Xiao Jianhua: the bag man of the powerful - Rupert Hoogewerf

Rupert Hoogewerf

China´s powerful families use so-called "bag men" to deal with their wealth. The disappeared billionaire Xiao Jianhua was such a bag man, according to China rich list producer Rupert Hoogewerf, including the family or president Xi Jinping to the Financial Times. Finding information on Xiao had been tough.

The Financial Times:

Mr Xiao Jianhua has long had strong connections with the families of Communist party leaders, but he was much more than a bagman by the time he was spirited back to mainland China by Beijing’s agents on the eve of the Chinese lunar New Year. 

Living for the past few years in self-imposed exile at the luxurious Four Seasons hotel and apartment complex in Hong Kong, Mr Xiao had become one of China’s richest men, a multi-billionaire in dollar terms with investments focused on banks and insurance. 

According to the Hurun Report, the young man who began his business career selling personal computers near his old university was worth US$6 billion (S$8.5 billion) by 2016. 

Mr Rupert Hoogewerf, chairman of the Hurun Report, said Mr Xiao had used his knowledge of capital markets and leverage to build a big empire. But, he said, it is extremely difficult to work out his wealth because he has “a myriad highly complex structures”. 

“He’s considered to be extremely intelligent and extremely low-profile,” said Mr Hoogewerf. “Within investor circles, he’s pretty respected because he comes from Peking University so he’s not some hillbilly who’s gone into the business of capital markets.” 

From his Four Seasons vantage point overlooking the busy harbour of Hong Kong, Mr Xiao held court attended by a bevy of female bodyguards, managed his business affairs and represented the government of Antigua and Barbuda.

More in the Financial Times.

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Hong Kong proves selfregulating financial industry does not work - Paul Gillis

Paul Gillis

A turf war between the Securities and Futures Commission (SFC) in Hong Kong and Hong Kong Exchanges and Clearing (HKEx) over who should regulate new listings in Hong Kong proves selfregulating of the financial industry does not work, writes accounting professor Paul Gillis on his website.

Paul Gillis:

Hong Kong is somewhat unusual since regulation of listings and auditors has been delegated to the regulated, a form of regulatory capture. The HKEx regulates listed companies, with the Hong Kong Institute of CPAs (HKICPAs) regulating auditors, leaving government regulators in a supporting role. Unsurprising, self-regulation rarely works, since market participants rarely take actions against themselves. 

Self-regulation is usually the preference of the regulated professions because professionals get the benefits of regulation but control any disadvantages of regulation. Professionals always seek closure – to limit market access to newcomers.  In Hong Kong, CPAs must be licensed by the HKICPAs, meaning that only members can provide audit services.  Yet while limiting market access and competition, the HKICPAs has done a pathetic job regulating its members.  Fines, when they happen, are insignificant and even serious violations by the Big Four get only a wrist slap. 

The failure to effectively regulate listings and auditors may have contributed to recent failures of IPOs. Tianhe Chemicals Group Limited listed on the Hong Kong exchange in May, 2014 only to be brought to its knees by allegations by short selling research firm Anonymous Analytics that the company was a fraud.  The stock remains suspended, which appears to be at least partly related to the inability of the company’s new auditors to issue an opinion. 

Weak regulation in Hong Kong led the European Union to withdraw regulatory equivalency for Hong Kong with respect to auditor inspections. Under regulatory equivalency, EU regulators would be able to rely on the work of Hong Kong regulators as if it were its own. The removal of regulatory equivalency was a major embarrassment for Hong Kong, which moved to restructure audit regulation by transferring most functions to the Financial Reporting Council.  Unfortunately, these reforms appear to have stalled since nothing has happened since a public consultation was concluded in 2015.

More at the ChinaAccountingBlog.

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Hongkongers do not like mainlanders, and it`s mutual - Shaun Rein

Shaun Rein

For a long time, Hong Kong was the place to go for visitors from the mainland, but the resentment against mainlanders in Hong Kong grew, says retail analyst and author Shaun Rein in Todayonline, and as Chinese got more travel alternatives, Hong Kong sees sales of luxury good drop dramatically.

Todayonline:

Chow Tai Fook, the biggest jeweller in the world by market capitalisation, is seen as a bellwether for mainland demand for Hong Kong’s luxury goods. Its sales in Hong Kong and Macau fell on an annualised basis by 22 per cent in the three months to the end of June. Other companies, such as handbag retailer Coach and watchmaker Jaeger-LeCoultre, which viewed Hong Kong as a cash cow, have been closing stores. 

