Weblog with daily updates of the news on a frugal, fair and beautiful China, from the perspective of internet entrepreneur, new media advisor and president of the China Speakers Bureau Fons Tuinstra
Winston Ma, Professor (Adjunct) and Executive Director, Global Public Investment Funds Forum, New York University School of Law and author of “The Hunt for Unicorns: How Sovereign Funds Are Reshaping Investment in the Digital Economy” gives advice on how to find the new unicorns and where to invest in digital infrastructure, cloud computing, and data preparation at the Cube, hosted by SiliconANGLE Media Inc. Co-Founder and Co-CEO John Furrier.
Investors need to keep their options open, in case things go wrong, to have an alternative, including China, says Singapore-based American investor Jim Rogers at the Nomad Capitalist. “You hope you do not need it, but you need to have the option,” he says.
Confidence among consumers and investors is still low, but Shanghai-based analyst Shaun Rein sees some light at the end of the tunnel. Liquidity is not a problem, but both consumers and investors are still careful in spending their money for the next two, three months, he tells CNBC.
When even an acknowledged China bull like strategic analyst Shaun Rein turns negative on its short-term economic development, things do not look well for the middle kingdom. “Consumer confidence has brutally collapsed and I think investors need to think twice or maybe even three or four times before investing in China right now,” says Rein in the Economic Times.
Shaun Rein
I have been in China for 25 years and this is by far the worst consumer confidence and business confidence I have ever seen and it is really because of the implementation of zero Covid. Most people in China actually support zero Covid because it saves lives and the Chinese government should be credited for what they did in 2020 and 2021 but in 2022, the implementation has been a disaster. That is the only way you can word it. It has hurt mental health, it has hurt other health issues and it has actually killed people because people cannot get to hospitals or as we saw in Xinjiang and Urumqi fire, people could not get out of their homes.
Consumer confidence has brutally collapsed and I think investors need to think twice or maybe even three or four times before investing in China right now. The next three to six months are going to be a real struggle because the government cannot ease up on zero Covid without causing a lot of deaths but they cannot continue the current pace without causing a lot of lack of business confidence. We are in a very difficult conundrum right now. No matter what the government does, the economy is going to be weak for the next three to six months…
The problem that we have right now is each province, each city, each district, even each street are making up their own rules as they go along and they are not following the directives of the central government. So sometimes the street will put up barriers and say one cannot cross the street. These local officials do not have the right to do that, the central government is telling them that they do not have the right to do that but they are so scared of Covid, that they are still putting up barriers.
The US should improve its infrastructure, just as China did, says business analyst Shaun Rein at the CGTN. He looks back at his 23 years in China, and how traveling has become so much easier, because of heavy investments in the fast speed railways network in the country.
India has been one of the hotspots of investments from China, but that might end now the hostilities between both countries increase, says business analyst Shaun Rein to AP. Chinese apps have already been banned by the Indian government, and startups seem to be next. Anti-Chinese feelings among consumers might be putting Chinese investors also off.
AP:
The antagonisms carry risks for India: A broader boycott could backfire if China were to retaliate by banning exports of raw materials used by India’s pharmaceutical industry. So far, it has not. In the longer term, Chinese companies might avoid investing in India's technology sector and Indian start-ups might be reluctant to accept Chinese investments for fear of repercussions, said Shaun Rein, managing director of market intelligence firm China Market Research Group. “Chinese investors are going to become very wary of investing in India. They’ll be worried that they might invest billions of dollars into the country and either Indian consumers will boycott and protest against them, or the government will just ban them because they’re backed by Chinese,” Rein said.
William Bao Bean, Shanghai-based managing director of startup accelerator Chinaaccelerator, discusses his investment strategy as the world is in disarray because of the coronavirus, at Focus Wire. “When things are bad, no one really does anything, and when things are hot, everybody's investing,” Bean says.
Focus Wire:
William Bao Bean, a general partner at SOSV and the managing director of startup accelerator Chinaaccelerator, says that venture capital investors “often have a herd mentality.”
“When things are bad, no one really does anything, and when things are hot, everybody's investing,” Bao Bean says.
“The best time to generally invest is when things are bad and the best time to exit is when things are hot.”
Although a global economic slowdown has an obvious impact on public equity investors, Bao Bean insists that earlier-stage investors are shielded due to a longer investment cycle over several years.
“The first thing that happens during any sort of a crisis or economic downturn is things just slow down measurably and significantly,” he says.
After years of growth and immense venture capital funding, China has experienced a funding slowdown - known as a “capital winter” - since late-2018.
