China

Train Travel in China Retains Its Special Magic

for train

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


http://wikitravel.org/en/Ganzhou

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

Aisidi

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

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

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

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

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

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

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

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

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

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

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


Going Private: The Unstoppable Rise of China’s Private-Sector Entrepreneurs

Qing Jun-style, from China First Capital blog post

China’s private sector economy continues to perform miracles. According to figures just released by China’s National Bureau of Statistics, private companies in China now employ 70 million people, or 80 percent of China’s total industrial workforce. These same private companies account for 70% of all profits earned by Chinese industry. Profits at private companies rose 31.4% in 2008 over a year earlier, while those of China’s state-owned enterprises (so-called SOEs) fell by 16%. 

The rise of China’s private sector is, in my view, the most remarkable aspect of China’s economic development. When I first came to China in 1981, there were no private companies at all. SOEs continued to be favored sons, until recently. Only in 2005 did the Chinese government introduce a policy that gave private companies the same market access, same treatment in project approval, taxation, land use and foreign trade as SOEs. During that time, over 150,000 new private companies have gotten started and by 2008 had annual sales of over Rmb 5 million.   

These statistics only look at industrial companies, where SOEs long predominated. By last year, fully 95% of all industrial businesses in China were privately-owned. In the service sector, the dominance of private companies is even more comprehensive, as far as I can tell. While banks and insurance companies are all still largely state-owned, most of the rest of the service economy is in private hands – shops of all kinds, restaurants, barbers, hotels, dry cleaners, real estate agents, ad agencies, you name it. 

Other than the times I fly around China (airlines are still mainly state-owned) and when I pay my electric bill, I can’t think of any time my money goes directly to an SOE. This is not something, of course, I could have envisioned back in 1981. The transformation has both been so fast and so thoroughgoing. And yet, it still has a long way to go, as these latest figures suggest. Almost certainly, private company business formation and profit-generation will continue to grow strongly in 2009 and beyond. SOE contribution to the Chinese economy, while still significant,  grows proportionately less by the day. 

There once were vast regional disparities in the role of the private sector. Certain areas of China, for example the Northeast and West of the country, were until recently still dominated by SOEs. But, the changeover is occurring in these areas as well, and every year more private companies will reach the size threshold (revenues of over Rmb 5mn) where they will be captured by the statisticians. 

Equally, every year more of these private companies will reach the sort of scale where they become attractive to private equity investors. That happens when sales get above Rmb 100mn.  

Never in human history has so much private wealth been created so fast, by so many, as it has in China over the last 20 years. And yet, all this growth happened despite an almost complete lack of outside investment capital, from private equity and other institutional sources. This shows the resourcefulness of China’s entrepreneurs, to be able to build thriving businesses with little or no outside capital. Imagine how much faster this transformation would have happened if investment capital, and the expertise of PE firms, was more widely available. It is becoming more available by the day. 

China is primed, as it’s never been, for spectacular growth in PE investment over the coming 20 years.

Shenzhen’s Place in China’s Long History Mixing Sex and Commerce

Shenzhen night time, from China First Capital blog post

Shenzhen is such a relentless modern city that it’s often hard to discern the influence of 3,000 years of Chinese history and culture. The skyline is so futuristic that it often resembles the home planet of a higher civilization.(See photo above, of the City Center and buildings near CFC’s office). 

But, of course, this is still a part of China, with all its embedded messages and references to a history longer and richer than any other. It just takes a little wisdom to perceive it. I can’t lay claim to any such wisdom. Luckily, though, I have a friend here who has both the historical knowledge and scholar’s temperament to properly put modern Shenzhen into a more classically Chinese context. 

This friend, Zhen Qinan, has had a exemplary career in the financial industry, first as part of the working team formed in 1990 to establish the Shenzhen Stock Exchange, and then as head of a joint venture between four Chinese financial firms and Merrill Lynch, where he worked with leading Chinese companies like Huawei and Taitai Pharmaceutical. 

