Highlights from the last week of China business news.

IPO safe havens
The A-share market isn’t doing so well these days, and regulators have their hands full. It wasn’t so long ago that the CSRC was encouraging mega-IPOs to soak up liquidity in the soaring A-share markets. Now, they’re saying the opposite, telling Ping An, for example, to cut back its planned share and bond offering. Investors are piling into IPOs and ditching buying on the secondary market, as China Railway Construction Group’s US$3.1 billion Shanghai listing proved - the retail tranche was 155 times oversubscribed. The chronically underpowered SEPA actually aided the CSRC by delaying 10 domestic listings last year due to non-compliance with environmental rules. Two of the companies seeking listings have yet to be approved for IPOs.

Pitching in
Everyone needs China’s help these days. US Secretary of State Condoleezza Rice came to Beijing to ask President Hu Jintao to exert more pressure on recalcitrant neighbor North Korea to get rid of its nuclear program. There’s also Sudan, China’s troublesome trading partner. The Chinese special envoy has been dispatched to the country to find a solution to its ongoing civil strife (some say genocide). If you remember, he got on the plane just days after Steven Spielberg (who did Schindler’s List - and ET) quit his advisory role with BOCOG to escape being tarred by the genocide brush. As the Sudan-Olympics-genocide pressure builds, China will be looking for ways to relieve the pain. One of those remedies is to resume bilateral human rights talks with the US: during Rice’s visit, China said it was interested in doing just that. We speculate that this announcement probably didn’t rank among the personal highlights of the meeting for President Hu.

You can also get the weekly news by e-mail. Just subscribe here.

Bill Dodson at the This is China! Blog makes an interesting point on companies trying to escape local environmental regulations by relocating to the next, less demanding county in this post (quoting from this Reuters article on the same subject):

Despite the trend of polluting factories moving inland to provinces such as Hunan, Guangxi, Zhejiang and Jiangxi, there have been examples of authorities hitting back.

That implies in my mind that as Western companies expand into the interior of China, they need to do their due diligence about just who their neighbors are. And don’t just necessarily follow the big names into the small cities: the Central Government recently tagged some MNCs like Pepsi, LG and Samsung for fouling the environment.

A new IPE report, written in collaboration with investment bank CLSA and green group WWF, found Chinese public and media pressure was playing a crucial role in filling a void in official enforcement, with complaints made to environmental authorities increasing 30 percent annually and hitting 600,000 cases in 2004.

A modern-day Chinese society that values environment over making money: now that’s downright anti-socialist with Chinese characteristics.

Highlights from the last week of China business news.

Icy chaos
A devastating winter is taking its toll on China. The civil affairs ministry has estimated exactly how much damage, in financial terms: US$4.5 billion. Dozens of people have lost their lives in the treacherous weather weather, the worst in 50 years. Electricity grids, roads and railways are overstretched as unusually heavy snow and rainfall batter the country. This has been compounded by the impending Lunar New Year holiday, which will see millions of workers returning to their home provinces by road and rail. The weather has left hundreds of thousands stranded: In Guangdong, 200,000 people claimed ticket refunds at the Guangzhou railway station, while another 200,000 continued to try their luck waiting. The country’s top leaders appear to be in full swing. Premier Wen Jiabao popped up at the Changsha railway station - and, just 24 hours later, at Guangzhou station - to show his support for stranded travelers. The People’s Liberation Army has reportedly mobilized half a million troops to clear roads of snow. China’s top meteorologist has said that snow and rainfall will ease on February 2, although it will still take weeks to get transport and electricity systems back to normal capacity.

Consume, consume!
It’s all about consumption. For deprived doughnut enthusiasts in China, Dunkin’ Donuts announced it will open more than 100 stores across the country in the next 10 years. For now, however, it’ll start with less than 10 stores in Shanghai. Just in case doughnuts weren’t sufficiently nutritious, McDonald’s said it will open 125 new restaurants in China this year. Half of those will feature drive-through windows - a sure way to tap into that lucrative middle-class market. These corporate announcements are bolstered by figures from the National Bureau of Statistics that show domestic consumption has overtaken foreign investment as a share of GDP in 2007. Bring on the doughnuts and burgers, we say.

You can also get the weekly news by e-mail. Just subscribe here.

The Financial Times reported today that China’s National Social Security Fund (NSSF) has held talks with three US private equity (PE) firms with a view to buying a stake of nearly 10% in one of them.

Given Beijing’s long-held ambition to boost outbound investment this is hardly surprising. China’s desire to increase capital outflows has gained momentum this year with China Investment Corp’s (CIC) investment in PE group Blackstone (See our July 2007 piece on it), CITIC Securities announcing a tie-up with Bear Stearns and ICBC moving in on both Seng Heng Bank of Macau and South Africa’s Standard Bank.

What is also unsurprising is the concern expressed in the West at the nature of some of these investments. Politicians and industrialists in the US and Europe may be coming around the the fact that the countries that have gobbled up all their forex are now trying to put it to constructive use; but the opaque management of the sometimes politically-motivated sovereign wealth funds doing the buying is proving a little harder to swallow.

So where does the NSSF come into this? CIC’s investment strategy may be a closely guarded secret but its ultimate aim - to realize greater returns on China’s foreign currency holdings, with half an eye on strategic resource purchases - is quite clear.

