comment on Li Shangbing. The listed owner of the Sino-Europe Sports Investment Management Changxing Company, Chen Huashan, could not be reached for comment.

Guangdong Lion’s listed headquarters are in a fancy skyscraper in Guangzhou. In August, the offices were closed, with an eviction notice on the door. Inside, desks and chairs were in disarray, computers were missing hard drives, and maggots festered in a trash can.

The phone number listed for Guangdong Lion connects to a woman who said she helped companies register with Chinese regulators.

Li Yonghong has an extensive business history, but Chinese records show it includes disputes with regulators and others.

In 2013, China’s securities watchdog fined Mr. Li $90,250 for failing to report the sale of $51.1 million in shares of a real estate company. A.C. Milan said Mr. Li had simply been unfamiliar with listing rules.

In 2011, that same real estate company said in a stock filing that Mr. Li was the chairman of Grand Dragon International Holding Company, a Chinese aviation company. Grand Dragon said in June that he had no present or past association with the company. The A.C. Milan spokesman said he had no knowledge of this.

In 2004, Mr. Li’s family business, the Guangdong Green River Company, teamed up with two other companies to bilk more than 5,000 investors out of as much as $68.3 million, according to The Shanghai Securities News, the official newspaper of China’s financial watchdogs. They had sold contracts for lychee and longan orchards and promised investors hefty returns, according to the report.

Mr. Li’s father and brother were sentenced to jail. Mr. Li was investigated but not accused of wrongdoing, the report said.

A.C. Milan said the episode had nothing to do with Mr. Li, adding that “he was not aware of the situation until the investigation.”

Amid Chinese concerns about deals abroad, China’s purchases of soccer teams with prestige names is likely to slow considerably for some time to come.

“If outbound investment should have the purpose of ‘strengthening the nation,’ even within the broadest of definitions,” Peter Fuhrman, chairman of the investment bank China First Capital, said in an email, “buying a soccer team in the U.K. or Italy would hardly seem to qualify.”

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As published in The New York Times–

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Amazon Sells Hardware to Cloud Partner in China — The Wall Street Journal

Leave a Comment / August 11, 2020

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Amazon Web Services is selling computing equipment used for its cloud services in China for as much as $300.8 million.
Amazon Web Services is selling computing equipment used for its cloud services in China for as much as $300.8 million.

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Amazon.com Inc. AMZN 0.68% on Tuesday said it has sold computing equipment used for its cloud services in China to its local partner, Beijing Sinnet Technology Co., in a move analysts said underscores the increasingly chilly atmosphere for foreign companies in the country.

Amazon Web Services said it took the step to meet new Chinese regulations.

”Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services,” AWS said. “As a result, in order to comply with Chinese law, AWS sold certain physical infrastructure assets to Sinnet, its longtime Chinese partner.”

The company said it remains committed to China and that customers would continue to receive AWS cloud services. It also said the deal didn’t involve any transfer of intellectual property.

Peter Fuhrman, chairman of technology investment bank China First Capital, said Amazon’s decision illustrates China’s tightened grip on companies providing internet services.

”The key policy brickwork is now done,” Mr. Fuhrman said. “The Chinese internet, in its broad entirety, will become even more comprehensively managed by the Chinese state.”

Mr. Fuhrman added that such protectionist moves will ultimately limit China’s access to the latest technology and could hurt its competitiveness over the long term.

Jim McGregor, chairman of the Greater China region for public-affairs consultancy APCO Worldwide, said the move should be viewed in light of China’s Made in China 2025 plan to promote domestic enterprises and technologies. ”China has a different plan and it has the power,” he said.

U.S. tech companies in China are dealing with a different world “and it would be corporate suicide not to acknowledge it,” he added.

Beijing Sinnet, in a regulatory filing late Monday, said it was paying up to 2 billion yuan ($300.8 million) for the assets to “comply with our country’s laws and rules and further improve the security and the service quality of the AWS cloud-computing service operated by the company.”

Early this year, China’s Ministry of Industry and Information Technology informed foreign companies with cloud ventures that new operating licenses would be applied by year-end. Amazon’s deal with Sinnet could clear the final obstacles for AWS to get such licenses, analysts from Citic Securities said in a note Tuesday.