These days, Qinan is semi-retired. I try to spend time with him whenever I can. He’s warm and thoughtful, and I know now from experience that he’ll offer astoundingly wise insights to even my most mundane questions. How mundane? Over a meal at one of Shenzhen’s better Sichuan places, I commented on how lucky we were to be in a city with so many good restaurants, even by Chinese standards. 

If I had to come up with reasons why, I would settle for the fact Shenzhen is richer than other cities, and has a population drawn from all parts of China. Qinan, however, offered a much richer explanation, rooted in his learning and respect for Chinese history. 

Shenzhen is part of an unbroken tradition, reaching back at least 1,200 years, of commercial centers in China having the best food and also the most beautiful women. So, in their day, the great trading cities along the Grand Canal — Hangzhou, Suzhou, Yangzhou — were particularly renowned as places with the finest and most varied cuisine, and the most desirable women. This reputation has remained largely intact in those cities, even as the commercial locus of China shifted elsewhere. 

The reason then, and the reason now, is the same: in wealthier commercial cities, there’s a heightened appreciation, as well as larger audience, for the pleasures that money can buy. Qinan is from Xian, and to drive home the point, he drew the comparison for me between Shenzhen and his home city.

Xian was always a center of learning and political power, rather than a city with vibrant trade and a large, successful merchant class. As a result, the food, though still quite delicious, has always been a little more basic, less expensive, less intricate, less subtle than that of the trading centers to the east, along the Grand Canal. There’s just not enough money around to support a thriving community of top-quality chefs and restaurants. They migrate to where the money is. 

The same logic, of course, applies to why beautiful women are more prevalent in rich commercial cities in China. Traditionally, beautiful women went to Suzhou, Hangzhou or Yangzhou to find a rich patron to take them as a subsidiary wife. They then produced better-looking children, on average, so creating a virtuous cycle. Let the process run, uninterrupted, for several centuries and the results would be that the cities gained a reputation, probably grounded in fact, for having particularly good-looking ladies. 

To this day, Chinese will always aver that Suzhou has the most beautiful women in the country. I haven’t been to Suzhou in over 25 years, so I can’t say if the reputation is deserved or not. But, I do know that most Chinese believe this to be true of Suzhou, even though, of course, few will have ever been there to see for themselves. 

While concubinage is officially no more in China, there is still a similar process at work in today’s Shenzhen. Concubines are no more. Polygamy is outlawed. Today, the term is 二奶 “er nai”, or “second lady”. It’s analogous to a mistress. Shenzhen, I’m told, has more “er nai” than any other city in China. These tend to be pretty girls in their early 20s who come to Shenzhen from all over China, and often end up clothed, housed, fed and otherwise supported financially by an older, usually married man. Nowhere else in the world (not Paris, Milan, or other centers of mistress culture) have I ever seen so many dreary older men in the company of stunningly beautiful women. 

Shenzhen has more “er nai” both because it’s the richest city in China, and also because there are a lot of men from neighboring Hong Kong who either live or work here, during the week. Part of the standard “expat package” would seem to be taking a Chinese girl as a mistress. I’m told the going rate, in terms of monthly cash stipend, is at least $1,000 a month, with apartment, car and clothing budget extra. That’s about five times more than a woman of similar age can make working in one of Shenzhen’s factories.

One other difference from the China of yore: these women will usually return to their home village with quite a nice nest-egg, marry locally and start a family. This then creates a “job opening”. The man will now find a new “er nai” and so start again the process of clothing, feeding and housing an attractive woman new to Shenzhen.   

Food and sex. They are life’s two most basic drives, as well as the fuel that has kept China’s commercial centers buzzing for well over a thousand years.

 

 

Field Report from Guizhou – Where Cement Turns Into Gold

Blue vase in China First Capital blog post

 

While writing this, I was more than a little the worse for drink. Over dinner, I drained the better part of a bottle-and-a-half of Maotai, China’s most celebrated rock-gut spirit, which sells for a price in China that French brandy would envy, upwards of $80 a bottle. It’s one of the more pleasant occupational hazards of life in China for a company boss. As far as I can tell, some Chinese seems to view it as a matter both of national pride and infernal curiosity to get a Western visitor plastered. By now, I know well the routine. I sit at a table surrounded by people generally drawn together with a common purpose – to treat me solicitously while proposing enough toasts to render me wobbly and insensate.  

