A Biblical Seven Years
By THOMAS L. FRIEDMAN
Beijing
After attending the spectacular closing ceremony at the Beijing Olympics and feeling the vibrations from hundreds of Chinese drummers pulsating in my own chest, I was tempted to conclude two things: “Holy mackerel, the energy coming out of this country is unrivaled.” And, two: “We are so cooked. Start teaching your kids Mandarin.”
However, I’ve learned over the years not to over-interpret any two-week event. Olympics don’t change history. They are mere snapshots — a country posing in its Sunday bests for all the world too see. But, as snapshots go, the one China presented through the Olympics was enormously powerful — and it’s one that Americans need to reflect upon this election season.
China did not build the magnificent $43 billion infrastructure for these games, or put on the unparalleled opening and closing ceremonies, simply by the dumb luck of discovering oil. No, it was the culmination of seven years of national investment, planning, concentrated state power, national mobilization and hard work.
Seven years ... Seven years ... Oh, that’s right. China was awarded these Olympic Games on July 13, 2001 — just two months before 9/11.
As I sat in my seat at the Bird’s Nest, watching thousands of Chinese dancers, drummers, singers and acrobats on stilts perform their magic at the closing ceremony, I couldn’t help but reflect on how China and America have spent the last seven years: China has been preparing for the Olympics; we’ve been preparing for Al Qaeda. They’ve been building better stadiums, subways, airports, roads and parks. And we’ve been building better metal detectors, armored Humvees and pilotless drones.
The difference is starting to show. Just compare arriving at La Guardia’s dumpy terminal in New York City and driving through the crumbling infrastructure into Manhattan with arriving at Shanghai’s sleek airport and taking the 220-mile-per-hour magnetic levitation train, which uses electromagnetic propulsion instead of steel wheels and tracks, to get to town in a blink.
Then ask yourself: Who is living in the third world country?
Yes, if you drive an hour out of Beijing, you meet the vast dirt-poor third world of China. But here’s what’s new: The rich parts of China, the modern parts of Beijing or Shanghai or Dalian, are now more state of the art than rich America. The buildings are architecturally more interesting, the wireless networks more sophisticated, the roads and trains more efficient and nicer. And, I repeat, they did not get all this by discovering oil. They got it by digging inside themselves.
I realize the differences: We were attacked on 9/11; they were not. We have real enemies; theirs are small and mostly domestic. We had to respond to 9/11 at least by eliminating the Al Qaeda base in Afghanistan and investing in tighter homeland security. They could avoid foreign entanglements. Trying to build democracy in Iraq, though, which I supported, was a war of choice and is unlikely to ever produce anything equal to its huge price tag.
But the first rule of holes is that when you’re in one, stop digging. When you see how much modern infrastructure has been built in China since 2001, under the banner of the Olympics, and you see how much infrastructure has been postponed in America since 2001, under the banner of the war on terrorism, it’s clear that the next seven years need to be devoted to nation-building in America.
We need to finish our business in Iraq and Afghanistan as quickly as possible, which is why it is a travesty that the Iraqi Parliament has gone on vacation while 130,000 U.S. troops are standing guard. We can no longer afford to postpone our nation-building while Iraqis squabble over whether to do theirs.
A lot of people are now advising Barack Obama to get dirty with John McCain. Sure, fight fire with fire. That’s necessary, but it is not sufficient.
Obama got this far because many voters projected onto him that he could be the leader of an American renewal. They know we need nation-building at home now — not in Iraq, not in Afghanistan, not in Georgia, but in America. Obama cannot lose that theme.
He cannot let Republicans make this election about who is tough enough to stand up to Russia or bin Laden. It has to be about who is strong enough, focused enough, creative enough and unifying enough to get Americans to rebuild America. The next president can have all the foreign affairs experience in the world, but it will be useless, utterly useless, if we, as a country, are weak.
Obama is more right than he knows when he proclaims that this is “our” moment, this is “our” time. But it is our time to get back to work on the only home we have, our time for nation-building in America. I never want to tell my girls — and I’m sure Obama feels the same about his — that they have to go to China to see the future.
Wednesday, August 27, 2008
Monday, August 25, 2008
Pan Shiyi and Zhang Xin
It’s Sunday night in Beijing, and a private lift sweeps me up to the 32nd-floor penthouse of Jianwai Soho tower: the family apartment of Zhang Xin and Pan Shiyi, China’s most visible and flamboyant property tycoons. When the door opens, I am led into a huge living room, with floor to ceiling windows and amazing Chinese art on white walls. I have met them before, in London, and they greet me warmly, Zhang, attractive and charismatic, dressed informally in black trousers and leather gilet, and Pan, who looks like a clever faun, with dark eyes that miss nothing behind black-rimmed spectacles.
They have invited me and a couple of friends for an informal dinner, and we sit down to delicious Chinese fare, while the conversation is peppered with financial jargon. No wonder. Jianwai is just one of several large-scale developments they have built in Beijing’s central business district (CBD), making them the largest developers of residential and commercial buildings in the city. Married since 1994, they started their company, SOHO China, in 1995, and took it public last year, raising US $1.9 billion (£950 million) on the Hong Kong stock exchange – a high point in a dizzying career which has seen them build a fortune in 12 years through fusing brilliant land deals, marketing genius and innovative architecture in a city where until recently everything was grey.
By contrast, their buildings are designed by renowned architects such as Japan’s Kengo Kuma, and make use of dramatic visual effects, either white or black, with splashes of colour in the interiors. Their business and personal lives have also been publicly intertwined, turning them into style icons and lending a fascination to the brand they represent. “They are the It-couple of China,” comments Sein Chew, an investment specialist from Hong Kong and New York. Pan has become famous through his blog on property and society at sina.com, which quickly surpassed 30 million hits.
Their current portfolio includes seven mixed-use developments: from New Town, their first project, which they started in 1995, on land no one wanted, to Chaoyangmen, due to complete in 2011. There is a residential development in Boao, on the emerging leisure destination of Hainan Island, and the extraordinary “Commune by the Great Wall”. Opened in 2002, it was mainland China’s first high-end luxury resort – a showcase of houses master-planned by Hong Kong architect Rocco Yim and designed by Asian architects, including Yung Ho Chang.
Boao and the Commune are managed by Kempinski Hotels, as Zhang, by her own admission, was not experienced in running resorts. “It didn’t really start as a business; it was a dream,” she says, a dream fuelled by her interest in architecture. Now, corporate giants such as Motorola, LVMH, Diageo and the Museum of Modern Art New York come for business weekends and brainstorming.
In the process, Zhang and Pan (the Chinese put surnames first), 43 and 44, have become symbols of the New China. Their success is underpinned by a deep knowledge of their customers – both the international corporate community and the rapidly increasing Chinese middle class, who are building their fortunes in the economic climate that emerged with the reforms of the Eighties and Nineties.
After all, before they became billionaires Zhang and Pan lived the life that SOHO China’s customers aspire to, young cosmopolitan types for whom the SOHO concept – “Small Office-Home Office” – was perfectly suited. The concept was inspired by the emergence of internet technology, the rise of small companies and the need for more live-work spaces. The company changed its strategy two years ago, from luxury housing developer to a focus on office and retail developments – in response to a government clampdown on the top-end housing market designed to control soaring prices.
Their own home, informal yet elegant, makes apparent that they have moved on to greater things. Zhang and Pan are frequent speakers at international conferences such as the World Economic Forum in Davos. Zhang, chief executive of SOHO China, of which Pan is chairman, was selected as one of the “Ten Women to Watch in Asia” by the Wall Street Journal. But they are still adjusting to the responsibility of running a publicly quoted company.
“I am exhausted,” Zhang tells me, every inch the chief executive in a Prada tweed suit and stiletto heels when I visit her in her office. “Since the IPO, we are on a different level. The projects are just flying through the doors. Everyone knows we have capital and a brand name and there are thousands of developers thirsty for cash.” She becomes visibly excited when talking about her latest project, Tiananmen South (Qianmen) – 360,000sq m of conservation and 201,831sq m of new buildings, in the largest hutong conservation zone in Beijing.
Hutongs are the low traditional houses that have disappeared rapidly in China’s construction boom, but now the government wants to breathe new life into the city’s cultural heritage. It turned to SOHO China for this project, and the company took it on once the government had relocated the people living there. Her description makes me melancholy, the sweeping away of old for new in the name of progress; she acknowledges it was painful to watch parts of old Beijing disappear. But only three years ago, there were dilapidated houses with severe fire hazards, and “20 families living on top of each other, shops with lots of yelling and screaming, and grandmothers sitting with their grandchildren”, Zhang says.
For the project Zhang employed leading international architects, from Herzog & de Meuron to David Adjaye. The main street will open in time for the Olympics, complete with a large Apple shop. The company is restoring old façades or working with photographs from the Thirties and Forties to re-create the authentic style. The irony of SOHO China being involved in conservation when it was part of the modernisation process is not lost on Zhang, but she is realistic: “On the whole, everyone is better off than they were ten years ago. When I am mandated to do a new building I do that. But I am equally proud to rebuild [old] Beijing.”