Late last year, China’s MIIT also issued draft measures calling for tighter technical cooperation between foreign cloud operators and their local partners. The proposed rule change triggered complaints from more than 50 U.S. lawmakers, who in March protested in a letter to China’s ambassador to the U.S., Cui Tiankai, that the change would force U.S. companies to essentially transfer ownership and operations of their cloud systems to Chinese partners.

Officials with the MIIT had no immediate comment.

Amazon and other U.S. companies, including Apple Inc., have faced increased pressure in the country in recent months in the face of the Chinese government’s desire to control cyberspace.

In July, Apple said it would begin storing cloud data for its Chinese customers on a server run by a government-owned company, to comply with Chinese law. The data include photos, documents, messages and videos uploaded by mainland China users of Apple’s iCloud service.

Since a new cybersecurity law came into effect in June, U.S. tech companies have been constrained in their efforts to operate as they normally would globally, and this has led to inefficiency and a higher risk of cyberthreats, said the U.S.-China Business Council in a statement Tuesday.

In August, AWS was caught up in a Chinese government clampdown on tools that allow internet users to circumvent the country’s vast system of internet filters. In that instance, AWS customers were sent emails by Beijing Sinnet asking them to delete tools enabling them to bypass the filters. Some of the tools that clients use include virtual private networks, or VPNs.

Cloud platforms provide their users with data storage, computing and networking resources over the internet, reducing the need for on-site servers. China’s $2 billion public cloud market is set to grow to a $16 billion by 2020, according to estimates by Morgan Stanley analysts. A government policy push for enterprises to migrate to the cloud, better vendor offerings and falling costs will boost demand for such services, Morgan Stanley said.

In China, AWS faces strong local competition in the form of Alibaba Group Holding Ltd. and China Telecom Corp. Alibaba’s cloud unit held 40% of the country’s cloud infrastructure-as-a-service market, according to International Data Corp. research. Microsoft Corp. , the largest foreign provider in China, had 5%, while AWS has 3.8%.

Still, China’s market is in its nascent stage, and it is too early to crown industry champions, said Kevin Ji, a research director at Gartner, an industry research firm. With their strong product offerings, AWS and Microsoft are likely to prove formidable competitors to Alibaba in the longer run, he said.

As published in The Wall Street Journal.

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Alzheimer’s: China’s Looming Health Challenges — The Diplomat

Leave a Comment / October 2, 2017

 

 

 

 

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Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into the U.S. Asia policy. This conversation with Peter Fuhrman – Chairman, Founder and Chief Executive Officer of China First Capital, Ltd. – is the 109th in “The Trans-Pacific View Insight Series.”  

With 9.5 million diagnosed Alzheimer’s sufferers in China, why is Alzheimer’s the country’s biggest future health problem?

I would broaden it to say that the treatment of chronic diseases, with Alzheimer’s at the forefront, is the largest future challenge to China’s national healthcare system. From a country that in living memory only offered a very rudimentary system of barefoot doctors, who were often nothing more than well-meaning but untrained quacks, China in 20 short years has expanded genuine healthcare coverage to all corners of the country, providing acute care and medications to the vast majority of its citizens. That’s an enormous achievement; one that’s done more good for more people than probably any other government initiative anywhere at any time. Chronic diseases, on the other hand, were never a focus, indeed never much of a problem. But, Chinese life expectancy has lengthened dramatically, thanks in part of the improvement in the delivery of acute health services. Chinese are now living as long as people in Europe and the United States. The result: China is already feeling the strain of millions of older ill folks with no real treatment options in place. The demographic die is already cast. Within 25 years, China will become a more geriatric society, where at least 25 percent of the population is over 65. Chronic disease will become commonplace, more prevalent than in any other country.

What cultural challenges hinder or help Chinese society in managing Alzheimer’s?    

The generation of people now growing old in China had limited expectations, as they mainly grew up in dire poverty. As they aged, they accepted more stoically that society couldn’t provide much assistance except for immediate medical emergencies. Their children and grandchildren, however, are constituted differently. They often have education and expectations similar to people in the West, including that there should be quality treatment options in China for every medical issue, as there are in the U.S., Europe, Japan, and elsewhere. They increasingly want better treatment for their sick parents, and will certainly expect even more for themselves when they grow older and are diagnosed with chronic diseases like dementia and Parkinson’s, or need extended care and rehabilitation after a stroke or heart attack, both quite common in China. There is still so little care available in China to fulfill this growing need.

What can China learn from the United States and Europe?