Bao Bean attributes this slowdown to the closures of underperforming venture capital funds and a drop in funding from the Chinese government.
Despite a surge of global venture capital deals in 2019, Bao Bean says that funding has started to dip and attributes some of that to activity around the SoftBank Vision Fund.
“The SoftBank Vision Fund deployed a huge amount of capital very rapidly and that threw off the numbers in terms of total investment because they deployed $100 billion over a couple of years,” says Bao Bean.
“We also had some mega-rounds in 2018. That throws off the numbers.”
“The biggest thing to happen is the whole model of using money as a weapon and buying growth and mega-rounds and negative unit economics where you spend a dollar to make 50 cents - that is out the window.
“Now it's prove your model first, then raise money.”
William Bao Bean, partner at SOSV managing director at the Shanghai-based Chinaccelerator, discusses the investment climate in the US, China and Europe at the F50 Global Capital Summit 2019 Fall. He does not fear the Trump administration, he says, "governments cannot stop businesses even if they want to," he adds.
Renowned investor Jim Rogers learned from the China market 23 years ago in a painful boom-and-bust cycle. Now he is bullish on China, but shares a few tough lessons he learned in those early days, he will not forget, he writes in the Daily Wealth.
Jim Rogers:
A lot has happened in 23 years. A lot has changed.
Today, I'm incredibly bullish on China. Prices are rising. And trillions of dollars are set to flow into Chinese stocks in the coming years.
That's because of three big stories we've been covering here in DailyWealth...
Stocks trading locally in China could see inflows of up to $2 trillion over the next 10 years as index provider MSCI continues to add them to its benchmarks.
After 23 years, this is the setup I've been waiting to see... And I believe this time, the gains could be even bigger than what I experienced during my first China boom.
But if you're going to invest in China, you've got to be smart. You've got to learn from my mistakes.
That means you need to avoid catastrophic losses. You need to have a plan and stick with it.
I suggest using trailing stops on your investments. That's how you stay in for the upside – and protect yourself on the downside. And it's the right way to benefit from the China boom that's happening right now.
No market stays in bad shape forever... least of all China. I've seen what the Chinese markets can do, firsthand. And you really want to invest in this incredible boom.
So make a plan... and take advantage of it!
Accountants have to figure out what is happening in a company, and the difference between Western and Chinese practices makes that often hard, says Paul Gillis, accounting professor at Peking University, and author of the leading website ChinaAccountingBlogto Young China Watchers.
Young China Watchers:
YCW: You have a wealth of experience as a certified public accountant (CPA) across many countries. At a high level, is there anything specific that analysts and observers should take into account when trying to understand financial statements and general business practices in China?
PG: One of the biggest challenges has been adapting Western accounting and auditing practices to Chinese business practices, where personal relationships can overshadow contracts and laws. In the West, internal controls often rely on the separation of duties on the premise that it is hard to get two employees to agree to commit a fraud. What we found in China is that the existence of 关系(guanxi) relationships between actors often overrode controls. There was a big problem with bank confirmations. A standard audit practice is for the auditor to ask the bank to confirm the bank account balances of clients. In China, it proved not very difficult for many companies to lean on the bank branch manager to confirm a false balance. Auditors needed to find other ways to audit to overcome these problems, but there were many frauds in the meantime.
YCW: A lot has been said about Beijing’s intention to open up China’s financial sector. How do you see this impacting the audit industry? Have you observed any broad trends recently as a result of the latest round of market reforms?
PG: Accounting is not directly affected by the opening up of the financial sector. Foreign accounting firms in China are structured like the firms elsewhere in the world: Local partners own the local firm. There has always been a lot of talk about allowing foreigners to own interests in local accounting firms—they already can, but the biggest obstacle is passing China’s CPA exam, which is the toughest in the world! It actually makes sense for local partners to own and operate the firms in China. They have local expertise and since most of them are now local Chinese, they better understand the cultural aspects of doing business.
YCW: A lack of transparency has always concerned investors and lenders in China, perhaps unjustifiably so. While the perception is changing, can you identify any obvious steps to be taken at the state and firm levels to speed up this process, or has all the low-hanging fruit been picked?
PG: Disclosures of public companies in China, particularly those listed abroad are pretty extensive. The greatest difficulty often lies in opaque ownership structures where it is hard to figure out who is ultimately in control.
One thing I have observed is that Chinese companies often do not do things in the most straightforward manner. For example, it is not uncommon to put the ownership of companies in the names of friends or relatives. I guess that gives people plausible deniability if problems come up, but it often scares investors and business partners who think they are trying to hide something. I think a lot of this is a legacy of earlier times when being a “capitalist roader” (走资派, zou zi pai) was a bad thing.