In her office, there are photographs of their sons, Sean, 9, and Luke, 8, who go to the international school and speak fluent English. At our dinner, it was Pan who put them to bed, while Zhang continued the conversation. And at SOHO China, Zhang’s office is lighter than Pan’s more modest one. They are not very social: “My kids are my priority,” she says. Their lives rotate around work, family and, increasingly, a search for spiritual values. She became a Baha’i two years ago; Pan is a Taoist who is “still exploring”, Zhang says. She is arguably the more worldly. Her parents were Chinese immigrants in Burma who returned to Beijing in the Fifties; they were translators at the Bureau of Foreign Languages, her mother translating Chou-Enlai and Deng Xiaoping “from Burmese to Chinese and vice versa”, says Zhang. Zhang herself worked her way up from a garment factory in Hong Kong and an assembly-line job at an electronics manufacturing plant to study economics at Sussex and Cambridge, and later work on Wall Street.
In the mid-Nineties, like other expatriate Chinese fascinated by the economic change, she wanted to move back to China. A friend suggested she check out a property company called Beijing Vantone, where Pan was a partner. They met and four days later he proposed; a year later they started a company called Hongshi, renamed SOHO China in 2002.
“I’m a person with a strong concept of family,” Pan tells me through an interpreter at his office. He was born in Gansu Province to a family stricken by poverty during the Cultural Revolution – his father a thwarted teacher, his mother an invalid. “My father is the one who has influenced me the most,” says Pan. “He taught me how to live and survive in the worst environment. During my childhood [in the early Seventies] in my village many children died of disease and starvation. In my family, no one died.”
He went to college at the Beijing Petroleum Institute in 1982, and worked in property, before co-founding Vantone. He sums up the extraordinary developments Beijing has been through: “Twenty years ago, the average living space was 7 to 8sq m. Now, the average living space is almost 30sq m – that’s a big change.”
Of meeting Zhang he says, “At different stages you have different needs, and our needs coincided” – and arguably marrying her may have been the best business decision Pan made. They complement each other perfectly: Zhang is in charge of aesthetics and design; Pan is the dealmaker. “How we divide work is just semantics,” he says. “Both of us have mutual respect and understanding and even if there is conflict, we can overcome it.”
With the Olympics looming – the opening ceremony is on August 8 – China’s major cities, in particular Beijing, are gripped by the building boom, which even warnings of a downturn cannot quell. It is a period of consolidation for the property market, where the big players swallow smaller companies. Indeed, SOHO China spent about $300 million of its raised money buying two high-end properties in Beijing – and the companies that owned them.
“In China there is a saying that the economists are never right; businessmen have always been right; and the government is sometimes right,” Pan says. “The reason that economists haven’t got it right is because China has been static for hundreds of years – the Tang Dynasty is the only one which has interacted with the West. But now the Chinese deep down are really interested in the outside world.”
SOHO China is currently building in Beijing only, but Zhang says this may change in the future. A city with an official population of 12.04 million, it has a migrant population of 5.1 million more. Rural workers are making their way to the city and the middle class is expanding fast, creating extraordinary demand. There are various estimates on billionaires, but China is closing in on the US’s No 1 spot. A year ago, there were 15 billionaires in China; Forbes has now documented 66, many of them property barons like Zhang and Pan.
When I ask them about the future, Zhang mentions their foundation, launched two years ago, which focuses on an educational strategy adapted to today’s needs: “Education is stuck in the Seventies and Eighties, as if China still had a communist ideology.”
But it sounds as if, in the longer term, they are also intent on developing SOHO China into a world-class company. “The world is becoming one,” Pan said at dinner – and perhaps what this means is that it will be more Chinese. “I want to see what a company will look like in ten years’ time,” Zhang says. “It will not be like a US company. There will be a dominant company in China then, which will be very different. Ultimately, US companies are the result of capitalism, but China is neither communist nor capitalist. Each has pros and cons – clearly, the world is moving ahead.” Tellingly, the invitation to their party at the Commune by the Great Wall, in honour of the Olympic Games, reads: “The 8th day of the 8th month of the 8th year of the millennium is proclaimed the official start of the new China Century.” And they are setting the pace.
They have invited me and a couple of friends for an informal dinner, and we sit down to delicious Chinese fare, while the conversation is peppered with financial jargon. No wonder. Jianwai is just one of several large-scale developments they have built in Beijing’s central business district (CBD), making them the largest developers of residential and commercial buildings in the city. Married since 1994, they started their company, SOHO China, in 1995, and took it public last year, raising US $1.9 billion (£950 million) on the Hong Kong stock exchange – a high point in a dizzying career which has seen them build a fortune in 12 years through fusing brilliant land deals, marketing genius and innovative architecture in a city where until recently everything was grey.
By contrast, their buildings are designed by renowned architects such as Japan’s Kengo Kuma, and make use of dramatic visual effects, either white or black, with splashes of colour in the interiors. Their business and personal lives have also been publicly intertwined, turning them into style icons and lending a fascination to the brand they represent. “They are the It-couple of China,” comments Sein Chew, an investment specialist from Hong Kong and New York. Pan has become famous through his blog on property and society at sina.com, which quickly surpassed 30 million hits.
Their current portfolio includes seven mixed-use developments: from New Town, their first project, which they started in 1995, on land no one wanted, to Chaoyangmen, due to complete in 2011. There is a residential development in Boao, on the emerging leisure destination of Hainan Island, and the extraordinary “Commune by the Great Wall”. Opened in 2002, it was mainland China’s first high-end luxury resort – a showcase of houses master-planned by Hong Kong architect Rocco Yim and designed by Asian architects, including Yung Ho Chang.
Boao and the Commune are managed by Kempinski Hotels, as Zhang, by her own admission, was not experienced in running resorts. “It didn’t really start as a business; it was a dream,” she says, a dream fuelled by her interest in architecture. Now, corporate giants such as Motorola, LVMH, Diageo and the Museum of Modern Art New York come for business weekends and brainstorming.
In the process, Zhang and Pan (the Chinese put surnames first), 43 and 44, have become symbols of the New China. Their success is underpinned by a deep knowledge of their customers – both the international corporate community and the rapidly increasing Chinese middle class, who are building their fortunes in the economic climate that emerged with the reforms of the Eighties and Nineties.
After all, before they became billionaires Zhang and Pan lived the life that SOHO China’s customers aspire to, young cosmopolitan types for whom the SOHO concept – “Small Office-Home Office” – was perfectly suited. The concept was inspired by the emergence of internet technology, the rise of small companies and the need for more live-work spaces. The company changed its strategy two years ago, from luxury housing developer to a focus on office and retail developments – in response to a government clampdown on the top-end housing market designed to control soaring prices.
Their own home, informal yet elegant, makes apparent that they have moved on to greater things. Zhang and Pan are frequent speakers at international conferences such as the World Economic Forum in Davos. Zhang, chief executive of SOHO China, of which Pan is chairman, was selected as one of the “Ten Women to Watch in Asia” by the Wall Street Journal. But they are still adjusting to the responsibility of running a publicly quoted company.
“I am exhausted,” Zhang tells me, every inch the chief executive in a Prada tweed suit and stiletto heels when I visit her in her office. “Since the IPO, we are on a different level. The projects are just flying through the doors. Everyone knows we have capital and a brand name and there are thousands of developers thirsty for cash.” She becomes visibly excited when talking about her latest project, Tiananmen South (Qianmen) – 360,000sq m of conservation and 201,831sq m of new buildings, in the largest hutong conservation zone in Beijing.
Hutongs are the low traditional houses that have disappeared rapidly in China’s construction boom, but now the government wants to breathe new life into the city’s cultural heritage. It turned to SOHO China for this project, and the company took it on once the government had relocated the people living there. Her description makes me melancholy, the sweeping away of old for new in the name of progress; she acknowledges it was painful to watch parts of old Beijing disappear. But only three years ago, there were dilapidated houses with severe fire hazards, and “20 families living on top of each other, shops with lots of yelling and screaming, and grandmothers sitting with their grandchildren”, Zhang says.
For the project Zhang employed leading international architects, from Herzog & de Meuron to David Adjaye. The main street will open in time for the Olympics, complete with a large Apple shop. The company is restoring old façades or working with photographs from the Thirties and Forties to re-create the authentic style. The irony of SOHO China being involved in conservation when it was part of the modernisation process is not lost on Zhang, but she is realistic: “On the whole, everyone is better off than they were ten years ago. When I am mandated to do a new building I do that. But I am equally proud to rebuild [old] Beijing.”
In her office, there are photographs of their sons, Sean, 9, and Luke, 8, who go to the international school and speak fluent English. At our dinner, it was Pan who put them to bed, while Zhang continued the conversation. And at SOHO China, Zhang’s office is lighter than Pan’s more modest one. They are not very social: “My kids are my priority,” she says. Their lives rotate around work, family and, increasingly, a search for spiritual values. She became a Baha’i two years ago; Pan is a Taoist who is “still exploring”, Zhang says. She is arguably the more worldly. Her parents were Chinese immigrants in Burma who returned to Beijing in the Fifties; they were translators at the Bureau of Foreign Languages, her mother translating Chou-Enlai and Deng Xiaoping “from Burmese to Chinese and vice versa”, says Zhang. Zhang herself worked her way up from a garment factory in Hong Kong and an assembly-line job at an electronics manufacturing plant to study economics at Sussex and Cambridge, and later work on Wall Street.