Even Hong Kong’s humble tea shops have seen a slide in sales of their cheap noodles and milk tea. At Tsui Wah, a popular chain, profits for the year to March fell by more than half to HK$72 million (S$12.6 million). Mr Shaun Rein, who runs China Market Research in Shanghai, warns that the slump in retail is not simply the result of the Chinese slowdown or the crackdown on extravagance and corruption by President Xi Jinping. “There is a deep-seated animosity to mainlanders in Hong Kong,” he says. “So why would they want to go somewhere they are not welcome when there are so many other choices?”

More in Todayonline.

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Ian Johnson interviews HK bookseller Bao Pu on his colleagues and business

Ian Johnson

Disappearing Hong Kong publishers have put them on the international agenda. Journalist Ian Johnson got the opportunity to interview HK publisher Bao Pu on his critical books about China and his kidnapped colleagues for the New York Review of Books.

Ian Johnson:

One of your first big coups was publishing Zhao Ziyang’s secret memoirs in 2005.  How did you do it? 

I had been brokering manuscripts by Party cadres who had been victims of the system. I was negotiating with the old Communist Party cadres who had Zhao Ziyang’s recordings. It was a complicated process to convince the cadres to agree to do this. They had the tapes. They wanted to know who would publish. So eventually I said I would. They said, Do you know how to do publishing? So I published a few books to prove that we could. That’s how we did it. We did poetry books and intellectual books. It was all professionally done—just to convince them. 

And then after you published the secret journals, a lot of people got in touch with you. You published analyses of political reform in the 1980s, a biography of the reformerChen Yizi, and memoirs of reform-minded generals, such as Qiu Huizuo, and Ding Sheng. 

In the mainland many former officials or their families had grievances against the Party, so I thought maybe it’s time to preserve it. 

Publishing these kinds of books seems increasingly sensitive with the recent kidnappings of employees of a Hong Kong publisher. Are you worried you’ll be next? 

They’re in a different business. They’re selling a product, and whatever sells they’ll sell. I was irritated by the media because they kept grouping all independent publishers together in one “banned books” category. But booksellers just publish whatever they want [without regard to facts]. Truth and fabrication are different. 

How do you make sure your books are accurate? 

Most importantly, I insist that authors of non-fiction use their real names; no pen names. Even though there is risk, they must be willing to take the risk and responsibility for their writing. I find people who know the subject in question to edit and fact-check. I have a Cultural Revolution guy. A guy who does early Mao. Others. 

And the books are printed in Hong Kong. Have any been shipped to the mainland? 

That’s difficult to do. People buy them in Hong Kong and carry to the mainland, but this has become tougher recently because of stronger border controls. This has hurt our sales.  

You’ve been publishing fewer books in recent years. Last year, you published only three books. Why have you scaled back? 

The main problem is the new generation doesn’t want to know. They don’t know about the Mao era or who Deng was. Another big problem is there aren’t interesting manuscripts. 

Why? 

The hongerdai [the “second red generation”—the children of the founding generation of Communist leaders] are liberated under Xi Jinping. In the past they had grievances, but now they feel that this is the best time for their interests: “We don’t want to rock the boat.”

Much more in the New York Review of Books.

Bao Pu

Ian Johnson on what spiritual values the Chinese are looking for

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The SCMP buy does not make sense for Alibaba - Shaun Rein

Shaun Rein

For more than a decade the Hong Kong newspaper South China Morning Post has been destroying its image as a quality paper it still was in the 1990. Key journalists were fired or walked away voluntarily. The purchase by Alibaba gives observers new reason for worry. It does not make sense for Alibaba, says business analyst Shaun Rein in the Star Beacon Herald.

The Star Beacon Herald.

During its glory days in the 1980s, the South China Morning Post was one of the world’s most profitable newspapers and was hugely respected for its coverage of mainland China. 

But the internet media revolution and changes in rules on how Hong Kong-listed firms announce company news have caused a drop in readership and profitability. 

The SCMP Group, which gets 68% of revenues from newspaper publishing, made a net profit of HK$136.8m ($17.65m) in 2014, less than the HK$223.7m it made in 2013. The newspaper has a readership of 349,000 people. 