As far as career liabilities go, this is one I can happily live with. I always try to eat my way to relative sobriety.  I’m in Guizhou Province. (I’ll wait five minutes while most readers consult an online atlas.) The food here is especially yummy – intense, concentrated flavors, whether it’s a chicken broth (I’m informed it’s so good because local chickens have harder bones than elsewhere in China), pig ear soup, a simple stir-fried cabbage, or a dizzily delicious dish of corn kernels from cobs gathered nearby. So, with each glass of Maotai (which started as thimble-sized and then were upgraded to proper shot-glasses) I tried as best as I could to wolf down enough solid material to hold at bay the nastier demons of drunkenness. 

Did I succeed? I believe so. At least in part. My Chinese didn’t sputter and seize up like a spent diesel engine, and my brain could just about keep up with the typhoon of sounds, smells and data points of the humongous cement factory I toured after dinner. 

If you can find a way to get to Eastern Guizhou, or Western Hunan, do. You’ll likely travel, as I did, along an otherwise empty but fantastically beautiful motorway, past the squat two-stored dwellings of the local Miao people, and the inspiringly eroded prongs that make up the local mountain-scape. If you are even luckier, and share my peculiar taste of what constitutes an ideal weekend, you might just end up, as I did, at the largest private cement company in Guizhou. It’s called Ketelin, and it’s to capitalism what a Titian portrait is to fine arts: drop-dead gorgeous. 

With Maotai bottles drained, and dinner inhaled, I went on a walking tour of the Ketelin factory, on a warm, breezy and clear summer night unlike any I’ve ever witnessed lately in smoldering Shenzhen and Shanghai. My host here is the company’s founder and owner, 宁总, aka Ning Zong. If I had to specify a single rule to determine how to discern a great entrepreneur, it might be “his favorite form of exercise is to walk 20 laps around his humming factory every night after dinner.” Such is the case with Ning Zong. Another great indicator, of course, is to have a business where customers are lined up outside your door, 24 hours a day, waiting to buy your product. That’s also true here. There is a queue of large trucks outside the front gate at all hours, waiting to be filled with Ketelin cement.  

Ning Zong is out here, in what is considered the Chinese “back-of-the-beyond”, and has built the largest private company in the province. And that’s just for starters. His only goal at this point is to build his company to a scale where it can serve all its potential customers, with the highest-quality cement in this part of China. This being China, that’s a very substantial, though achievable vision. He’s already built a state-of-the-art factory, on a scale that few can match anywhere else. And yet, there’s still so much unmet demand, not just in Guizhou, but in nearby provinces of Sichuan, Hunan and Hubei that Ning Zong’s burning desire, at this phase, is to expand his business by several-fold. 

That’s why I’m here, to work with him to find the best way to do so, by bringing in around $15 million in private equity. I have no doubt whatsoever that his plans and track record will prove a perfect match for one of the better PE firms investing in China. Whichever one of them gets to invest in Ketelin will be very fortunate. This facility, and this owner, are both pitchforks perfectly tuned to the key of making good money from the boom in China’s infrastructure development. Among other customers, Ketelin supplies cement to the big highway-construction projects underway in this area of China. 

 Is Ketelin an exception, here in Guizhou?  I don’t really have the capacity to answer that. Guizhou is generally considered by Chinese to be the also-ran in China’s economic derby, poorer, more hidebound and more geographically-disadvantaged than elsewhere in southern China. Water buffalo amble along the middle of local thoroughfares, and field work is still done largely without machines, backs stooping under the weight of newly-gathered kindling. While Guizhou is poor compared to neighboring Hunan and Sichuan, poor regions often produce some of the world’s best companies:  think of Wal-Mart and Tyson’s, both of which got started and are based in Arkansas, which is as close as the US has to a province like Guizhou.  