In the mid-Nineties, like other expatriate Chinese fascinated by the economic change, she wanted to move back to China. A friend suggested she check out a property company called Beijing Vantone, where Pan was a partner. They met and four days later he proposed; a year later they started a company called Hongshi, renamed SOHO China in 2002.
“I’m a person with a strong concept of family,” Pan tells me through an interpreter at his office. He was born in Gansu Province to a family stricken by poverty during the Cultural Revolution – his father a thwarted teacher, his mother an invalid. “My father is the one who has influenced me the most,” says Pan. “He taught me how to live and survive in the worst environment. During my childhood [in the early Seventies] in my village many children died of disease and starvation. In my family, no one died.”
He went to college at the Beijing Petroleum Institute in 1982, and worked in property, before co-founding Vantone. He sums up the extraordinary developments Beijing has been through: “Twenty years ago, the average living space was 7 to 8sq m. Now, the average living space is almost 30sq m – that’s a big change.”
Of meeting Zhang he says, “At different stages you have different needs, and our needs coincided” – and arguably marrying her may have been the best business decision Pan made. They complement each other perfectly: Zhang is in charge of aesthetics and design; Pan is the dealmaker. “How we divide work is just semantics,” he says. “Both of us have mutual respect and understanding and even if there is conflict, we can overcome it.”
With the Olympics looming – the opening ceremony is on August 8 – China’s major cities, in particular Beijing, are gripped by the building boom, which even warnings of a downturn cannot quell. It is a period of consolidation for the property market, where the big players swallow smaller companies. Indeed, SOHO China spent about $300 million of its raised money buying two high-end properties in Beijing – and the companies that owned them.
“In China there is a saying that the economists are never right; businessmen have always been right; and the government is sometimes right,” Pan says. “The reason that economists haven’t got it right is because China has been static for hundreds of years – the Tang Dynasty is the only one which has interacted with the West. But now the Chinese deep down are really interested in the outside world.”
SOHO China is currently building in Beijing only, but Zhang says this may change in the future. A city with an official population of 12.04 million, it has a migrant population of 5.1 million more. Rural workers are making their way to the city and the middle class is expanding fast, creating extraordinary demand. There are various estimates on billionaires, but China is closing in on the US’s No 1 spot. A year ago, there were 15 billionaires in China; Forbes has now documented 66, many of them property barons like Zhang and Pan.
When I ask them about the future, Zhang mentions their foundation, launched two years ago, which focuses on an educational strategy adapted to today’s needs: “Education is stuck in the Seventies and Eighties, as if China still had a communist ideology.”
But it sounds as if, in the longer term, they are also intent on developing SOHO China into a world-class company. “The world is becoming one,” Pan said at dinner – and perhaps what this means is that it will be more Chinese. “I want to see what a company will look like in ten years’ time,” Zhang says. “It will not be like a US company. There will be a dominant company in China then, which will be very different. Ultimately, US companies are the result of capitalism, but China is neither communist nor capitalist. Each has pros and cons – clearly, the world is moving ahead.” Tellingly, the invitation to their party at the Commune by the Great Wall, in honour of the Olympic Games, reads: “The 8th day of the 8th month of the 8th year of the millennium is proclaimed the official start of the new China Century.” And they are setting the pace.
Friday, August 22, 2008
Inflation to take off?
Scary article about the outlook for inflation in the US
Washington Is Quietly Repudiating Its Debts
By GERALD P. O'DRISCOLL JR.
August 22, 2008; Page A15
Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer "no" without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.
In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold.
1
Corbis
The bond markets are certainly not protecting creditors from the risk of what Smith called "pretended payment" through inflation. Nor did they do so until far into the great inflation of the 1970s. Not until late 1977 and into 1978 did the bond market fully incorporate the reality of the debased dollar, by demanding higher long-term interest rates.
How can this happen? Markets are supposed to be forward-looking and efficiently price in all relevant risks. Yet monarchs have been repudiating debt explicitly and implicitly throughout recorded history.
Many years ago, the Austrian economist Ludwig von Mises offered an explanation. He suggested that while you can't, in Abraham Lincoln's words "fool all of the people all of the time," you can fool all of the people at least some of the time. And this is easier to do if a central bank has in the past earned credibility in fighting inflation.
In the 1980s, Ronald Reagan and Paul Volcker worked together to get inflation under control. They were greatly assisted by the "bond vigilantes," traders who were by then exerting discipline in bond markets by bidding up interest rates to double-digit levels. The outcome of the Reagan/Volcker policy of tight money and low marginal tax rates was not only a great economic expansion, but also a great boost to the Fed's credibility. The Fed proved it was able and willing to withstand political heat in the fight against inflation.
Alan Greenspan built on the Volcker legacy and, at least in the early years of his long tenure, continued the fight against inflation. In the 1990s, when Mr. Greenspan faced his own banking crisis, he was able to adopt a policy of comparatively low short-term interest rates. Banks used the opportunity to borrow cheaply and lend profitably to grow their way out of the crisis. Credibility allowed the Fed to engineer a recovery without stoking inflation fears.
After the collapse of the dot-com bubble in 2000, and then 9/11 and its aftermath, Mr. Greenspan again relied on the Fed's credibility to drive down the federal-funds rate to 1% and then hold it there for a year. This time there was a rumbling of doubts. But eventually the Fed did reverse course to preserve its inflation-fighting credentials, and briefly hiked the federal-funds rate to over 5%.
Now Fed Chairman Ben Bernanke has decided to try for a hat trick, and spend the Fed's reputational capital on an easy credit policy. He is doing so under considerably more adverse circumstances than his two predecessors.
Thanks to Reagan and Volcker -- and the credibility he built up on his own early on -- Mr. Greenspan did not face strong inflationary forces in the 1990s. But Mr. Bernanke began his easy money policy with inflation already picking up steam. Worse, we have the accumulated effects of seven years of loose fiscal policy.
Yes, we had the Bush tax cuts, but their beneficial, growth-enhancing effects have long since been swamped by an explosion of government spending. As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use. And there is the rub.
Not even a President Obama and a Congress controlled by House Speaker Pelosi and Senate Majority Leader Reid is going to hike taxes enough to pay for all their spending. Indeed, they have shown themselves quite unwilling to engage in honest budgeting. The best example is saddling Fannie Mae and Freddie Mac with $500 million of new (off-budget) obligations to fund cheap housing at a time when the two companies were already on the ropes. Is it any wonder the stock prices of these two companies are imploding?
The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury's guarantee, now explicit. But no one has ever seriously assessed the Treasury's creditworthiness with Fannie and Freddie on its books. The public guarantee is entirely open-ended and unbounded. The appetite of the two companies to balloon their balance sheets and take on risk has not been curtailed. Meanwhile, Congress spends apace with new programs for constituents in an election year.
We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.
If the Fed maintained its independence of action and said no to the inflationary finance of Congress's profligacy, we wouldn't have reached this point. But the Fed has forsaken that independence amid an absence of leadership.
Perhaps, as rarely happens, Adam Smith will be proven wrong. Let us hope so, because hope appears to be all we have.
Mr. O'Driscoll is a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas.
Washington Is Quietly Repudiating Its Debts
By GERALD P. O'DRISCOLL JR.
August 22, 2008; Page A15
Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer "no" without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation.
In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold.
1
Corbis
The bond markets are certainly not protecting creditors from the risk of what Smith called "pretended payment" through inflation. Nor did they do so until far into the great inflation of the 1970s. Not until late 1977 and into 1978 did the bond market fully incorporate the reality of the debased dollar, by demanding higher long-term interest rates.
How can this happen? Markets are supposed to be forward-looking and efficiently price in all relevant risks. Yet monarchs have been repudiating debt explicitly and implicitly throughout recorded history.
Many years ago, the Austrian economist Ludwig von Mises offered an explanation. He suggested that while you can't, in Abraham Lincoln's words "fool all of the people all of the time," you can fool all of the people at least some of the time. And this is easier to do if a central bank has in the past earned credibility in fighting inflation.
In the 1980s, Ronald Reagan and Paul Volcker worked together to get inflation under control. They were greatly assisted by the "bond vigilantes," traders who were by then exerting discipline in bond markets by bidding up interest rates to double-digit levels. The outcome of the Reagan/Volcker policy of tight money and low marginal tax rates was not only a great economic expansion, but also a great boost to the Fed's credibility. The Fed proved it was able and willing to withstand political heat in the fight against inflation.
Alan Greenspan built on the Volcker legacy and, at least in the early years of his long tenure, continued the fight against inflation. In the 1990s, when Mr. Greenspan faced his own banking crisis, he was able to adopt a policy of comparatively low short-term interest rates. Banks used the opportunity to borrow cheaply and lend profitably to grow their way out of the crisis. Credibility allowed the Fed to engineer a recovery without stoking inflation fears.
After the collapse of the dot-com bubble in 2000, and then 9/11 and its aftermath, Mr. Greenspan again relied on the Fed's credibility to drive down the federal-funds rate to 1% and then hold it there for a year. This time there was a rumbling of doubts. But eventually the Fed did reverse course to preserve its inflation-fighting credentials, and briefly hiked the federal-funds rate to over 5%.