“If North Korea introduces reforms and openness, it will achieve rapid economic growth in the double digits or higher.”
Speaking in an Oct. 2 interview on the Traffic Broadcasting System (TBS) program “Kim Eo-jun’s News Factory,” world-renowned investor Jim Rogers, chairman of Rogers Holdings, said North Korea is currently “in a similar situation to China when Deng Xiaoping came to power in 1978.”
“The positive changes happening in North Korea will make the entire Korean Peninsula a very suitable target for investment,” he predicted.
Rogers also offered a positive appraisal of South Korean President Moon Jae-in’s policies for their role in guiding North Korea toward reforms and openness.
“If President Moon’s North Korea policies succeed, South and North Korea will be able to save a great deal of money and bring tremendous peace not just to the Korean Peninsula but the world,” he said.
“I sincerely hope and believe President Moon’s North Korea policies will succeed,” he added.
Rogers pointed to North Korea’s abundant workforce and natural resources as factors making it an appealing investment target.
“
With [North Korean leader Kim Jong-un] attempting changes, the combination of South Korean knowledge, capital, and know-how with North Korea’s human and natural resources will make a tremendous Korea that even Japan won’t be able to match,” he predicted.
Tencent's investment strategy is mostly a black box, where observers try to find a red line by looking at what the internet giant is doing. Tencent analyst Matthew Brennan got the unique possibility to discuss those issues with Tencent Investment Partnership Manager, Li Zhaohui, and published a translation on China Channel.
China Channel:
Q：There is a view that Tencent’s focus on investment is now hindering its own business innovation. What do you think of this?
A： It’s totally wrong to place the investment performance and one’s own business as opposing goals. i.e. if the investments are doing well, it will lead to a bad core business, or saying business is turning bad because Tencent has placed more energy into investing. This is a misunderstanding.
On one hand Tencent’s investment contributions to the main business can be very direct, such as our investments into the gaming industry. In this way, we have established long-term strategic relationships with our core partners to ensure that we have access to the best games in the world. On the other hand, other investments can have very strong synergies and mutual promotional relationships with Tencent’s core businesses. These relationships are far from being as simple as how much money is reported on our financial statements.
Q：What synergies are there with the main business?
A： Investments provide Tencent with many opportunities and possibilities for expansion into new areas. The classic example is e-commerce. If there was no investment, it would be difficult for Tencent to enter this field. Before Tencent had （拍拍网）PaiPaiWang, which it was running for many years. After entering the e-commerce business, it was through investments that we gained controlled of 51buy.com, which was the biggest competitor of JD at the time. After that, we invested in some vertical e-commerce players and new format e-commerce, such as Pinduoduo. Some investments also combine offline operations, for example we are not likely to run our own offline bike rental business. In this way it’s only through the strong binding of interests through investment, that Tencent will use its huge traffic and user base to help these business. In this process, Tencent’s investment department plays a very important role.
Q：But the establishment of partnerships is possible not only through investment. For example, Starbucks and Ali have recently reached a cooperation, but they do not have an equity partnership.
A： The Tencent business unit has done many things on its own. We are the biggest proponents of the “Internet+” policy and have business partnerships with various entities including local governments. Another example is that every year we distribute thousands of games, and it is impossible to have an investment relationship with every company.
Q：Why are you entering so many industries? This type of investment has been referred to as “sprinkling pepper”.
A： The investment reflects to some extent Tencent’s attitude of restraint towards other industries. Our thinking is relatively clear, only invest in areas related to Tencent’s business, mainly consumer Internet (tips: Consumer Internet refers to the application of internet across an individual’s daily life. Specifically, the comprehensive digitalization of personalized needs regarding clothes, food, housing, travel, medical and other daily life situations). If you say that we are constantly entering new areas, there are only two reasons. First, the Internet is also expanding and entering many new areas. We are simply following the trends of how the Internet is expanding. Secondly, too many industries and fields are converging. It’s getting difficult to easily categorize what field companies are in.
Q：Are there any areas you absolutely will not invest in?
A： Many. For example, in the past few years, many companies that have nothing to do with our core business have asked us to consider investments, some of which are very certain to be profitable, but we won’t do it. New materials and communication equipment in the TMT sector, we are very clear not to invest there because we do not understand this area. Alternatively, if we see a loss-making company with a lack of experienced management, but we believe the company holds value and can meet the needs of a large number of users, even if it faces many difficulties, we are willing to invest.
Q：Some investors suggest that you should learn from Alibaba, to do more mergers and acquisitions, integration, do you think that makes sense?