Guizhou, from what I’ve seen of it, is breath-takingly beautiful, with clean air and little of the ceaseless hubbub that marks the cadence in big cities like Shenzhen and Shanghai. This is China’s true hinterland, the part of this vast country that eminent outsiders have long said was impossibly backward and so beyond the reach of modern development.  

They are wrong, because what’s right here is the same thing that has already generated such stupendous growth in coastal China. It’s the nexus of vision and opportunity, of seeing how much money there is to be made and then doing something about it, to claim some of that opportunity and money as your own. Ning Zong has done so, on a scale that inspires awe in my otherwise Maotai-mangled mind. 

Come see for yourself.

 

Most Thankless Well-Paid Job in China: Market Forecaster

Calligraphy from China First Capital blog post

 

Looking for a new career with plenty of growth potential, and low standards for success? Here’s one to consider: China market forecasting. Rapid economic growth and urbanization are both creating huge demand for market research predicting future areas for opportunity and profit. Pay is good. But, there’s another aspect to the job that will appeal to many: repeated failure is no obstacle. 

Market research is, of course, a treacherous profession anywhere. Predicting the future always is. But, in China, market forecasting is particularly hard. It’s mainly been distinguished by how often, and by how much, the predictions turn out to be wrong.  Market segments in China grow so quickly, so explosively, that it makes a fool of just about anyone trying to guess its economic future. 

I’m reminded frequently of this these days. We’re working on a complicated infrastructure financing. One of the central components of the deal is a now two-year-old forecast of car purchases and driving patterns in China. The forecast was prepared by a respectable outfit in Hong Kong, and my guess is that they charged quite a lot to do it. But, looking at the numbers now, they seem ridiculous, like numbers pulled out of thin air – which is probably what they were. The actual growth of car traffic and car purchases over the last two years in China has been much higher than these predictions. In other words, the forecasts weren’t off by a mile, but by a light year. 

Given that track record, it’s surprising these market forecasters can continue to pay the rent, let alone prosper. And yet they do. It’s a familiar paradox: we know projections are often wrong, and yet many business decisions, often with billions of dollars at stake, are made on them. It’s probably connected to what’s sometimes called “the scientific theory of management”, which tried to systematize complex business decisions into quanta of data.

It’s the same approach taught in business schools, and is certainly one of the reasons so few MBAs make successful entrepreneurs. A hunch is often a better tool in business than a spreadsheet. Indeed, I’ve yet to meet a successful entrepreneur who ran his business, or started out in life, based on a market forecast. 

In our case, we’re stuck using the projections on auto traffic, because there’s nothing else available. So, we send them out to investors with the guidance to take the projections with a grain of salt. If not a fistful. This creates its own set of problems, including frequently the request to do a new set of “up-to-date” projections. In other words, the solution to bad projections is – you guessed it — to commission more projections. As I said, it’s a great job, being a market forecaster. 

The errors in a bad projection become cumulative. The longer the time line, the more distorted the projections will usually become.  In our case, we’re using a 25-year projection. So, these sizable errors in the first years will propagate across time. Year by year, the forecast becomes less and less tethered to reality, like the NASA space probe that escaped its flight path, lost contact with Mission Control and ended up, as far as we know, drifting in galactic space. 

Most markets outside China are more stable, so projections, even when they are wrong, don’t diverge quite so much from the actual situation.  Car sales are a great example. They are booming in China. Everyone I meet in Shenzhen, across all social classes, either has a car, is taking driving lessons or plans to begin soon. GM just announced its car sales in July in China rose 77% from a year earlier. 

For several months this year, China has been the world’s largest car market, outpacing the US. A quick web search turns up a supposedly highly credible forecast, from 2008, claiming that China is “on track to become the world’s largest car market by 2020, according to J.D. Power.” In other words, J.D. Power said it would take 12 years. It didn’t even take two. 