Now Fed Chairman Ben Bernanke has decided to try for a hat trick, and spend the Fed's reputational capital on an easy credit policy. He is doing so under considerably more adverse circumstances than his two predecessors.
Thanks to Reagan and Volcker -- and the credibility he built up on his own early on -- Mr. Greenspan did not face strong inflationary forces in the 1990s. But Mr. Bernanke began his easy money policy with inflation already picking up steam. Worse, we have the accumulated effects of seven years of loose fiscal policy.
Yes, we had the Bush tax cuts, but their beneficial, growth-enhancing effects have long since been swamped by an explosion of government spending. As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use. And there is the rub.
Not even a President Obama and a Congress controlled by House Speaker Pelosi and Senate Majority Leader Reid is going to hike taxes enough to pay for all their spending. Indeed, they have shown themselves quite unwilling to engage in honest budgeting. The best example is saddling Fannie Mae and Freddie Mac with $500 million of new (off-budget) obligations to fund cheap housing at a time when the two companies were already on the ropes. Is it any wonder the stock prices of these two companies are imploding?
The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury's guarantee, now explicit. But no one has ever seriously assessed the Treasury's creditworthiness with Fannie and Freddie on its books. The public guarantee is entirely open-ended and unbounded. The appetite of the two companies to balloon their balance sheets and take on risk has not been curtailed. Meanwhile, Congress spends apace with new programs for constituents in an election year.
We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.
If the Fed maintained its independence of action and said no to the inflationary finance of Congress's profligacy, we wouldn't have reached this point. But the Fed has forsaken that independence amid an absence of leadership.
Perhaps, as rarely happens, Adam Smith will be proven wrong. Let us hope so, because hope appears to be all we have.
Mr. O'Driscoll is a senior fellow at the Cato Institute and a former vice president and economic adviser at the Federal Reserve Bank of Dallas.
Wednesday, August 20, 2008
HNWIs Stepping Back
From SCMP
Back to basics
Asia's wealthy, shaken by global financial market woes, are returning to private bankers for investment advice
Louis Beckerling
Updated on Jun 10, 2008
The shake-out of global financial markets in the wake of the United States subprime credit crisis has sent the region's mega-wealthy investors running for cover - and back into the fold of the investment advisers attached to the family offices of private banks in Asia.
For the ultra high-net-worth investors in the region who make use of family office services, the roller-coaster ride taken by markets as the credit crisis unfolded became more scary than the market meltdown that followed the collapse of regional currencies in 1997, say industry insiders.
As a result the region's super-wealthy are now paying belated attention to the advice of their private bankers and cutting back on high-risk investments - chief among them the often highly leveraged "share-accumulator" style structured products that proved popular during the equity bull run in the region and bet on big share price gains of a selected portfolio of stocks.
"The riskier equity products had become a massive focus for many ultra high-net-worth customers of private banks, and the emergence of a bear market in Asian equities has been a wake-up call to investors and the family offices that serve them to ensure greater diversification of their investment portfolios," says Nicolas Reille, managing director and head of sales and marketing Asia ex-Japan for Societe Generale.
Rather than borrowing heavily to boost returns, investors intent on preserving family wealth for successive generations are now also sitting on growing cash piles rather than investing, say bankers, and returning to the investment basic of diversifying their portfolios to limit the erosion of the family wealth.
David Cripps of HSBC's Family Wealth Advisory Group acknowledges this trend to risk aversion. "In 1997-98 we saw a big correction in growth stocks after a lot of companies got overpriced," he says. "Now people are genuinely concerned about such things as the long-term outlook for the US dollar, inflation, and talk of oil prices reaching US$200 per barrel."
Finding investments in this environment that offer secure short-term gains is now more challenging than ever, he says.
HSBC's Todd James, head of the Family Office Investment Advisory Group in Hong Kong covering structured products, says the outcome of the shake-out is that the super-rich are now becoming risk managers rather than aggressive investors.
Michael Troth, managing director and head of Global Wealth Structuring for Citi Global Wealth Management, Asia-Pacific, says with the focus of the region's wealthy families back on the preservation of that wealth, greater attention is being paid to managing risk in increasingly globalised investment portfolios and ensuring a smooth intergenerational transfer of that wealth. "For example, if I am a non-US person and wish to have a portfolio of US equities and if I were to hold those equities in my name and I passed away, I only have an exemption limit of US$60,000 after which I would start to pay US estate tax. The top rate is 45 per cent," he says.
"So for a lot of our clients we manage this by setting up a private investment company that would acquire the US equities, in which case there would be zero estate duty tax exposure for the individual." He adds that particular care is taken to ensure that such structures are compliant and not regarded as attempts to evade tax.
Citi's mega-wealth unit caters for the ultra high-net-worth families that typically have a net worth of more than US$250million, and with the increasing internationalisation of families and their investments, more attention is being paid to establishing the most tax-efficient but compliant investment structures and smooth succession planning, Mr Troth says.
Lionel Kwok, head of investment solutions, North Asia, for Credit Suisse, also notes the increasing attention being paid by the region's wealthy families to the preservation of their wealth.
"In the past few months most investors, especially North Asian who tend to be a lot more directional-trading oriented, have changed their risk appetite and are now less aggressive in taking on leveraged risk," Mr Kwok says.
While markets performed strongly last year, investors put a lot of energy and money into structured equity derivatives, Mr Kwok says, but portfolios are now less geared and more diversified. "Larger clients are now tending to look at a better allocation process and adhering to a better portfolio advisory process suggested by their bankers and a better allocation of risk."
Capital-protected structured investment products as opposed to riskier equity-linked products are now returning to favour, he says.
"We encourage our clients to look at core holdings for medium-term investment. In the short-term the present market volatility will prevail and it will be very difficult to outsmart the market in three to six months.
"So we propose a proper portfolio advisory process that will maintain a certain percentage of a portfolio in a well-diversified core holding, with some `satellite' structured products or hedge fund holdings that may be more related to market direction," he says.
Before the subprime crisis and the collapse of several big financial institutions that followed, Asia's wealthy families paid little attention to counter-party risk when making investment decisions to preserve that wealth, he says.
"One thing we want to highlight is that we have a risk dimension in the market that we have not seen before. We now have the fear factor and liquidity risk, but most important is the realisation that there is counter-party risk as well. A lot of investors had not looked at this before, but they are now looking at who the issuer of the securities is before they invest. And, given recent developments in financial markets, they want to see higher returns if the credit is perceived to be a higher risk, which means yield is becoming more important," Mr Kwok says.
Samantha Bradley, managing director of the newly opened Hong Kong office of Withers Bergman, a unit of global law firm Withers Worldwide, says wealthy families in Asia are paying increasing attention to issues of wealth transfer and turning to Family Offices for advice.
"Our research shows that there is a lot of thought being given by wealthy families in the region to issues of succession, and another topical issue is the increasing internationalisation of investment," Ms Bradley says.
"This is particularly so with the emerging class of wealthy families in China who are looking further afield to make strategic investments across world markets," she says.
Asia's wealthy families have also become more selective about their philanthropic grants and bequests. Whereas family philanthropy used to take the form of a simple gift to charity, or possibly the establishment of a grant-making foundation, donors are now taking a more hands on approach to target their gift-giving.
Commenting on this trend, Withers Bergman says that philanthropists now expect to enhance the value of their charitable investments through maximum tax-efficiency to ensure that the most money is available for the work they wish to support at the least cost. And through using that money to meet their goals in the most efficient manner.
Back to basics
Asia's wealthy, shaken by global financial market woes, are returning to private bankers for investment advice
Louis Beckerling
Updated on Jun 10, 2008
The shake-out of global financial markets in the wake of the United States subprime credit crisis has sent the region's mega-wealthy investors running for cover - and back into the fold of the investment advisers attached to the family offices of private banks in Asia.
For the ultra high-net-worth investors in the region who make use of family office services, the roller-coaster ride taken by markets as the credit crisis unfolded became more scary than the market meltdown that followed the collapse of regional currencies in 1997, say industry insiders.
As a result the region's super-wealthy are now paying belated attention to the advice of their private bankers and cutting back on high-risk investments - chief among them the often highly leveraged "share-accumulator" style structured products that proved popular during the equity bull run in the region and bet on big share price gains of a selected portfolio of stocks.
"The riskier equity products had become a massive focus for many ultra high-net-worth customers of private banks, and the emergence of a bear market in Asian equities has been a wake-up call to investors and the family offices that serve them to ensure greater diversification of their investment portfolios," says Nicolas Reille, managing director and head of sales and marketing Asia ex-Japan for Societe Generale.
Rather than borrowing heavily to boost returns, investors intent on preserving family wealth for successive generations are now also sitting on growing cash piles rather than investing, say bankers, and returning to the investment basic of diversifying their portfolios to limit the erosion of the family wealth.
David Cripps of HSBC's Family Wealth Advisory Group acknowledges this trend to risk aversion. "In 1997-98 we saw a big correction in growth stocks after a lot of companies got overpriced," he says. "Now people are genuinely concerned about such things as the long-term outlook for the US dollar, inflation, and talk of oil prices reaching US$200 per barrel."
Finding investments in this environment that offer secure short-term gains is now more challenging than ever, he says.
