Most people know about Muhammad Yunus’ Grameen Bank, what with him being a Nobel Peace Prize winner and all. But there’s also an organization called Grameen Foundation, which, although it has no legal ties to Yunus’ bank, nevertheless follows his principles. It’s not a source of capital; it’s more of a lubricator for capital and expertise to flow from people who have it to people who don’t have it but need it.

The EU Chamber of Commerce in Shanghai arranged for a presentation by Grameen Foundation’s East and Southeast Asia Regional Coordinator, Kate Druschel, about its activities in China. I wrote about China’s nascent venture philanthropy scene for this month’s magazine, so I was particularly interested to hear that Grameen Foundation would be ramping up its activities here.

As usual, we give you the highlights:

(more…)

Apologies for the long silence, dear readers. The monthly period of chaos known as ‘production week(s)’ engulfed us recently, but we’re now ready to resume regular service and we plan not to have further disruptions.

Now we would like to bring your attention to the curious case of Richard Ong of Goldman Sachs. Ong, a Malaysian Chinese, was not allowed his promotion to head Goldman’s Beijing joint venture, Goldman Sachs Gao Hua Securities, because he failed a government mandated Chinese-language proficiency exam.

That seems odd. Ong was co-head of investment banking in Asia and headed Goldman’s Singapore office before moving to Beijing. He was clearly well-qualified, and, at the age of 42, also on a rapid ascent up the ranks. Goldman is supposed to be the world’s most profitable investment bank, and enjoys special status in China, since it’s one of only two foreign brokerages with management control over its JVs here (the other is UBS). According to the FT, many exemptions have been given in the past to foreign executives whose Chinese wasn’t up to scratch.

So what gives? Why wasn’t one of the most powerful investment banks in the world allowed to name its candidate to head an important division? Why was it instead embarrassed publicly, having its choice blocked by a technicality that showed the candidate was incompetent in the language of the host country?

Maybe it was office politics. Zha Xiangyang, the Goldman Gao Hua’s former deputy CEO, was elevated to the top job. Maybe it was, as the foreign press suggest, a case of the government enforcing its Chinese-language proficiency rules.

But can we glean a clue by examining Richard Ong’s resume? According to the FT again, Ong was “instrumental” in Singapore government investment vehicle Temasek’s purchase of ousted Thai PM Thaksin Shinawatra’s Shin Corp last year. But just how instrumental was he? The Nation, a Thai paper, noted that Richard’s brother, Charles Ong, is Temasek’s head of overseas investment strategy and “right-hand man” to Temasek chief Ho Ching. According to Goldman’s website, its Singapore office counts Temasek as a “key client”.

The Temasek-Shin Corp deal went through, but triggered a series of events that led to a military coup against Thaksin’s government and an US$820 million paper loss for Temasek at one point. Because Temasek is seen as a proxy of Singapore’s government (although ostensibly independent), with close links to the ruling People’s Action Party (Ho Ching is Prime Minister Lee Hsien Loong’s wife), the purchase of Shin Corp caused alarm in Thailand. Thais saw the deal as Singapore’s government getting too close for comfort.

China is now planning a foreign exchange investment vehicle, which it said is taking some cues from Temasek. But maybe Beijing, after noting Thaksin’s political demise and the extreme volatility that accompanied Temasek’s deal, thought it unwise to have a key Temasek adviser so close at hand in the capital? There’s been no word on Richard Ong’s next posting that we could find.

Highlights from the last week of China business news:

Japan finds 5 million tubes of Chinese antifreeze toothpaste and promptly recalls them; a number of august banks get caught fueling the mainland’s stock and property markets with illegal loans and hot money.

Read on for the details .

(more…)

It appears the Chinese management merry-go-round is turning once again. Sinopec Chairman Chen Tonghai has resigned, citing “personal reasons,” which may or may not transpire to be “serious breaches of discipline.”

Meanwhile, China Banking Regulatory Commission employees Tang Shuangning and Xu Feng are to become chairman of China Everbright Group and president of Shanghai Pudong Development Bank respectively. Xiang Junbo, a deputy governor at the People’s Bank of China, is taking over as president of the Agricultural Bank of China.

No underhanded behavior tied to these last three personnel changes – they’re being made, well, because the government feels like it.

I wrote an article recently (for the upcoming July issue of CER) about the role of non-executive independent directors on the boards of listed Chinese companies. The appointment of senior executives cropped up because it is one area where – at state-owned enterprises, at least – independent directors can’t expect to have much of a say. On issues like this, the Communist Party delegates on the board rule the roost.

It makes for interesting situations in terms of governance.

First of all, it doesn’t do wonders for corporate transparency and serves as a reminder that, particularly in sensitive industries, policy is set by Beijing. One would like to think that an increasingly business-minded Beijing’s thinking is increasingly in tune with Western corporate philosophy, but there are no guarantees.