A： It’s not a case of black and white. Regarding mergers and acquisitions, we are quite strong willed. M&A itself is a very difficult thing. Alibaba has done very well, I think they’ve done amazing and it’s worth learning from. If you look at Alibaba’s mergers and acquisitions, they are all in the fields that they are relatively familiar with. We also do similar things in the areas of gaming and literature for example.
Twelve Chinese investors attended the event as part of a weeklong tour of the United Kingdom in search of opportunities.
Rupert Hoogwerf, chairman of Hurun and organizer of the trip, said the fact that Britain is in the process of leaving the European Union does not trouble Chinese entrepreneurs at the individual level.
“Most of the interest today is either to send children to school here, or to buy real estate for long-term investments,” he said. “Not one of these entrepreneurs this year and last year was particularly concerned, so it wasn’t really relevant.”
At this year’s event, the companies making pitches were scale-ups, rather than start-ups. Hoogwerf said the event focused on start-ups last year but that “was actually a little bit too much for these people to swallow, so we think that the idea of scale-ups is potentially a much better way of doing it”.
Hoogwerf said several investors had shown interest in some of the presentations.
The investment splurge by Chinese technology companies is not too dissimilar to that of their US counterparts, many of which historically acquired or invested in firms that were deemed as key to future growth. Facebook, for example, bought photo-sharing app Instagram in 2012 and messaging platform WhatsApp in 2014, while Google acquired YouTube in 2006 and navigation app Waze in 2013.
“Companies like Baidu, Alibaba and Tencent have become like investment companies. They are sitting on top of piles of money and they are figuring out how to try and make the best use of it,” said Shaun Rein, managing director at China Market Research Group.
“The rate of investments is increasing because they’re trying to stay ahead of each other. Their major business lines have got so big that they are not going to get the same growth they are used to and it’s faster to buy technology and market share than to grow it organically and sustain a similar pace of growth.”...
“Baidu is looking to become a technology leader. They’re trying to come up with innovation in artificial intelligence and autonomous driving,” said China Market Research Group’s Rein. “Baidu needs to find another growth driver, as the search business doesn’t have the same stickiness factor with consumers and advertisers that Tencent and Alibaba have with social media and e-commerce. So in a way, their back is against a wall where they must innovate to keep up.”
China's massive One-Belt, One-Road program has often been compared with the US Marshal plan after the Second World War. Keen to reap the benefits, risks for investors have also been highlighted, writes financial analyst Sara Hsuat Capital Watch. US investors like Marc Merlino, head of Citi's global subsidiaries group started to explore the field, she writes.
Sara Hsu:
While investing directly in poorly screened OBOR projects directly may not make sense, Marc Merlino, to his credit, noted that ventures surrounding major OBOR projects provide huge potential for returns. Merino states, "it's the opportunities for micro infrastructure beyond the core projects. All the knock-on effects ...." Certainly, after OBOR plans are carries out and the success of the construction can be more easily understood, investing in micro infrastructure could be quite profitable.
Past evidence of profitability of backward linkages between major invested projects and the rest of the economy can be witnessed in China's special economic zones (SEZs). The clearest example of this is the city of Shenzhen, which was established as an SEZ in 1980, when it was a sleepy fishing village of 30,000 residents. Today, Shenzhen has become a megacity with a population of 12.53 million, and one of the most economically important cities in China. The city grew not only because of the influx of foreign direct investment, but also because of the growth of supporting industries. Many people who invested in the city early on have enjoyed significant profits as the city grew.
Prudent analysis would require that investors financing micro projects surrounding an OBOR project should perform the due diligence that China's policy banks might have failed to undertake. This may require more resources to carry out than individual investors have, but is feasible for large institutional investors or lenders like Citi.
In sum, investors need to proceed prudently with regard to OBOR projects and recognize that many of the projects have been insufficiently vetted. Plans surrounding visibly successful OBOR projects may bear fruit as long as investors focus on assessing and hedging against risks. After this work is done, one can be cautiously optimistic about such plans.
Will Mobike and Ofo, China's largest bike-sharing companies merge, like car-sharing firm did in the past? Not yet, says Peking University professor Jeffrey Towson. International expansions goes well, capital is freely available, and a crippling price war has not yet emerged, he argues.
China's unstable economy has its beginnings not in China but on Wall Street in 2008, when Lehman Brothers filed for bankruptcy, setting off the worst economic crisis in living memory.
"In the year after the Lehman Brothers bankruptcy, the value of Chinese exports fell by about 20 percent, which is a very big deal," says Arthur Kroeber, a founding partner of Gavekal Dragonomics and author of China's Economy: What Everyone Needs to Know.