HSBC's Todd James, head of the Family Office Investment Advisory Group in Hong Kong covering structured products, says the outcome of the shake-out is that the super-rich are now becoming risk managers rather than aggressive investors.
Michael Troth, managing director and head of Global Wealth Structuring for Citi Global Wealth Management, Asia-Pacific, says with the focus of the region's wealthy families back on the preservation of that wealth, greater attention is being paid to managing risk in increasingly globalised investment portfolios and ensuring a smooth intergenerational transfer of that wealth. "For example, if I am a non-US person and wish to have a portfolio of US equities and if I were to hold those equities in my name and I passed away, I only have an exemption limit of US$60,000 after which I would start to pay US estate tax. The top rate is 45 per cent," he says.
"So for a lot of our clients we manage this by setting up a private investment company that would acquire the US equities, in which case there would be zero estate duty tax exposure for the individual." He adds that particular care is taken to ensure that such structures are compliant and not regarded as attempts to evade tax.
Citi's mega-wealth unit caters for the ultra high-net-worth families that typically have a net worth of more than US$250million, and with the increasing internationalisation of families and their investments, more attention is being paid to establishing the most tax-efficient but compliant investment structures and smooth succession planning, Mr Troth says.
Lionel Kwok, head of investment solutions, North Asia, for Credit Suisse, also notes the increasing attention being paid by the region's wealthy families to the preservation of their wealth.
"In the past few months most investors, especially North Asian who tend to be a lot more directional-trading oriented, have changed their risk appetite and are now less aggressive in taking on leveraged risk," Mr Kwok says.
While markets performed strongly last year, investors put a lot of energy and money into structured equity derivatives, Mr Kwok says, but portfolios are now less geared and more diversified. "Larger clients are now tending to look at a better allocation process and adhering to a better portfolio advisory process suggested by their bankers and a better allocation of risk."
Capital-protected structured investment products as opposed to riskier equity-linked products are now returning to favour, he says.
"We encourage our clients to look at core holdings for medium-term investment. In the short-term the present market volatility will prevail and it will be very difficult to outsmart the market in three to six months.
"So we propose a proper portfolio advisory process that will maintain a certain percentage of a portfolio in a well-diversified core holding, with some `satellite' structured products or hedge fund holdings that may be more related to market direction," he says.
Before the subprime crisis and the collapse of several big financial institutions that followed, Asia's wealthy families paid little attention to counter-party risk when making investment decisions to preserve that wealth, he says.
"One thing we want to highlight is that we have a risk dimension in the market that we have not seen before. We now have the fear factor and liquidity risk, but most important is the realisation that there is counter-party risk as well. A lot of investors had not looked at this before, but they are now looking at who the issuer of the securities is before they invest. And, given recent developments in financial markets, they want to see higher returns if the credit is perceived to be a higher risk, which means yield is becoming more important," Mr Kwok says.
Samantha Bradley, managing director of the newly opened Hong Kong office of Withers Bergman, a unit of global law firm Withers Worldwide, says wealthy families in Asia are paying increasing attention to issues of wealth transfer and turning to Family Offices for advice.
"Our research shows that there is a lot of thought being given by wealthy families in the region to issues of succession, and another topical issue is the increasing internationalisation of investment," Ms Bradley says.
"This is particularly so with the emerging class of wealthy families in China who are looking further afield to make strategic investments across world markets," she says.
Asia's wealthy families have also become more selective about their philanthropic grants and bequests. Whereas family philanthropy used to take the form of a simple gift to charity, or possibly the establishment of a grant-making foundation, donors are now taking a more hands on approach to target their gift-giving.
Commenting on this trend, Withers Bergman says that philanthropists now expect to enhance the value of their charitable investments through maximum tax-efficiency to ensure that the most money is available for the work they wish to support at the least cost. And through using that money to meet their goals in the most efficient manner.
More info on HNWIs in Asia
From Private Banker International
Despite ploughing many millions of dollars into building up their wealth management operations in Asia, the leading global private banks still have a poor record when it comes to regional client asset-gathering on a major scale.
Between them, the top ten banks manage only 6 percent of the high net worth personal financial assets in Asia, which are estimated by the Merrill Lynch/Capgemini World Wealth Report to total $7.6 trillion. New data, based in part on UBS estimates, shows that the leaders between them had about $470 billion of assets under management (AuM) in Asia as of the end of 2006 (see table).
Top-ranked is UBS itself, with $93.3 billion or only around 1 percent. UBS’s total client assets in Asia puts it just ahead of next-ranked Citigroup, with $81.6 billion.
UBS claims a market share for the total global private banking market of about 3.5 percent, showing that it and its competitors still have much to do to attract Asian high net worth business.
The UBS data is contained in an investor presentation given by Kathryn Shih, the head of UBS Wealth Management Asia-Pacific, and Johan Riddergard, head of business development for UBS Wealth Management Asia. The ranking excludes ABN AMRO and Société Générale, but PBI has added in the totals for these two institutions.
ABN AMRO’s private banking AuM in Asia was $10 billion at the end of 2005, $15 billion by the end of last year and had ballooned to $17 billion by this May. Société Générale Private Banking also reports a year-end figure of $17 billion.
Talking about the issues of client penetration, the two UBS executives admit: “Our market share in Asia-Pacific is 1 percent and we are the biggest player – [leaving] large room for additional growth.”
As part of its costly build-up in the region, UBS had amassed 750 advisers across Asia by the end of last year, representing a compound annual growth rate of 30 percent since 2000. Over the same period, its AuM posted a compound growth of 19 percent.
The next stage of UBS’s push into Asia will be to shift increasingly into onshore wealth management, rather as it has done in Europe as traditional Swiss-style offshore banking has declined in relative importance amid fierce regulatory controls and a demand by clients for better performance.
So far, private banking in Asia-Pacific has focused on regional international wealth, but the two UBS executives contend that “the real opportunity is in domestic wealth accumulation”.
“About 90 percent of the wealth in Asia-Pacific is domestic and we have just started to capture it,” they add.
Onshore growth
Onshore wealth will grow as wealth becomes more concentrated among high net worth houses, while there is an increased need for professional advice as clients become more sophisticated and first-generation wealth passes on to the next generation, they say.
UBS’s own estimate is that total Asia-Pacific wealth management assets are worth $12.5 trillion among households with more than $210,000 of investable liquid assets, a figure higher than that of the World Wealth Report, which sets a client wealth cut-off point of $1 million and above.
These assets across Asia, excluding Japan, are projected by UBS to grow by 9.7 percent between 2007 and 2010 – versus comparable growth globally of less than 6 percent. By the end of the decade, global wealth assets as a whole are forecast to hit $55 trillion.
Despite ploughing many millions of dollars into building up their wealth management operations in Asia, the leading global private banks still have a poor record when it comes to regional client asset-gathering on a major scale.
Between them, the top ten banks manage only 6 percent of the high net worth personal financial assets in Asia, which are estimated by the Merrill Lynch/Capgemini World Wealth Report to total $7.6 trillion. New data, based in part on UBS estimates, shows that the leaders between them had about $470 billion of assets under management (AuM) in Asia as of the end of 2006 (see table).
Top-ranked is UBS itself, with $93.3 billion or only around 1 percent. UBS’s total client assets in Asia puts it just ahead of next-ranked Citigroup, with $81.6 billion.
UBS claims a market share for the total global private banking market of about 3.5 percent, showing that it and its competitors still have much to do to attract Asian high net worth business.
The UBS data is contained in an investor presentation given by Kathryn Shih, the head of UBS Wealth Management Asia-Pacific, and Johan Riddergard, head of business development for UBS Wealth Management Asia. The ranking excludes ABN AMRO and Société Générale, but PBI has added in the totals for these two institutions.
ABN AMRO’s private banking AuM in Asia was $10 billion at the end of 2005, $15 billion by the end of last year and had ballooned to $17 billion by this May. Société Générale Private Banking also reports a year-end figure of $17 billion.
Talking about the issues of client penetration, the two UBS executives admit: “Our market share in Asia-Pacific is 1 percent and we are the biggest player – [leaving] large room for additional growth.”
As part of its costly build-up in the region, UBS had amassed 750 advisers across Asia by the end of last year, representing a compound annual growth rate of 30 percent since 2000. Over the same period, its AuM posted a compound growth of 19 percent.
The next stage of UBS’s push into Asia will be to shift increasingly into onshore wealth management, rather as it has done in Europe as traditional Swiss-style offshore banking has declined in relative importance amid fierce regulatory controls and a demand by clients for better performance.
So far, private banking in Asia-Pacific has focused on regional international wealth, but the two UBS executives contend that “the real opportunity is in domestic wealth accumulation”.
“About 90 percent of the wealth in Asia-Pacific is domestic and we have just started to capture it,” they add.
Onshore growth
Onshore wealth will grow as wealth becomes more concentrated among high net worth houses, while there is an increased need for professional advice as clients become more sophisticated and first-generation wealth passes on to the next generation, they say.
UBS’s own estimate is that total Asia-Pacific wealth management assets are worth $12.5 trillion among households with more than $210,000 of investable liquid assets, a figure higher than that of the World Wealth Report, which sets a client wealth cut-off point of $1 million and above.