Its website has about four million unique visitors a month, of which two-thirds come from outside Hong Kong and China. 

Those are reasonable figures for a regional Asian newspaper, says Shaun Rein, managing director of the Shanghai-based China Market Research Group, but he does not believe the deal make sense for Alibaba. 

“It looks like they’re a little lost,” he says. “What’s their strategy? Is it to integrate the newspaper into the rest of its business? If so, I don’t see how they would do that given you can’t even read the SCMP in mainland China right now.” 

He adds the deal would make sense only from a strategic, relationship-building point of view. 

“It might be a way of currying favour [with]the Chinese government, for the most important English-language newspaper in Hong Kong to be owned by a pro-Beijing, pro-business company,” he says. 

Over the past year, Alibaba has purchased shares in several media companies, including the China Business Network and Youku Tudou. But its purchase of the SCMP Group is the most controversial yet.

More in the Star Beacon Herald.

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Bankers win, retailers lose in Hong Kong - Wei Gu

Wei Gu

The recent financial turmoil has different effects on different industries, notes Wei Gu, wealth editor of the Wall Street Journal in Hong Kong. While sales have dropped in retail, as mainland shoppers drop out, bankers are extremely busy helping mainland customers to change a devaluating Yuan into other currencies.

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Expected: crackdown on smaller CPA firms - Paul Gillis

Paul Gillis

 New rules apply to foreign CPA firms in China since July 1, and will rely on the cooperation of China´s regulators. The big four might not have much trouble, writes accounting professor Paul Gillis at his website. But the smaller foreign CPA firms might be heading for a hard time.

Paul Gillis:

I believe the real crackdown to come is over the US listed Chinese companies that are audited by small US based accounting firms. Most of these companies came to market through reverse mergers and trade thinly, if at all, on over-the-counter boards. These companies have had a high incidence of fraud and have embarrassed Chinese regulators who have no authority over them. After the NYSE and NASDAQ cracked down on reverse mergers by requiring a seasoning period before listing, the reverse merger market for Chinese companies in the U.S. died, replaced by China’s National Equities Exchange and Quotations(NEEQ – China’s third board). NEEQ has listed over 2,000 small Chinese companies with an average market cap of under $75 million.

Those US CPA firms with a significant client base in China are going to have more serious problems complying with these rules. Some of these firms have set up consulting practices in the form of wholly foreign owned enterprises (WFOEs) that do the audit work on the mainland. Such WOFEs are clearly violating Chinese law by doing auditing, and since most have not registered with the PCAOB, they are also violating US laws. Regulators have looked the other way, until now, perhaps. 

The audit committee of any firm audited by an overseas CPA firms should seek written assurance from its auditor that it will be able to comply with the new rules. The SEC should demand that companies disclose the material risk that the auditor may be unable to complete the audit if the auditor is not in compliance with the new rules. The Big Four all have significant mainland affiliates and should not face any difficulties in complying with the new rules.

More at the ChinaAccountingBlog.

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Why Hong Kong resists market oversight - Paul Gillis

Paul Gillis

Political protest have dominated most of the media coverage from Hong Kong, but the resistance against a financial and regulatory overhaul has been as important, tells Beida accounting professor Paul Gillis in Quartz. Why an improved market oversight is long overdue.

Quartz:

 “The (Hong Kong) government and the regulators just haven’t kept pace with the responsibility they are charged with,” Paul Gillis, co-director of the IMBA program at Peking University, told Quartz...
Hong Kong’s resistance to tough regulation relates in part to the city’s dependence on a handful of wealthy tycoons, critics say. “It’s the nature of Hong Kong society, which is basically an oligarchy or a plutocracy,” Gillis said. “There are many powerful institutions in Hong Kong that will resist any change they find adverse to them.”...
Without changes, the long-term damage could be severe. “When we had a rash of [Chinese company] frauds in the US, the US-listed China stocks got beat up,” Gillis said. A slew of mainland Chinese stocks that had listed in the US were delisted, suspended or withdrawn in late 2010 and early 2011, after being hit by short sellers and fraud litigation.
“The question is whether the short sellers turn their attention to Hong Kong and find the same problems as they do on the mainland,” Gillis said. “Then, yes, the Hong Kong exchange could lose prestige.”

More in Quartz.