Probably the key lesson is to not to expect, as too many in the U.S. and Europe did, a big breakthrough in Alzheimer’s care, the development of drugs to arrest the progress or undo the damage of the disease. The sad reality is despite huge sums spent on research, we’re as far away from such a medical miracle as we were 20 years and at least $20 billion ago. Instead, China needs to foster the development of thousands of quality treatment centers for Alzheimer’s patients, to care for them according to the best global standards, to lengthen and enrich their lives. This requires along with lots of new buildings a huge number of trained doctors, geriatricians, specialist nurses, and aides.

Describe differences between Chinese rural and urban treatment of Alzheimer’s.

Quality healthcare in China is still available mainly in large national hospitals located in major cities. Though the number of rural Chinese with Alzheimer’s is large and growing fast, there is virtually no professional care available for them locally. The government is seeking to change this, not only for chronic diseases, to raise the standards of healthcare in small cities and rural townships, to relieve the huge disproportionate burden on the big urban hospitals.

Identify opportunities for the international healthcare industry in addressing China’s looming Alzheimer’s challenge?  

Over the next 40 years in China, there is no single area offering better investment fundamentals than chronic care, including the care of Alzheimer’s. Sober forecasts are, by 2045, there will be over 40 million Chinese with Alzheimer’s, four times the number presently. By then, it’s likely half the total number of Alzheimer’s cases worldwide will be here in China. As of today, there are fewer than 500 beds in China for patients needing specialist Alzheimer’s treatment. A French company, Orpea, has a first mover advantage, having already opened a world-class facility in Nanjing. In financial terms, quality Alzheimer’s and chronic care provides very solid returns. As or more important, though, is that the benefits will be captured also by Chinese society as a whole. This will certainly be one of those areas where investors will do quite well by doing good, by contributing to a China where the diseases of old age will be competently managed and families kept happy and intact for longer.

 

As published by The Diplomat

 

 

 

China’s Bold “One Belt One Road” Move To Dramatically Extend Its Power and Commerce in the Indian Ocean — The Financial Times

Leave a Comment / August 11, 2020

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Much has been said — but far less is understood — about the One Belt One Road initiative, the centerpiece of Xi Jinping’s expansive foreign policy. That Mr. Xi has ambitions to extend across Eurasia China’s commercial, political and military power is not in doubt. But, the precise details on OBOR remain just about as unclear now as they did four years ago when the policy was unveiled — which countries are included, how much cash China will invest or lend, where are the first-order priority projects, will any of the trillions of dollars of proposed spending achieve commercial rates of return? Questions multiply. Answers are few.

There is one remote corner of the planet, however, where the full weight of OBOR’s grand strategy and profit-making potential are coming into view. It’s in a small village called Hambantota along the southern fringe of Indian Ocean beachfront in Sri Lanka.

One of China’s largest and most powerful state-owned companies, China Merchants Group, with total assets of $855 billion, is in the final stages of completing the purchase for $1.1 billion of a 99-year lease for a majority stake in a seven-year-old loss-making deep-water container port. It was built for over $1 billion on a turnkey basis by Chinese state-owned contractors. It is owned and operated by the Sri Lankan government’s Port Authority.

I’m just back in China from a rare guided visit inside Hambantota port. Like other bankers and investors, we’ve felt the pinch as much of Chinese outbound investment has been cancelled or throttled back this year. Hambantota, though, is full steam ahead.

Hambantota’s future appears now about as bright as its present is dreary. On the day I visited, there was virtually no activity in the port, save the rhythmic wobbling of a Chinese cargo ship stuck in Hambantota for three weeks. Due to choppy seas and also perhaps inexperienced Sri Lankan port staff, the Chinese ship has been sitting at anchor, unable to unload the huge Chinese-made heavy-duty cranes meant to operate on the quayside.

Though the Chinese ambassador to Sri Lanka has pledged that Hambantota will one day resemble Shanghai, as of today, elephants in the nearby jungle are about as numerous as dockworkers or pedestrians. Tragically, the region was ravaged, and partly depopulated, by the Tsunami of 2004. China Merchants will take over management of the port within the next month or so. There is much to do — as well as undo. The Hambantota port, under Sri Lankan government management, has been a bust, a half-finished commercial Xanadu where few ships now call. The port has lost over $300 million since it opened.