The NSSF is generally referred to as the lender of last resort for China’s wobbly social security network. But what is this “last resort”? Since it was founded in 2000, various theories have been put forward: it is a strategic reserve; it is to be spent in provinces where poverty is most prominent; it is for use once China’s demographics become so twisted that each worker will have to feed a string of elderly dependents; it is only there to support the pension system; it is a cash pile for welfare in general, including unemployment benefits, medical cover, and so on.

Will the NSSF do all these things? Will it do none of them? This fund has been given license to invest abroad, it has been allocated chunks of big-money IPOs, yet we don’t know exactly why it is there. Ultimately, this isn’t an issue for suspicious foreign trade partners. It is an issue for the Chinese people who are supposed, at some time and in some way, to rely on it for support.

We were recently contacted by Ogilvy, which is responsible for Danone’s PR in China, seeking to clarify what it believed were misconceptions in Steven Dickinson’s article (which appeared in September’s CER) about the French company’s problem-hit joint venture with Chinese firm Wahaha. You can read Ogilvy’s full, unedited response, and Dickinson’s (of China Law Blog) analysis of the dispute between the two companies that appeared in September’s CER.

Highlights from the last week of China business news: Cathay’s attempt to block SIA’s deal with China Eastern gets blocked by the big boys in Beijing; Foreign investment banks are finally allowed to buy stakes in local securities firms.

(more…)

The newly revitalized Shanghai Foreign Correspondents’ Club (facebook link) has been organizing some interesting and useful events lately, thanks to a new board.

It invited Kerry Brown, a scholar (now a fellow at the think tank Chatham House in the UK, though he has even lectured at Inner Mongolia University), former diplomat and now author of a new book on our favorite subject, for a talk at Arch on Changshu Lu. It’s called Struggling Giant: China in the 21st Century, and it’s published by Anthem Press.

The venue was rather cramped, but the talk went well - Brown made a few very good points about China from an outside observer’s point of view. We’ll be running an interview with him soon about his ideas on China. Here are some key points from his Shanghai FCC talk:

-China’s strategy of inviting foreign investment was primarily to facilitate technology and knowledge transfer; this has failed, so FDI is now no longer the yardstick the central government uses for provinces

-Foreigners tend to look at China in an ahistorical way, despite the country’s long history and attendant baggage

-NGOs are increasingly tolerated by the government as a way to help plug holes in a tattered social safety net

-Beijing’s control over the provinces is brittle – it can snap quickly and “the whole thing could fall apart tomorrow,” he said

-There’s no clear candidate for the top job when the Party Congress convenes this autumn, unlike previous leadership transitions

-What keeps Hu Jintao up at night? Not economic stability; not human rights and foreign government criticism. He’s worried about income disparities, including the great underclass of 200 million migrant workers, who are disenfranchised in almost every way. And since there’s no democracy, no one really knows what in the world they are thinking.

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.

Millions of Indians reside in the Middle East. They constitute the largest portion of the populations within the Arab Gulf – upwards of 50% in some country states. Spread across the economic divide, the Gulf is the cherished destination for a first time expat from India – a softer landing internationally & importantly cultural affinity which could be traced back to time.

It’s the Chinese though who are stepping in with a concerted investment strategy within the Middle East. Will leave the investments within the Oil & Gas industry to be a foregone conclusion and focus on the supposedly USD 300+ million investment by the Chinese government within Dubai, UAE for setting up the largest Chinese exhibition centre for goods manufactured within China in a country outside the Mainland. (more…)

As far as my email inbox is concerned, the words “DLA Piper news flash” usually spell some impending trouble in venture capital paradise.

I’m not suggesting bad karma, just that the law firm’s updates are not a once-a-week event and, when they do come, I tend to set aside a few minutes to read them. And then re-read them. Legal terminology is not easy to digest.

The July 1 bulletin contained updates on new rules implemented by the State Administration of Foreign Exchange (SAFE) that could complicate venture capital (VC) and private equity (PE) deals in China.

Basically, the offshore special purpose vehicles (SPV) used by venture capitalists to take money in and out of China are coming under closer scrutiny. If they set up an onshore subsidiary or make any cross-border M&A deals, approval is now required from both the Ministry of Commerce and SAFE. To get this approval, the SPV must submit evidence of a three-year track record of investments. It must also disclose assorted financial information and meet shareholder structuring requirements.

Further tightening measures are expected and more foreign VC and PE deals are likely to run into trouble for not dotting all the ‘i’s and crossing the ‘t’s.

The end goal for Beijing is to encourage more emerging Chinese companies to list on domestic exchanges. It is part of the widely-reported effort to reduce liquidity and improve governance in the markets by bringing in well-run companies – Hong Kong red chips become Chinese blue chips while strong start-ups provide solid growth opportunities.

This isn’t good news for the typical foreign VC/PE fund. The domestic market is volatile, a far cry from the reliable, well-informed valuations on NASDAQ. With Chinese stocks currently overpriced and analysts struggling to predict if and when the cards will come tumbling down, what investor would want to risk an A-share exit?

And even if a fund settles for a domestic IPO, the proceeds are in renminbi, which poses further problems in terms of getting back into US dollars and out of the country. The long-term solution is to set up a renminbi-denominated fund, but that means making a commitment to China that might not suit overall strategy.

DLA Piper’s verdict is not an optimistic one: “We believe that the [new rules], together with the government’s unwritten policy to encourage onshore listings, may herald another dry period for offshore investments into China and offshore listings of PRC companies.”