These assets across Asia, excluding Japan, are projected by UBS to grow by 9.7 percent between 2007 and 2010 – versus comparable growth globally of less than 6 percent. By the end of the decade, global wealth assets as a whole are forecast to hit $55 trillion.
Ultra Wealthy in Hong Kong
Ultra high net worth individuals: Mega-rich prefer to be members of an exclusive club
By Florian Gimbel
Published: December 8 2006 12:25 | Last updated: December 8 2006 12:25
Asian private banking tends to be highly profitable because clients are willing to believe they are members of an exclusive club.
Yet some want to be more equal than others – a trend that has not been lost on banks that service the ultra-wealthy.
Industry giants such as UBS, HSBC and Citigroup have been seeking to woo high-end private banking clients – ranging from entrepreneurs with $100m of assets to billionaire tycoons – by establishing dedicated teams of specialist bankers.
These clients may be a boon for the corporate finance departments of big groups because of the investment needs of their family companies. But as private banking clients, they can be a mixed blessing because of their bargaining power.
Typically, Asia’s super-rich set up companies, known as family offices, run by investment specialists who act as advisers and gatekeepers. They oversee the family’s multiple private banking relationships, which often include a mix of US and European banks as well as US brokers for aggressive trading strategies.
But unlike their counterparts in the US and Europe, ultra-wealthy Asians have balked at the idea of joining multiple family offices designed to help rich families share the cost of sophisticated investment management and back-office administration.
This reflects the fact that Asia’s mega-wealth is still in the hands of the “first generation”, the larger-than-life entrepreneurs who are fiercely competitive and deeply suspicious of their fellow tycoons.
“A family office is so personal it is hard to share it with others,” says Kathryn Shih, head of the Asian operation of UBS Wealth Management. “These businesses are run in the style of the owners and even that changes periodically.”
Fleming Family & Partners, the company launched by the UK banking dynasty, is seeking to change these perceptions. The firm, which has recently launched a Hong Kong office, is hoping to carve out a profitable niche by focusing on what it sees as truly independent advice.
“The size of many banking institutions means that, however hard they may try, they face conflicts of interest between their private banking arm and their product manufacturing business,” says Lucy Sutro, head of Fleming Family’s Hong Kong operation. “Most clients in this region have multiple private banking relationships. We will help clients assess what performance they get from their banks.”
HSBC, one of Asia’s biggest private banks, has implicitly recognised the need for greater transparency by launching a separately incorporated family office service firm. David Cripps, who leads the one-year-old venture, insists there is no sharing of client information with HSBC private bankers.
“By providing strategic asset allocation advice, we can correct imbalances and overlaps in a client’s overall portfolio,” says Mr Cripps. “We are here to provide a value-added service, but we are not set up as a profit centre within the group.”
Companies such as Citigroup, which counts a large number of Asia’s wealthiest tycoons and families among its clients, are unimpressed by the new kids on the block.
“In highly developed markets such as Hong Kong, people care about value for money,” says Kaven Leung, head of the north Asia operation of Citigroup Private Bank. “So long as the selection of the products and services is objective and valuable to clients, there will be demand regardless of whether the provider is a family office or mega-wealth team at a bank.”
A powerful weapon in the hands of the big banks, however, is their ability to offer ultra-wealthy families a chance to co-invest with the bank in sought-after private equity deals.
“Because we are taking the same risk as the clients, they know we will be objective in evaluating the opportunity,” says Mr Leung. “Above all, by co-investing with us, clients are benefiting from our due diligence and risk management expertise.”
Still, while groups such as UBS and Citigroup are happy to share some of the risk with their best clients, others believe big banks no longer have exclusive access to the best private equity deals. “Being big is not necessarily an advantage when it comes to some of the most attractive investment opportunities such as private equity, where you can invest only a limited amount,” says Philippe Damas, global head of the private banking at ING. “Moreover, big banks are no longer the first point of call for private equity deals, because everybody is chasing the best deals.”
Another potential problem for Asia’s largest private banks is the growing perception that they may be spreading themselves too thinly. Ultra-wealthy families may start to worry about banks that move too far into the affluent mass market to sustain high profit growth rates.
“I recently met two big Hong Kong clients who said: ‘please stay focused on your segment’,” says Jes Staley, global head of private banking at JP Morgan, which caters to extremely wealthy entrepreneurs and families.
Indeed, whatever they may do to woo Asia’s super-rich, banks will have to make sure they remain the kind of club that clients would actually want to join.
Copyright The Financial Times Limited 2008
By Florian Gimbel
Published: December 8 2006 12:25 | Last updated: December 8 2006 12:25
Asian private banking tends to be highly profitable because clients are willing to believe they are members of an exclusive club.
Yet some want to be more equal than others – a trend that has not been lost on banks that service the ultra-wealthy.
Industry giants such as UBS, HSBC and Citigroup have been seeking to woo high-end private banking clients – ranging from entrepreneurs with $100m of assets to billionaire tycoons – by establishing dedicated teams of specialist bankers.
These clients may be a boon for the corporate finance departments of big groups because of the investment needs of their family companies. But as private banking clients, they can be a mixed blessing because of their bargaining power.
Typically, Asia’s super-rich set up companies, known as family offices, run by investment specialists who act as advisers and gatekeepers. They oversee the family’s multiple private banking relationships, which often include a mix of US and European banks as well as US brokers for aggressive trading strategies.
But unlike their counterparts in the US and Europe, ultra-wealthy Asians have balked at the idea of joining multiple family offices designed to help rich families share the cost of sophisticated investment management and back-office administration.
This reflects the fact that Asia’s mega-wealth is still in the hands of the “first generation”, the larger-than-life entrepreneurs who are fiercely competitive and deeply suspicious of their fellow tycoons.
“A family office is so personal it is hard to share it with others,” says Kathryn Shih, head of the Asian operation of UBS Wealth Management. “These businesses are run in the style of the owners and even that changes periodically.”
Fleming Family & Partners, the company launched by the UK banking dynasty, is seeking to change these perceptions. The firm, which has recently launched a Hong Kong office, is hoping to carve out a profitable niche by focusing on what it sees as truly independent advice.
“The size of many banking institutions means that, however hard they may try, they face conflicts of interest between their private banking arm and their product manufacturing business,” says Lucy Sutro, head of Fleming Family’s Hong Kong operation. “Most clients in this region have multiple private banking relationships. We will help clients assess what performance they get from their banks.”
HSBC, one of Asia’s biggest private banks, has implicitly recognised the need for greater transparency by launching a separately incorporated family office service firm. David Cripps, who leads the one-year-old venture, insists there is no sharing of client information with HSBC private bankers.
“By providing strategic asset allocation advice, we can correct imbalances and overlaps in a client’s overall portfolio,” says Mr Cripps. “We are here to provide a value-added service, but we are not set up as a profit centre within the group.”
Companies such as Citigroup, which counts a large number of Asia’s wealthiest tycoons and families among its clients, are unimpressed by the new kids on the block.
“In highly developed markets such as Hong Kong, people care about value for money,” says Kaven Leung, head of the north Asia operation of Citigroup Private Bank. “So long as the selection of the products and services is objective and valuable to clients, there will be demand regardless of whether the provider is a family office or mega-wealth team at a bank.”
A powerful weapon in the hands of the big banks, however, is their ability to offer ultra-wealthy families a chance to co-invest with the bank in sought-after private equity deals.
“Because we are taking the same risk as the clients, they know we will be objective in evaluating the opportunity,” says Mr Leung. “Above all, by co-investing with us, clients are benefiting from our due diligence and risk management expertise.”
Still, while groups such as UBS and Citigroup are happy to share some of the risk with their best clients, others believe big banks no longer have exclusive access to the best private equity deals. “Being big is not necessarily an advantage when it comes to some of the most attractive investment opportunities such as private equity, where you can invest only a limited amount,” says Philippe Damas, global head of the private banking at ING. “Moreover, big banks are no longer the first point of call for private equity deals, because everybody is chasing the best deals.”
Another potential problem for Asia’s largest private banks is the growing perception that they may be spreading themselves too thinly. Ultra-wealthy families may start to worry about banks that move too far into the affluent mass market to sustain high profit growth rates.
“I recently met two big Hong Kong clients who said: ‘please stay focused on your segment’,” says Jes Staley, global head of private banking at JP Morgan, which caters to extremely wealthy entrepreneurs and families.
Indeed, whatever they may do to woo Asia’s super-rich, banks will have to make sure they remain the kind of club that clients would actually want to join.
Copyright The Financial Times Limited 2008
Wednesday, April 30, 2008
Tech company headquarters moving to China?
From WSJ Blog on China:
April 30, 2008, 4:33 am
If at First You Don’t Succeed…
Here’s one novel solution for what to do when your company’s planned sale to a Sino-American investment group is upended by U.S. fears about China: move your headquarters to Beijing.
That’s not quite what U.S. network equipment company 3Com is doing - but it’s close. A month after its deal to be bought by U.S. private equity firm Bain Capital and Chinese telecommunication gear maker Huawei Technologies fell apart because of purported national security concerns over Huawei’s planned minority stake, 3Com announced Tuesday that it had replaced its CEO with a new boss - who will be based in China.