China Merchants’ plan to turn things around will rest on two prongs. Its port operations subsidiary, Hong Kong-listed China Merchants Port Holdings, will take over management of Hambantota. It is the largest port owner and operator in China. Almost 30% of all containers shipped into and out of China are handled in China Merchants’ ports. The ports business earned a profit of $850 million last year. China Merchants has what the Sri Lankan government’s Hambantota port operator could never muster: the operational skill, clout, capital and commercial relationships with shippers inside China and out to attract significant traffic to Hambantota. China’s state-owned shipping lines deliver more containers than those from any other country.

In addition, China Merchants will enlist other large China SOEs to invest and set up shop in an 11 square-kilometer special economic zone abutting the Hambantota port. The SEZ was created at the request of the Chinese government, with the promise of $5 billion of Chinese investment and 100,000 new jobs to follow. China Merchants is now drawing up the master plan.

A who’s who of Chinese SOE national champions are planning to move in, beginning with a huge oil bunkering and refining facility to be operated by Sinopec as well as a large cement factory, and later, Chinese manufacturing and logistics companies. This “Team China” approach – having a group of Chinese SOEs invest and operate alongside one another — is a component of other OBOR projects. But, the scale of what’s planned in Hambantota is shaping up to be far larger. The flag of Chinese state capitalism is being firmly planted on this Sri Lankan beachfront.

Hambantota is only ten to twelve nautical miles from the main Indian Ocean sea lane linking the Suez Canal and the Malacca Straits. Most of China’s exports and imports sail right past. An average of ten large container ships and oil tankers pass by every hour of every day. From the Hambantota port office building, one can see the parade of huge ships dotted across the horizon. Along with transshipping to India and the subcontinent, Hambantota will provide maintenance, oil storage and refueling for shipping companies.

Sri Lanka is the smallest of the four Subcontinental countries, with a population of 20 million compared to a total of 1.7 billion in India, Pakistan and Bangladesh. It has one geographic attribute its neighbors lack — a deep-water coastline close to Indian Ocean shipping lanes and conducive to building large deep-water ports able to handle the world’s largest container ships and supertankers. This should make Sri Lanka the ideal transshipment point for goods and natural resources going into and out of the Subcontinent.

The Port of Singapore is now the region’s main transshipment center. It is three to four times as distant from India’s major ports as Hambantota. Singapore is now the world’s second-busiest port in terms of total shipping tonnage. It transships about a fifth of the world’s shipping containers, as well as half of the world’s annual supply of crude oil.

Even before President Xi first articulated the OBOR policy, Sri Lanka was already seen as a key strategic and commercial beachhead for China’s future trade growth in the 40 countries bordering the Indian Ocean. China and Sri Lanka have had close and friendly diplomatic ties since the early 1950s. Both style themselves democratic socialist republics.

Sri Lanka is the one country in the region that enjoys cordial relations not only with China but also the US, and the three other Subcontinental nations. Sri Lanka’s GPD is $80 billion, less than one-tenth the total assets of China Merchants Group. Sri Lankan per capita GDP and literacy rate are both about double its Subcontinental neighbors. While a hardly a business nirvana, it is often easier to get things done there than elsewhere in region.

The first port was established in Hambantota around 250 AD. It was for centuries, until Chinese emperors sought to prohibit Chinese junks from sailing the open seas, a stopping point for Chinese ships trading with Arabia.

China Merchants has been trying for four years to close the deal there. China Merchants Port Holdings is a powerful presence in Sri Lanka. It already built and operates under a 35-year BOT contract a smaller, highly successful container port in the capital Colombo. It opened in 2013. It’s one of the few large-scale foreign direct investment success stories in Sri Lanka. The future plan is for the China Merchants’ Colombo port to mainly handle cargo for Sri Lanka’s domestic market, while Hambantota will become the main Chinese-operated transshipment hub in the Indian Ocean.

Chinese SOEs are also in the throes of building a port along the Pakistani coast at Gwadar and upgrading the main ports in Kenya. The direction of Beijing’s long-term planning grows clearer with each move. If not exactly a Chinese inner lake, the Indian Ocean will become an area where Chinese shipping and commercial interests will more predominate.

During the Hambantota negotiations, the Sri Lankan government blew hot and cold. The country needs foreign investment and Chinese are lining up to provide it, as well as additional infrastructure grants and loans. Chinese building crews swarm across a dozen high-rise building sites in Colombo. Chinese tourist arrivals are set to overtake India’s. The main section of the unfinished highway linking Colombo and Hambantota was just completed by the Chinese.