Secondly, who comes in as the replacement? The guy taking over from Chen at Sinopec is Su Shulin, a former vice-president at key rival PetroChina, which naturally leads to questions about strategy and relations within the top echelon of management.

People I spoke to for the article gave a range of responses. One foreign independent director on the boards of a number of Chinese firms argued that the state, as major shareholder, was entitled to have the main say on appointments. And this merry-go-round isn’t necessarily a bad thing at Chinese firms …

“Companies can become bureaucratic and stale over time. A change-around in leadership is not without its merits. You might come to one answer because it is the standard approach but look deeper and there might be some rationale there. You have to look at it on a case-by-case basis.”

A foreign banker, responsible for overseeing his employer’s investments in China, was more concerned about the unpredictability factor. He also had a horror story to tell:

“They [another foreign bank] heard rumblings that the chairman of the Chinese bank they had invested in was not getting full support and so flew to Beijing to speak to the bank and the regulators, saying ‘This is our guy’. They were given reassurances but then the chairman was sacked while they were on the plane going home.

“Senior management positions are not a real board issue in China.”

Much is made of the cultural differences between China and the West, but some things are the same the world over. Unwanted gifts, for example.

According to state media, China’s pawnbrokers have been doing a roaring trade since Chinese New Year - just as their Western counterparts do in the post-Christmas period.

With traditional food-based gifts being replaced by consumer durables, it appears that pawnshops trump second-hand markets when it comes to realizing cash value.

All in all, it has been a good year for China’s pawnbrokers, with turnover rising 40% to US$12.3 billion, according to Ministry of Commerce figures.

The principal driver of this growth? The rebound in the country’s stock markets, of course, as punters searched for funds so they could cash in on the 130% gain posted by the Shanghai Composite Index during 2006.

The government has raised banks’ reserve ratios in order to limit lending; it has also told banks to do background checks in a bid to stop so-called auto loans being channeled straight into shares.

What next? An embargo on people pawning their Playstations? Or emergency measures to prevent the sale of grandmothers?

On the face of it, the proposed pilot scheme allowing certain Chinese securities firms to invest their own capital is a good move.

Rather than live or die according to market fluctuations, they could, for example, make a sensible investment in a meat processing plant, thereby opening another, more sustainable source of income.

The problem is that, historically, letting a broker invest his firm’s own money has been akin to issuing checkbooks to toddlers and releasing them into the nearest toy store.

China’s 100-plus brokerages are said to have made combined profits of US$3.3 billion in 2006 on the back of a 130% rise in the domestic stock markets. Set against the US$2.6 billion net loss of 2004, which came as the Shanghai Composite Index was on its way to a six-year low, it shows the extent to which brokerages are beholden to market movements.

However, it’s worth pointing out that the single biggest source of losses was proprietary trading - trading on one’s own behalf - as brokers created webs of false accounts to hide their losses.

This behavior led to a government crackdown, with all proprietary trading accounts separated from standard accounts and all trades using own funds reported to regional head offices.

Diversifying income streams is exactly what needs to happen in China’s securities industry - indeed, stock index futures are expected to do just this as they give brokers a chance to profit on a downturn.

However, such measures will only be successful if they are backed up by tighter risk control. Brokers may be on a roll now but it remains to be seen whether they can stop treating the market as a casino.

This is the fifth in a series of entries that Alfred Romann will post from India in the coming weeks.

China is on the lips of just about every Indian with money to invest. And the setiments are less than flattering.

The way in which a decline in the Shanghai Stock Exchange last week contributed to falls around the world is a sign of the interdependence of the global financial markets as well as the emerging maturity of China’s bourses.

India didn’t escape the carnage and the drop was felt, deeply, in Delhi and Mumbai.

“Budget jitters, Chinese flu send Sensex plunging,” ran the headline on the front page of Thursday’s Hindustan Times. The story was the only one on the page not dominated by the country’s annual budget, which was presented a day earlier.

“Though markets did react negatively to the budget, you can put most of the blame of Tuesday’s crash on China, which triggered heavy foreign institutional investor outflows,” Deven Choksey, of KR Choksey Shares and Securities, was quoted as saying.

If nothing else, the global drop this week underscored the herd mentality that seems to dominate the markets.

Fund managers often look at the region as a whole and move in and out sometimes with little regard for the individual strengths or weaknesses of individual markets. On Wednesday in India, the Bombay Stock Exchange dropped 4.01% and the National Stock Exchange’s Nifty index lost 148.6 points to close at 3,745.

Talk of China’s stock markets was actually a bit of a change of pace in India, though. The Indian on the street prefers to complain about floods of cheap Chinese goods while the big-business types look at the opportunities inherent in the growing relationship between the two countries.

There is no one to fault for the ups and downs of the market – at least no one that can be held to account. Nevertheless, the drop did little to endear China to the average Indian, who has little trust, or love, for the Asian neighbor.