Robert Mao, the incoming chief (pictured), is a fluent mandarin-Chinese speaker and a veteran of China’s telecom business, having headed operations there for both Alcatel and Nortel. He replaces Edgar Masri, a veteran of the U.S. tech industry who was appointed in August 2006 (and who isn’t fluent in Chinese - although he’s been studying, as he discusses in this YouTube video.)
3Com’s official headquarters will remain 10,800 kilometers (6,700 miles) away, in Marlborough, Mass., where a newly named COO will oversee the company’s business outside China. But the relocation of the CEO job shows just how important China has become for global technology companies - especially 3Com. While much of its business has fallen on hard times in recent years, 3Com has been booming in China. In the last quarter, fully half its revenue came from the country, and H3C Technologies, its Chinese subsidiary, was the only major business segment that made an operating profit.
Its headquarters may still be in Massachusetts, but 3Com’s heart is increasingly in China. -Jason Dean
April 30, 2008, 4:33 am
If at First You Don’t Succeed…
Here’s one novel solution for what to do when your company’s planned sale to a Sino-American investment group is upended by U.S. fears about China: move your headquarters to Beijing.
That’s not quite what U.S. network equipment company 3Com is doing - but it’s close. A month after its deal to be bought by U.S. private equity firm Bain Capital and Chinese telecommunication gear maker Huawei Technologies fell apart because of purported national security concerns over Huawei’s planned minority stake, 3Com announced Tuesday that it had replaced its CEO with a new boss - who will be based in China.
Robert Mao, the incoming chief (pictured), is a fluent mandarin-Chinese speaker and a veteran of China’s telecom business, having headed operations there for both Alcatel and Nortel. He replaces Edgar Masri, a veteran of the U.S. tech industry who was appointed in August 2006 (and who isn’t fluent in Chinese - although he’s been studying, as he discusses in this YouTube video.)
3Com’s official headquarters will remain 10,800 kilometers (6,700 miles) away, in Marlborough, Mass., where a newly named COO will oversee the company’s business outside China. But the relocation of the CEO job shows just how important China has become for global technology companies - especially 3Com. While much of its business has fallen on hard times in recent years, 3Com has been booming in China. In the last quarter, fully half its revenue came from the country, and H3C Technologies, its Chinese subsidiary, was the only major business segment that made an operating profit.
Its headquarters may still be in Massachusetts, but 3Com’s heart is increasingly in China. -Jason Dean
Tuesday, April 8, 2008
Chinese model of economic development?
From the FT:
China’s champions: Why state ownership is no longer proving a dead hand
By Geoff Dyer and Richard McGregor
Published: March 16 2008 17:58 | Last updated: March 16 2008 17:58
When the Aluminium Corporation of China acquired a 9 per cent stake in Rio Tinto last month, the Chinese state-owned company pulled off a number of firsts. Not only was it the biggest ever overseas investment by a Chinese group, it was also the largest ever dawn raid on the London stock market.
Yet while most of the attention focused on what the share purchase meant for BHP Billiton’s efforts to acquire Rio Tinto, the acquisition heralded another important trend – the quiet revolution under way in the Chinese state sector, which has produced a new generation of confident companies with global ambitions.
A decade ago, China’s state-owned sector looked like an economic disaster waiting to happen. In the aftermath of the 1997 Asian financial crisis, average profit margins in Chinese state companies fell to close to zero, and many reported huge losses. The government felt it had no option but to embark on a brutal programme of closures that left tens of millions without jobs.
Fast-forward 10 years and the situation is almost unrecognisable. In 2007, the combined profit of the 150 or so companies controlled by the central government is expected to have reached Rmb1,000bn (£70bn, $140bn, €90bn). In the five years to 2008, this figure rose by 223 per cent. At the end of last year, the list of the world’s 10 most valuable companies contained four groups controlled by the Chinese state – even if this partly reflected the relatively high valuation of the Shanghai stock market.
What we are witnessing, in other words, is an experiment in capitalism that could challenge much of the conventional wisdom about state ownership. Plenty of countries have strong state-owned companies in semi-monopolies such as telecommunications or heavily regulated sectors such as energy and mining. Yet China is trying to create a series of leading public companies in industries exposed to cut-throat competition, where technology, design and marketing are crucial features – just the sort in which state-owned companies have typically suffered at the hands of private rivals.
At a time of growing discussion about whether there is a genuine “China model” for economic development that involves a much bigger role for the state, the fate of China’s public companies could help change the terms of the debate.
One of the most interesting tests will be in the car industry. Chinese companies have startled the auto industry over the past three years by grabbing a 26 per cent share of one of the most competitive markets in the world – which is also now the second-largest. The company with the fifth-biggest brand in the local market – ahead of Nissan, Ford and Hyundai – is the state-owned Chery Automobile.
Based in Anhui, a poor province inland from Shanghai, Chery has benefited greatly from local government assistance in terms of access to financing and land purchases. Critics also claim that the company cut a few corners in its earlier years – its highly successful QQ micro-car was very similar to General Motors’ Chevrolet Spark.
But Chery has also proved skilful at marketing, for example using the internet to create buzz among young car-buyers, and has displayed a ruthless control of costs – neither of which are traditional attributes of state companies. Industry executives have also been impressed by the heavy investment the company has made to boost its engineering capabilities, which will be vital if it is to compete overseas. “Chery looks, feels and has the DNA of a private company,” says Michael Dunne, managing director of consultants JD Power in Shanghai.
State-owned enterprises – often known by the initials SOE – are making their mark in a string of other industries where there is plenty of competition and companies need both capital and a technological edge.
China is awash with private investment in steel, but the industry leader and most technologically advanced steelmaker in the country is the state-owned Baosteel. Chinalco, another SOE, has rapidly become one of the world’s leading producers of aluminium and alumina and is developing plans to become a diversified metals multinational.
Shanghai Electric, meanwhile, is increasingly taking on Japan’s Mitsubishi and Marubeni in bidding to build new coal-fired power plants around Asia. China’s two state-owned shipbuilding giants, China Shipbuilding Industry Corporation and China State Shipbuilding Corporation, are expanding rapidly and beginning to catch up with their Korean and Japanese competitors in terms of technology.
Some of the sector’s improvements reflect reforms the government has pushed on the state sector. Many SOEs have listed at least part of their shares, exposing them to at least some shareholder influence. Executives’ compensation is linked ever more to performance rather than bureaucratic formulas.
“SOEs are increasingly competitive in attracting top executive talent,” says David Michael, head of Boston Consulting Group’s China office. “There are a number of local Chinese managers of multinationals or private sector companies who have gone to work in the state sector.”
Several SOEs have taken on foreign strategic investors in recent years and some have multinational executives on their boards. These relationships have not been without tensions, but they have helped to sharpen performance.
The government has attempted to ensure that those state-owned companies competing globally are competitive at home. Chinalco’s acquisition of shares in Rio was approved by a government agency only after it had pitched its case against other SOEs, including Baosteel and Shenhua, China’s biggest coal company and the world’s second-largest.
There also have been increasing signs that China’s SOEs are learning the skills of corporate finance. Chinalco’s snap purchase of Rio Tinto stock was one example; another has been the ongoing tussle between China’s two biggest airlines, Air China and China Eastern, which could turn out to be the first public takeover battle between SOEs.
Last year, Singapore Airlines agreed to buy a 15.7 per cent stake in China Eastern, which is still controlled by the government but has listed minority stakes in both Shanghai and Hong Kong. The Chinese government gave its approval.
Yet Air China had other ideas, because it wanted to join forces itself with China Eastern to create a national champion. The company started to criticise the deal in public and lobby China Eastern’s shareholders to vote against it. “Everywhere we went, it seemed as if Air China had been there the day before,” says Li Fenghua, chairman of China Eastern. Sure enough, investors rejected the deal after Air China promised to make a higher bid. China Eastern has so far rebuffed Air China’s offer.
Large SOEs in China have always fought tough battles over strategy. But what has been different about the China Eastern situation is that a lot of the debate has been in public – and that Air China has gained an upper hand by offering more money to investors rather than winning a backroom political deal.
Such reforms only explain part of the success of some SOEs. According to Andrew Grant, head of McKinsey’s China practice, many of the successful companies in China have what he calls a “hybrid” structure, mixing features of private and state companies. The best SOEs gain financial firepower from their state parents but have sufficient independence to be managed like private companies. Likewise, some of the most successful privately run groups, such as telecommunications equipment maker Huawei and PC manufacturer Lenovo, have been helped by their close ties to government. “You are starting to see the development of a really interesting dynamic in the state sector,” says Mr Grant. “It is not the case that SOEs are going to dominate the entire economy, but I am very optimistic about some of them.”
The idea of such “hybrid” companies also helps explain the winners in other capital-intensive sectors, including China’s auto industry. “To develop a car company in China, you need to be able to play both sides, running the business with private sector-type discipline but also getting close to local governments for the land and bank contacts that this brings,” says Mr Dunne.
However, the record of SOE reform has not been a uniform success. While there are some outstanding state-owned companies, there are also plenty that demonstrate the well documented pitfalls of political interference and heavy-handed bureaucracy.
Top managers in SOEs are political appointees who can be forced to move jobs regularly between different companies and government departments. In a notorious case in the telecoms sector in late 2004, the government shifted the heads of China Telecom, China Mobile and China Unicom overnight, without giving them any notice.