The new coalition government that came to power in Sri Lanka in early 2015 has sometimes showed qualms about the scale and pace of Chinese investment. India has already signaled unease with the Chinese plans to take over and enlarge the port in Hambantota. Prior to signing the contract with China Merchants, the Sri Lanka government provided India with assurances the Chinese will be forbidden to use the port for military purposes.

China Merchants will effectively pay off the construction loans granted by the state-owned Export-Import Bank of China to the Sri Lankan government in return for the 99-year operating lease. China Merchants plans to invest at least another $1 billion, but perhaps as much as $3 billion, to complete Hambantota port and turn it into the key Indian Ocean deep-water port for ships plying the route between Suez and East Asia. Rarely if ever in my experience do OBOR projects have the crisp commercial logic of Hambantota. Assuming ships do start to call there, Hambantota should prove quite profitable, as well as a major source of employment and tax revenue for Sri Lanka.

As of now, there is almost no housing and no infrastructure in Hambantota, only the port facility, a largely-empty international airport and a newly-opened Shangri-La hotel and golf course. The airport and port were pet projects of a local Hambantota boy made good, Mahinda Rajapaksa. He was Sri Lanka’s president from 2005 to 2015, when he was voted out of office. In December last year, the port was taken over by a mob of workers loyal to the Rajapaksa. They took several ships hostage before the Sri Lankan navy sailed in to end the chaos.

The port will be able to handle dry cargo, Ro-ro ships transporting trucks and autos, oil tankers as well as the world’s largest 400-meter container ships. Hambantota should lower prices and improve supply chains across the entire region, and so drive enormous growth in trade volumes — assuming power politics don’t intrude.

China and India have prickly relations, most recently feuding over Chinese road-building in the disputed region of Doklam. India has balked at direct participation in OBOR, and complains loudly about its mammoth trade deficit with China, now running about $5 billion a month. Chinese exports to India have quadrupled over the past decade, in spite of India’s extensive tariffs and protectionist measures. Hambantota should allow India’s manufacturing sector to be more closely intertwined with Chinese component manufacturers and supply chains. That is consistent with India’s goal to increase the share of gdp coming from manufacturing, and manufactured exports, both still far smaller than China’s. But, India will almost certainly push back, hard, if Hambantota leads to a big jump in its trade deficit with China.

China’s exports may be able to come in via the Sri Lankan backdoor. India and Sri Lanka have a free trade agreement that in theory lets Sri Lankan goods enter the vast market duty-free. Chinese manufacturers could turn the Hambantota free trade zone into a giant Maquiladora and export finished products to India. This would flood India with lower-priced consumer goods, autos, chemicals, clothing. Bangladesh, Pakistan and Burma — smaller economies but friendlier with China — would likewise absorb large increases in exported Chinese goods, either transshipped from Hambantota or assembled there.

No area within OBOR is of greater long-term significance to Chinese commerce. Fifty years from now, if UN estimates prove correct, the population of India, Pakistan and Bangladesh will be about 2.3 billion, or about double where China’s population will be by then.

Some China Merchants executives are dreaming aloud the Thai and Chinese governments will close a deal to build a canal across Southern Thailand. This would shave 1,200 miles off the sea route from Suez to China. The preferred canal route across the isthmus of Southern Thailand is actually shorter than the length of the Panama Canal. The canal would re-route business away from Singapore and the Malacca Straits. The likely cost, at around $25 billion, could be borne by China without difficulty. Hambantota would grow still larger in importance, commercially and strategically.

For now, though, the Thai canal is not under active bilateral discussion. Not only does the ruling Thai junta worry about its landmass being cleaved in two, the governments of the US, Japan, Singapore would likely have serious reservations about altering Asian geography to enhance China’s sea power and naval maneuverability.

By itself, a Chinese-owned and operated Hambantota will almost certainly reconfigure large trade flows across much of Asia, Africa and Europe, benefitting China primarily, but others in the region as well. It is a disruptive occurrence. While much of China’s OBOR policy remains nebulous and progress uncertain, Chinese control of Hambantota seems more than likely to become a world-altering fact.

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As published in The Financial Times

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Venture Fundraising in Yuan Soars as Investors Target Chinese Tech Firms — The New York Times

Leave a Comment / August 11, 2020

 

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HONG KONG (Reuters) – China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.