In 2008, exports were the beating heart of China's economy, employing hundreds of millions of migrant workers who were working their way up China's social ladder to make up the world's largest consumer class.
"The estimates at the time were that somewhere in the neighborhood of 20 million workers in export-related industries along the coasts lost their jobs and had to return home," says Kroeber. "It was a pretty major shock to China."
How would a country accustomed to double-digit economic growth cope with tens of millions of workers suddenly out of work? China's leaders didn't wait to find out. Within weeks, they passed a historic stimulus package, injecting nearly $600 billion into the economy, an amount worth 15 percent of China's entire economy.
"It was by far the largest fiscal stimulus, in absolute terms or relative to GDP, of any economy in the world at that time," says Kroeber.
It worked a little too well.
Millions of Chinese went back to work on infrastructure projects like the world's most extensive high-speed rail network, highways and subway systems. By 2010, China was back into double-digit growth territory again.
But all this new money flowing through local governments exposed deep-seated vulnerabilities in China's political system — namely corruption, says Kroeber.
"Corruption throughout the economy, it kind of got out of control," he says. "It was pretty bad before the financial crisis. The stimulus, I think, just poured gasoline on the fire of corruption."
Mr Howard French, whose book China’s Second Continent charts the experience of about one million Chinese entrepreneurs who have settled in Africa, agrees. “Africa has been a field where China can try various things in a very low-risk environment,” he says.
“Africa has been a workshop of ideas that now have a much bigger scale and strategic significance.”
A few numbers illustrate the shift. In 2000, China-Africa trade was a mere US$10 billion (S$13.8 billion). By 2014, that had risen more than 20 times to US$220 billion, according to the China Africa Research Initiative at Johns Hopkins School of Advanced International Studies in Washington, though it has fallen back because of lower commodity prices...
Mr French says Africans’ view of China “is still positive, but not as exuberant as it was”.
People welcome the infrastructure, he says. But they insist their governments should not be taken for a ride, either by overpaying, accepting shoddy work or allowing Chinese companies to use all their labour and materials.
Africans resent it, he says, when corrupt governments inflate the price of projects — as has been alleged with the US$4 billion Mombasa-Nairobi railway, inaugurated this month — to make space for kickbacks.
Still, he adds, Chinese companies have become more attuned to such issues than critics suggest.
A decade ago, they thought that dealing with the government was enough. Now, they realise they also need to engage civil society and international non-governmental organisations on issues from local skills to the environment.
Chinese companies like to be seen to be transferring skills.
Huawei, which earns 15 per cent of its global revenue in Africa, trains 12,000 students in telecoms a year at centres in Angola, Congo, Egypt, Kenya, Morocco, Nigeria and South Africa.
According to Johns Hopkins researchers, 80 per cent of workers on Chinese projects are African, even if many are in low-skilled jobs such as trench-digging.
“I give the Chinese a fair amount of credit,” says Mr French. “They have been mounting quite a steep learning curve from almost no knowledge to becoming very sophisticated players.”
A Chinese bid for the Chicago Stock Exchange is running into major roadblocks, both in China and the US. The bidder the private Chinese company Chongqing Casin Enterprise Group might have waited too long, says business analyst Shaun Rein in the South China Morning Post. Both in China and the US barriers seem too high to close the deal.
The South China Morning Post:
Starting Monday, all overseas payments under the capital account made through commercial banks in Shanghai that exceed US$5 million have to be submitted to Beijing for special clearance before proceeding, banking sources told the Post.
“My guess is it will be very difficult for them to get approval. The Chinese government is cracking down on capital outflow... particularly on companies that are buying assets offshore that are not in their core areas of expertise,” said Shaun Rein, managing director of China Market Research.
“Too many real estate and other firms are buying assets that they know nothing about and clearly this is viewed as a way to transfer yuan out and evade capital controls,” he added...
Analysts said the updated information about the deal was meant to ease concerns raised by US lawmakers in February when the planned sale was announced, about Chinese companies taking control of the US bourse and gaining access to confidential information.
“The Chinese have been looking to buy into the Chicago bourse for quite a while now,” said Rein. “There is good cash flow and if the equity markets do better then there is a lot of money to be made. But a lot of lawmakers in the United States complain about a stock change being owned by the Chinese and worry over it being owned by companies or parties related to the Chinese government.”
Confidence among consumers and investors is still low, but 
, at a discussion at the National Bureau of Asian Research on the report by Nadège Rolland“A New Great Game? Situating Africa in China’s Strategic Thinking.”