The recession in the US is a contributing factor, of course. But, the forecasts also, quite obviously, guessed very wrong about the growth rate of auto sales in China.   These wrong guesses have real-world consequences, because they can impact today’s decisions on investment and employment. In our case, by underestimating the growth rate of auto sales over the last two years, the projected revenues over 25 years from a $300mn toll expressway project in China also come in much lower. How much lower is anyone’s guess. Mine is that the revenue projections are off by at least 80% over the 25 years, and that this particular project will generate a profit of over $2 billion over that time, rather than the $1.2bn in the forecast built on the Hong Kong market researcher’s two year-old guesses. If so, the annual return on investment goes from the outstanding  to stratospheric. 

Here are my two projections: despite a record often unblemished by success, market forecasters in China will continue to ply their particular craft, collect their fees, sell their reports, and mainly miss the mark. Meanwhile, markets in China will continue to grow very fast, for a very long time. 

 

 

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In Global Private Equity, It’s China as #1

Qing ceremonial ruyi in China First Capital blog post

 

I spent the day in Shanghai on Friday, attending a private equity conference, and giving one of the keynote speeches. I’d thought about giving my talk in Chinese, but in the end, the discretion/valor calculus was too strong in favor of using my native language. I was one of only two speakers who used English — or in my case, a kind of half-bred version of miscegenated Mandarin and English. The rest of the conference participants — including two other Westerners and dozens who participated in panels – all spoke in Chinese.  It was quite humbling, and I’m determined to use only Chinese next time around. 

Shanghai has, so rapidly, become a truly international city. It’s one thing to say, as Shanghai’s leadership has been doing over the last decade, that Shanghai will surpass Hong Kong as Asia’s largest, most vibrant international financial center. It’s quite another to achieve this, or even make significant headway, as Shanghai has done. So many of the factors aren’t under the control of government authorities. They can only create the legal and tax framework. In the end, the process is driven by individual decisions made by thousands of people, who commit to learning English and mastering the basics of global finance. All are staking their careers, at this point, on Shanghai’s future as a financial center. 

It’s a version of what economists like to call “network effects”: the more individuals who commit to building Shanghai as a financial center, the more each benefits as the goal comes closer to fruition. On Friday, in Shanghai, I could see this process vividly displayed in front of me, of how widespread knowledge of English has become: of the 200 or so people who heard my talk, at a glance 99% were Chinese, and only a handful needed to use the translation machines.

My talk was titled “Trends in Private Equity: China as #1”.  In Chinese, it’s “私募股权投资:中国成为第一”

The basic theme was how “decoupled” China has become from private equity and venture capital investment in the rest of the world.  China is in the ascendant, and will remain that way, in my opinion, for the next ten years at least. It will be years before the PE and VC industries in the US reach again the size and significance they enjoyed a year ago. China, meanwhile, is firing on all cylinders.

There are many reasons for China’s superior current performance and future prospects. In my talk, I focused on just a few, including principally the rise over the last decade of a large number of outstanding private SME. They are now reaching the scale to raise successfully private equity and venture capital funding.

It’s another example of positive network effects: the Chinese economy is undergoing a shift of breathtaking significance: from dependence on the public sector to reliance on the private sector, or in my shorthand, “from SOE to SME”. The more successful SME there are, the more embedded this change becomes, and the more favorable overall circumstances become for newer SME to flourish. 

Here’s one of the slides from my PPT that accompanied the talk: 

—  Global Private Equity: in trouble everywhere except China
全球私募股权投资:除了中国以外的其它市场都陷入困境

—  Recession; Credit Crisis; Over-leveraged ; closing IPO window

—  经济衰退,信贷危机,杠杆率过高,几近停止的IPO

—  Most PE firms dormant, can’t raise new equity or new debt; industry contracting

—  PE公司无法进行股权和债权融资,几乎处于休眠状态,行业萎缩

—  China is the exception:  strong economic fundamentals; shift from export to domestic market;  shift from state-owned to private sector;  rise of world-class SME

—  中国的独特之处:强劲的经济增长,从出口导向到关注国内市场的转变,经济从国有企业到私营企业的迁移, 富有成为世界级企业潜力的中小企业

 For anyone interested, the whole speech is available, in Chinese, at http://news2.eastmoney.com/090717,1117,1134998.html

 

 

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Voices From the Abyss: the Crooked Dealmakers Write Back, Offering to Work Together — and Why I’ll Always Say No

One of the earliest bonds issued in China     One of first bonds issued in China

 

My last two posts have elicited an unusual amount of feedback. The posts deal with the underhandedness, deceit, negligence and shameless greed of so many of the advisors, lawyers and investment bankers doing IPOs of Chinese companies outside China. 