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Luxury bag sets record price – Wei Gu

Wei Gu

Some luxury brands have been slashing prices to keep their Chinese customers. But as a  fuchsia Hermès Birkin bad with diamonds sets a record price in Hong Kong, WSJ wealth editor Wei Gu wonders in Marketwatch whether luxury goods are really in the doldrums.

Wei Gu:

At Christie’s afternoon handbags and accessories sale in Hong Kong on Monday, the bag fetched 1.72 million Hong Kong dollars (US$221,846) and was sold to a phone bidder. The previous record was a diamond-adorned rouge crocodile Hermès Birkin bag that went for US$203,150 at a Heritage Auctions sale in New York in 2011. (A diamond and gold evening bag once owned by Elizabeth Taylor sold for US$218,500 at Christies in New York in December 2011, although that item was in the jewelry category.) 

The identity of the buyer of Monday’s record sale wasn’t known. 

The record came at a time when storied luxury names such as Chanel and Gucci have been slashing prices in Hong Kong and China to attract buyers.

More at Marketplace.

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Reforms on auditing stalled - Paul Gillis

Paul Gillis

A range of pending reforms in auditing issues have been stalled, writes Beida professor Paul Gillis at his weblog, creating potential risks for investors. Here two of those stalled reforms: the VIE´s and the auditing regulations in Hong Kong.

Paul Gillis:

The most significant change was proposed in Hong Kong, where the regulation of listed company auditors would be taken away from the Hong Kong Institute of CPAs (HKICPAs) and given to the Financial Regulatory Commission. Hong Kong had faced the embarrassment of having its regulatory equivalency with the European Union revoked because of the lack of an independent audit regulator. The HKICPA has proven to be an ineffective regulator. Public consultations were held in Autumn 2014 and then everyone went silent. In March, HK Secretary for Financial Services and the Treasury, Professor KC Chan, reported that the government had completed the public consultation and found majority support for the direction of the reforms. The consultation conclusions are to be published in the middle of this year. ... 

In a related matter, VIE reforms are now working their way through China’s legislative process. The proposed new foreign investment law makes it clear that foreign controlled VIEs are banned, but opens the door to VIEs (and perhaps alternative structures) so long as the foreign company remains under Chinese control. Many of China’s larger internet companies have structures in place to keep control in Chinese hands.  Others may need to restructure to continue to operate, or else seek special permission. Multinational corporations that use the VIE structure may have greater difficulties. The US Chamber of Commerce, the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai jointly asked China to provide grandfathering for existing VIEs or a 25-year grace period, likely a fool’s errand.

More at the China Accounting Blog.

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China´s booming investment scene - William Bao Bean

+William Bean 

Investments are flooding into China´s innovative industries. But investing in China is a completely different game from the traditional VC approach, tells William Bao Bean, Managing Director of Chinaccelerator, in VentureCon Japan, according to E27. China is providing more finance, and more competition.

E27:

(One) reason why Hong Kong is seen as a great environment to do business is its proximity to Mainland China and its often seen as a gateway to that giant market. William Bao Bean, Investment Partner of SOS Ventures ... attempted to explain what’s been happening in China in a fireside chat. ...  

Bean paints a succinct picture: “40 billion was done from VCs in the US last year in China and last year, 20 billion was done on the angel side. Most of it was late stage but now there is a huge amount of activity going on in the early stage. Chinese investors want a quick return in two to three years — they’re not willing to wait ten,” he said. 

Speed is clearly one China’s strong suites and Bean said that this is reflected in generations of successful entrepreneurs giving back to the ecosystem. “Things have gotten so competitive that second generation entrepreneurs are starting to get acquired by Alibaba and Tencent, and these entrepreneurs do not want to continue working past their earn out — so they’re funding the third generation of entrepreneurs. So you have a blossoming of the early stage and before there were hundreds of angels, but now there are tens of thousands of angels investing,” he said. 

According to Bean, China has produced a whopping 16 unicorns and he said investors have been swapping their investment strategies. While traditional Series B investors are switching to A, those doing Series C are now focusing on the super early stage — and Bean said the valuations are coming up to meet them.

More in E27.

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A private tour at the Art Basel Hong Kong - Wei Gu

+Wei Gu 

WSJ wealth editor Wei Gu enjoys a private tour at the Art Basel Hong Kong, with a strong focus on Asia. A leading exhibition where Chinese art is still favorite but other countries and young artists are emerging too.

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