Yesterday’s 8.8% fall in the Shanghai stock market was the largest in 10 years - surpassed, somewhat ironically, by the 8.9% decline on February 18, 1997, the day former leader Deng Xiaoping died.

It was, after all, Deng’s vision and reforms that were initially responsible for the phenomenon we have now - a Chinese stock market that can move markets in other countries. Korea, Japan, Australia, Europe and the US all took a hit as a result of the sell-off in China.

Admittedly, the US decline - the worst since September 11 - was also driven by bad economic news at home.

It’s said that China’s fall was initiated by institutional investors cashing in on gains made in the last month, with the Monday highpoint - when the Shanghai Composite Index passed 3,000 for the first time - becoming Tuesday’s turning point.

Deutsche Bank cites rising CPI inflation, which increases the likelihood of an interest rate hike, and government moves to cut illegal fund flows into the A-share market as the key contributors.

But really this is the big correction everyone has been saying is due for several months now, when overvalued Chinese stocks return to something nearer the norm. No reason not to have nightmares about the state of the Chinese economy as a whole or to stop being bullish about the country’s near-term prospects.

As an afterthought, the Deutsche Bank report says: “Given that almost all the catalysts for the A-share market correction are domestic in nature, we do not think they should have a significant spill-over effect on markets in other countries. If it occurs, we consider it an over-reaction.”

China the global ripple-maker then, with the waves still to come.

China is intent on keeping its markets under control. In a couple of simultaneous events Thursday, Beijing underlined a ban on personal loans to buy stocks and state media aired an interview with a well known investor who said the market is approaching a bubble.

As expected, the markets went tumbling down. Shanghai slid, breaking a week-long bull run, while Shenzhen and Hong Kong also dropped. (By midday on Friday the Hang Seng Index was down more than 400 points, negating hard-earned gains throughout the week.)

Still, it will take more than a couple of announcements to break the fevered pitch. In Shanghai, people are lining up to buy shares, now confident in local markets following years of disappointment. In Hong Kong, as capitalist a city as there ever was, investors are as willing to dip a toe in as they always have been.

The pitch hit me in the face when I walked into a branch of the smallish Wing Lung bank in downtown Hong Kong. Few foreigners use their services, as evidenced by the literature in Chinese and lackluster customer service. What was unique was the open area in the back of the branch under a sign “securities services”.

The square space was lined by five computers that displayed stock quotes. Groups or six or seven people crowded each machine, cheering stocks up or down much like one would cheer a horse at the track.

Judging by the state of the market at closing time on Thursday (the Hang Seng went up and down to close in negative territory), the cheering did little. But the ultimate reality of feverish investment is hard to ignore.

Stock markets in Hong Kong and Shanghai are jumping up and down like a kid on a trampoline.

For the last few days, Hong Kong stocks have taken something of a beating, returning to pre-New Year’s Day levels. Mainland stocks, however, were all the rage on Tuesday, led by China Life’s spectacular A-share listing.

During the first day of business after Christmas and again in the New Year, the Hong Kong Stock Exchange climbed more than 400 points while the Hang Seng Index topped the psychological 20,000 barrier.

On Thursday, the Shanghai Stock Exchange jumped up almost 6% and then dove back to close only 1.5% higher. On Friday, the Hang Seng index continued a drop that started Thursday but, as these words were written, seemed to be hanging in just above the 20,000 mark.

The old story about the Rockefeller scion that pulled out of the market after his shoe-shine boy gave him some stock tips is on everybody’s lips.

Taxi drivers and migrant domestic workers in Hong Kong are now investing on margin, borrowing money to buy stocks and get in on oversubscribed IPOs, one market watcher said.

Meanhiwle, analysts repeat time and again that there is too much liquidity. And, time and again, they follow that up with reassurances that fundamentals are still strong and getting stronger.

Yet, price-to-earnings ratios in Chinese insurance companies’ Hong Kong H-shares, typically an investor favorite, are at stratospheric levels. The stocks may be significantly overvalued but they are not the only ones - telecoms are getting up there and the once undervalued Chinese banks are following suit.

“People in Hong Kong have short memories,” said one acquaintance who follows the markets. “They don’t remember what it’s like to be in a crash.”

Many a trader got a nice surprise on January 2 and many a trader cashed in on January 3, causing the Thursday drop in Hong Kong. Friday was underlined by another drop and a slump in the US caused every market in the region to slump with it. Tuesday, however, things seemed to be back to the green across the region, except in Hong Kong, which started out on a high and closed in a low.

Still, the ride is great for now but, sooner or later, something will happen to bring everybody to their senses. New currency regulations in Thailand? A shock in Mumbai? An unexpected decision in Shanghai? God forbid, an earthquake in Tokyo?

Those who can ride the crash or slump will nervously laugh it off.

Investors who look at buying on margin as a sign of manhood will feel the pain as will the much less capitalized taxi drivers and domestic workers who have caught stock fever and are betting everything they have, and some stuff they don’t, on a fickle and often intractable animal.