It’s always nice to get mail. Well, mostly. A lot of the comments and emails were complimentary. But, probably half of the email traffic came from various ethically-challenged financial advisors, brokers, lawyers and fixers asking to work with me on their different China IPO schemes. All of them were, from what I could tell, the sort of transactions I railed against in my recent posts – particularly OTCBB listings, reverse mergers. In other words, the same people I would like to see neutered wrote to see if I wanted to go whoring around with them. 

I even got invited to a reverse merger conference in Las Vegas — hard to decide which part I’d least prefer, the conference or the setting.

In one sense, this is more than a little depressing. Either these guys hadn’t understood what I wrote, or figured I would be a useful shill for them somehow: “Look, we even convinced that guy Fuhrman who criticized OTCBB listings to get in on the game.” If so, they seriously miscalculated. 

There is another, more hopeful explanation for these wildly off-target emails. I know that times have gotten very tough for this whole crowd who made all the money wrecking what were often quite promising Chinese SME companies by convincing them to do bad IPO deals. The stock market, of course, is still limping, and most IPO activity (both the good and the debased) has all but dried up. 

Perhaps, then,  these emails to me are a last dying gasp, a tangible sign that the low practices that flourished over the last ten years are doomed. That would be great news, that bad advisors are contacting me as a last resort, because they’ve tried everything else and failed to revive a once-lucrative franchise fleecing good Chinese companies. 

You know what they say about things that sound too good to be true… We’ll see. 

For the record, as well as for those who may harbor any lingering hope I might be able to revive their business doing OTCBB listings or reverse mergers, I wanted to set out, clearly, what it is we do:

  • We only work with some of China’s best, fully-private SME
  • We only work with them on the basis of a long-term partnership, and we will only succeed financially, as a firm, if our SME clients do so. To assure this is the case, we take a significant part of our fees in shares that are likely to be illiquid for 3-5 years
  • We focus on raising our SME clients pre-IPO capital from any of the 50 or so Top Tier Private Equity firms active in China, and providing other financial advisory services over the longer-term, including subsequent capital-raisings, M&A work
  • In most cases, our clients will remain private for at least 2-3 years from the time we begin working with them
  • We are never involved in any kind of “rush to market” IPO, or any deal involving an OTCBB listing, reverse merger, SPAC, PIPEs

Now, I can imagine what a few of my recent email correspondents must be thinking, “What a dope. Why would anyone bother with this ‘high integrity’ stuff when you can make a fortune pushing Chinese companies through the IPO meat grinder?” 

That sort of approach, of grabbing fees while mutilating your client,  is so far removed from what I built China First Capital to do that it’s like asking a ballerina to enter a demolition derby. I’m lucky (or crazy, take your pick), but I didn’t start CFC with the primary motive of making money. I started it for three reasons:

(1) to have a chance, after achieving some career success elsewhere, to give something back to China, a country that’s been the deep and abiding love of mine since I was a little boy;  (2) to work alongside world-class founder/entrepreneurs, and help them get the financing they need to go farther and faster, and so become industry leaders in China over the next 10-20 years; and (3) to provide Chinese SMEs with at least one alternative to the sort of noxious advisory firms that have preyed on them for over 10 years. 

It’s demanding work. We refuse to cut corners, or get involved with a deal because there’s easy money to be made. We view our clients as our partners, not as a meal ticket.  In all these ways, I know I come from a different planet than the guys who arrange OTCBB deals, reverse mergers, or other quickie IPOs.

There’s another difference: I feel profoundly lucky every day to do what I get to do. I doubt they do. 

 

 

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