Fund managers have raised 95.8 billion yuan ($14.54 billion) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7 billion yuan in all of 2016. That puts 2017 on pace to be the biggest year since 2012, when 145.8 billion yuan was raised, according to data provider Preqin.

There are currently 78 funds looking to raise as much as another 1.15 trillion yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.

 Those include the 350 billion yuan sought by the China Structural Reform Fund, 200 billion yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150 billion yuan for the state-owned Enterprise National Innovation Fund.

The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals. The China Structural Reform Fund, which was launched in 2016, has raised 20 percent of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.

“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital. “China has a lot of money in its government apparatus. It wants to seed innovation and entrepreneurship and this is how it’s doing it.”

The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years. It also compares with flat growth expected for U.S. venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA).

CATCHING ENTREPRENEURS

Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had U.S. dollar funds are launching their first funds in yuan. Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.

Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.

“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies. “That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50 percent of the deals. Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”

Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group (BABA.N), is looking to raise at least 10 billion yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd (0700.HK), Baidu Inc (BIDU.O) and JD.com Inc (JD.O), is targeting about 8 billion yuan for its fund, sources told Reuters.

The investment management arm of securities firm China Renaissance is also adding to its yuan reserves with a new fund worth about 6 billion yuan, according to a person familiar with the plans who couldn’t be named because details of the fundraising aren’t yet public. Ion Pacific is raising 1 billion yuan for its debut fund in the Chinese currency, while GGV Capital is about to close fundraising for its first yuan-denominated fund.

“Some sectors don’t allow foreign investors, so for example, in the culture and media industry you need to apply for certain licenses like video licenses and you need to be a local investor,” said Helen Wong, a partner at Qiming Venture Partners.

“Now the IPO window is open for the local stock market, so that encourages a lot of companies to go for a local listing,” she added, in reference to the increase in IPO approvals by regulators in 2017 that is prompting more companies to start preparations to go public. Previously, a slow approval process and long line of companies waiting for clearance dissuaded many from those plans.

The shift would give an added boost to the Shenzhen and Shanghai bourses. China has had 322 new listings this year, raising a combined $22.9 billion, Thomson Reuters data showed. This already surpasses the 252 for all of 2016, even after the country’s securities regulator slowed the number of weekly IPO approvals in May.

It could also reduce the influence of the Nasdaq and New York stock exchanges, where many Chinese technology companies previously flocked when they went public.

“For the RMB side, you see more companies in restricted sectors like healthcare and media and certain parts of cleantech that needs government support to get started,” said Hans Tung, managing partner at GGV Capital. “You also see companies in the fintech space and a lot of them need a license to operate a business in the financial services industry, so they tend to want to list in China.”

As published in The New York Times.

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Why Has China’s GDP So Outpaced IRR?

Leave a Comment / September 23, 2017

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It’s the paradox at the core of China investing: why has such a phenomenal economy proved such a disappointing investment destination for so many global institutional investors, PE firms and Fortune 500s.

Financial theory provides a conceptual explanation. Investment returns are not absolutely correlated to GDP growth. China will likely go down in history as the best proof of this theorem. China as certainly delivered exceptional GDP growth. In per capita PPP terms, China is 43 times larger than in 1981, when I first set foot in China as a grad student. No other country has ever grown so fast, for so long and lifted so many people out of poverty and into the consumer middle class.

Commensurate investment returns, however, have been far harder to lock in. Harvard Business School’s global alumni organization invited me to give an hour-long talk on this topic this week. It required a quick gallop through some recent and not always happy history to arrive at the key question — does the future hold m0re promise for global institutional investors looking to deploy capital in China.

 For more detailed look at some reasons for the big disconnect between China’s national GPD growth and investment IRR, and some suggestions how to improve matters, please have a look by clicking here at the HBS talk slide deck.

Publicly-quoted shares in Chinese companies have failed by far and away to keep pace with the growth in overall national income. In the alternative investment arena, global PE and VC firms enjoyed some huge early success in late 1990s and first part of the 2000s. Since then, the situation has worsened, as measured in cash returns paid out to Limited Partners. One major reason — the explosion within China of Renminbi investment funds, now numbering at least 1,000. They’ve bid up valuations, gotten first access to better opportunities, and left the major global PE and VC firms often sitting on the sidelines. With tens of billions in dry powder, these global firms look more and more like deposed financial royalty — rich, nostalgic, melancholy and idle.

China this year will add approximately $1 trillion of new gdp this year – that’s not a lot less than the entire gdp of Russia. Indeed, China gdp growth in 2017 is larger than the entire gdp of all but 15 countries. Who is making all this money? Are all the spoils reserved for local investors and entrepreneurs? Can global investors find a way at last to get a bigger piece of all this new wealth?

Overall, I’m moderately sanguine that lessons have been learned, especially about the large risks of following the Renminbi fund herd into what are meant to be sure-thing “Pre-Ipo” minority deals. Active investment strategies have generally done better. With China’s economy well along in its high-speed transition away from smokestack industries and OEM exports to one powered by consumer spending, there are new, larger and ripe opportunities for global investors. In virtually all major, growing categories of consumer spending, Western brands are doing well, and will likely do better, as Chinese consumers preferences move upmarket to embrace high-quality, well-established global household brand names.

Harvard, its alumni and benefactors have a two hundred year history of investing and operating in China. So, there’s some deep institutional memory and fascination, not least with the risks and moral quandaries that come with the territory. The Cabot family, at one time among America’s richest, provided huge grants to Harvard funded in part by profits made opium running into China.

Harvard Management Company, the university’s $35 billion endowment, was an early and enthusiastic LP investor in China as well as large investor in Chinese quoted companies including Sinopec. Their enthusiasm seems to be waning. Harvard Management is apparently considering selling off many of its LP positions, including those in PE and VC funds investing in China.

This looks to be an acknowledgment that the GP/LP model of China investing has not regularly delivered the kind of risk-adjusted cash-on-cash returns sophisticated, diversified institutional investors demand. While China’s economy is doing great, it’s never been harder to achieve a successful private equity or venture capital investment exit. True, the number of Chinese IPOs has ratcheted up this year, but there are still thousands of unexited deals, especially inside upstart Renminbi funds.

While decent returns on committed capital have been scarce, the Chinese government continues to pour billions of Renminbi into establishing new funds in China. There’s hardly a government department, at local, provincial or national level that isn’t now in the fund creation business. Diversification isn’t a priority. Instead, two investment themes all but monopolize the Chinese government’s time and money — one is to stimulate startups and high-tech industry (with a special focus on voguish sectors like Big Data, robotics, artificial intelligence, biotech) the other is to support the country’s major geostrategic initiative, the One Belt One Road policy.

One would need to be visionary, reckless or brave to add one’s own money to this cash tsunami. Never before has so much government money poured into private equity and venture capital, mainly not in search of returns, but to further policy and employment aims. It’s a first in financial history. The distortions are profound. Valuations and deal activity are high, while returns in the aggregate from China investing will likely plummet, from already rather low levels.

Where should a disciplined investor seek opportunity in China? First, as always, one should follow the money — not all the government capital, but the even larger pools of cash being spent by Chinese consumers.

In China, every major consumer market is in play, and growing fast. This plays to the strengths of foreign capital and foreign operating companies. There are almost unlimited opportunities to bring new and better consumer products and services to China. Let the Chinese government focus on investing in China’s future. High-tech companies in China, ones with globally competitive technology, market share and margins are still extraordinarily rare, as are cash gains from investing here.

Meantime, as I reminded the HBS alumni, plenty of foreign companies and investors are doing well today in China’s consumer market. Not just the well-known ones like Apple and Starbucks. Smaller ventures helping Chinese spend money while traveling globally, or obtain better-quality health care and education options, are building defendable, high-margin niches in China. One company started by an HBS alumnus, a native New Yorker like me, is among the leading non-bank small lending companies in China. It provides small loans to small-scale entrepreneurs, mainly in the consumer market. Few in China know much about Zhongan Credit, and fewer still that it’s started and run by a Caucasian American HBS grad. But, it’s among the most impressive success stories of foreign investment in China.

Of course, such success investing in China is far from guaranteed. Consumer markets in China are tricky, fast-changing, and sometimes skewed to disadvantage foreign investors. For over two hundred years, most foreign investors have seen their fond dreams of a big China payday crash on the rocks of Chinese reality.

The rewards from China’s 35 years of remarkable economic growth has mainly — and rightly — gone to the hard-working people of China. But, there’s reason to believe that in the future, more of the new wealth created each year in China will be captured by smart, pragmatic investors from HBS and elsewhere.

 

As published by China Money Network

As published by SuperReturn

YouTube video of the full lecture to Harvard Business School alumni organization

 

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