Older SOEs are often still grappling with outmoded equipment and might be obliged to purchase components and other supplies from affiliated companies, regardless of quality or cost. SOEs can also face more restrictions than other companies when hiring and firing workers.
Although corporate governance has improved, investors regularly complain about lack of transparency in SOE finances, particularly over the transfer of assets between listed companies and their state-owned parent groups.
Moreover, there are several economic downsides to the increasing power of the large SOEs for the Chinese authorities. Although China’s private sector has grown sharply in recent years, the state sector still manages to command the lion’s share of formal financing. The commercial banking market is still dominated by the large state-owned banks and analysts say that these banks still prefer to lend to other large SOEs. Indeed, this close relationship is one reason that the Chinese economy is still vulnerable to periods of over-investment.
The massive boom in the local stock market, which saw companies raise more money in mainland China last year than in any other market, has also largely benefited SOEs. The 12 biggest initial public offerings last year in Shanghai were all by SOEs and accounted for 85 per cent of the capital raised.
Shen Minggao, an economist at Citigroup in Beijing, argues that the recent boom has affected the economy in other ways, by delivering most of the benefits of economic growth to state-owned companies in the form of higher profits, with relatively little going into the pockets of ordinary wage-earners. The massive reorganisation of the state sector in the late 1990s pushed responsibility for a lot of health and education spending on to families.
Meanwhile, the state has been the main beneficiary of the recent surge in SOE share prices, given that in most of these companies only a small proportion of the shares are actually traded – 4 per cent in the case of Industrial and Commercial Bank of China. “It is the state and not households that became wealthier during the blossoming of the SOEs,” says Mr Shen. “Households actually enjoyed only a small portion of the expanding wealth cake.”
Greater independence is good for corporate performance, but there are also signs that China’s more powerful SOEs are outstretching the ability of the country’s regulators to control them. The most remarkable incident occurred last summer, when the large state-owned oil companies forced the authorities to raise fuel prices by helping to create an artificial shortage.
The Chinese government sets prices for oil sold domestically, which puts pressure on the large oil companies – PetroChina, Sinopec and CNOOC – when international prices rise. The response from the large oil companies was a high-stakes game of bluff with the authorities: the amount of oil sold in China was reduced and several large refineries were put on “scheduled maintenance”. When many smaller, private refineries also refused to sell oil at the government-set price, creating an even bigger shortage, the authorities had no option but to increase prices.
The SOEs are also facing a backlash in some Beijing policy circles over their overseas investments. PetroChina has been operating in Sudan for over a decade, during which time Beijing has forged a close relationship with Khartoum. While these ties have prompted criticism that China has weakened international efforts to halt the violence in Darfur, PetroChina has at times sold more of the oil from Sudan to Japan than it has at home – prompting some experts to ask if the controversial Sudan policy actually brings real benefits.
Zhu Feng, of Peking University, says that the oil companies have “hijacked” the country’s foreign policy on Sudan. “Chinese oil companies and a lot of other oil companies in Sudan have made the money. It is not the people or the country [that have made money],” he says.
According to Zhang Yunling, at the Chinese Academy of Social Sciences: “It is not the government deciding to go to Sudan. It is the oil company. They have gradually developed their business and asked the government for support.”
Erica Downs, of the Brookings Institution in Washington, says Sudan is the “crown jewel” of PetroChina’s international business, but that “the company’s domination of the Sudanese oil industry arguably has done more damage to China’s reputation abroad than the activities of any other Chinese SOE”.
“The case demonstrates how the overseas activities of a Chinese SOE can simultaneously harm one Chinese foreign policy objective – to be and be perceived as a responsible rising power – and help another – to enhance energy security,” she says.
The Chinese government has attempted to improve its public relations in recent years, ordering ministries, with varying success, to explain decisions to the foreign and local media. Petro-China, however, one of the country’s most powerful companies, has shown no inclination to fashion a public message.
Elsewhere, in countries as diverse as the Philippines, Zambia and Peru, Chinese investments have provoked a political backlash. “In the future, this issue will become more and more serious,” says Mr Zhang.
For the ruling communist party the political benefits of the SOEs’ new wealth far outweighs any financial costs incurred in keeping them at the “commanding heights” of the economy. To maintain its grip, the party needs a strong state sector with the power to balance a rising entrepreneurial class. The risk for the authorities, however, is that over-mighty companies end up dictating policy themselves.
SAFE gets into foreign investments
From the FT:
Chinese funds jostle to invest abroad
By Henny Sender in Hong Kong and Richard McGregor in Beijing
Published: April 4 2008 23:28 | Last updated: April 4 2008 23:28
Since its formation last September, China’s sovereign wealth fund, China Investment Corp (CIC), has been beset by suspicion and criticism abroad, and recriminations from officials and the public at home, over its investment decisions.
Suddenly, as it battles to establish itself as a credible global investor, CIC has found itself running into another, unforeseen, obstacle – a second Chinese state investment agency with even deeper pockets.
The State Administration of Foreign Exchange (SAFE) is both competing with CIC for investments and complicating the sovereign fund’s attempts to defuse criticism of the way it operates and makes investment decisions.
SAFE, which is under the central bank, has long conservatively managed China’s rapidly swelling foreign reserves, which stood at about $1,650bn (€1,050bn, £828bn) at the end of February.
For a long time, that meant investing largely in US Treasuries. Even now, about 70 per cent of its assets are in dollar bonds, say bankers.
But in recent months, SAFE has emerged as a powerful and more aggressive investor, chasing the kind of returns offshore that CIC was mandated to go after.
SAFE has built up a 1.6 per cent stake in the French oil firm, Total, worth about €1.8bn ($2.8bn, £1.4bn), the Financial Times revealed this week. It has bought stakes in Australian banks and considered investing in private equity funds.
Bankers familiar with its operations believe that it is also considering investing in international real estate.
The decision to make such investments is partly linked to concern over the declining value of the dollar, which reduces the domestic purchasing power of its Treasury holdings.
But increasingly, it raises the possibility of head-on competition between the two pools of sovereign funds, only one of which – CIC’s – is under any pressure to disclose its dealings.
SAFE has potentially far deeper pockets than CIC, which has only about $70bn to $80bn to invest directly at the moment. Moreover, the head of SAFE sits on the CIC board, with access to sensitive information about its planned investments.
For example, when the private equity firm TPG was marketing a multi-billion-dollar fund to invest in troubled US financial institutions, it first approached CIC. But CIC baulked at the terms and it decided to partner with JC Flowers instead, ultimately putting about $4bn into a fund developed by the financial investor. TPG then courted SAFE.
CIC has sought to tackle its critics head-on, conducting its business in a frank and straightforward manner. Lou Jiwei, its head, has toured global investment capitals to make his case.
By contrast, SAFE has a reputation for secrecy, whether its investments originate out of a Hong Kong subsidiary or a newly established office for alternative investments out of Beijing. Its secrecy complicates life for CIC, which is trying to be more transparent in response to concerns from governments that are suspicious of sovereign funds.
The sparring between the two comes at a time when many governments are debating whether it makes sense to have rival domestic investment bodies – a model that Dubai and Singapore have adopted – to spur better performance and impose more checks and balances.
The alternative is to have a single agency, as is the case with the Kuwait Investment Authority, currently a role model for best practice among sovereign funds.
Part of the jockeying between the two Chinese pools of money reflects institutional rivalry. SAFE is controlled by the People’s Bank of China, while the CIC has ministry status and is closer to the finance ministry.
China to build passenger jets
From the WSJ:
China has confirmed plans to set up a company to make large passenger airplanes, taking another small step toward a grand goal but with a long haul yet ahead.
The new company will aim to design, produce and sell jetliners big enough to carry more than 150 passengers. If successful, it could eventually pose a threat -- at least in mainland China -- to Boeing Co. and Airbus, which now dominate the Chinese and global markets for passenger aircraft.
Although China had earlier flagged its intentions to produce big planes, the creation of a company specifically for this task would be new. The venture's shareholders are to include China's two biggest plane manufacturers and the Shanghai city government, Xinhua said, in comments it attributed to Jin Xingming, the director of Shanghai's aviation administration. Xinhua reported in January that the planned company would be capitalized at five billion yuan ($700 million).
AVIC I is making some progress toward this goal, with a 90-seat regional jet called the ARJ21 that it rolled out in December. AVIC I plans to produce 30 of the jets each year by 2011. It also produces aircraft components for both Boeing and Airbus. Starting in August, AVIC I plans to begin assembling entire single-aisle Airbus A320 jets at a plant under construction in the northern city of Tianjin.
Air travel within China is booming. Chinese airlines operated 1,150 commercial aircraft last year, and Boeing forecasts they will need 3,310 additional jetliners by 2026 to satisfy the surging demand.
Intel Launches New China VC Fund
From today's WSJ:
Intel Corp.'s venture-capital arm has completed its first round of investment in China and plans to invest another $500 million in the country over the next several years, executives said.
Intel Capital, the Santa Clara, Calif., chip maker's investment unit, has created the new $500 million fund to focus on technology startups at varying stages, including companies working with wireless broadband, technology media and telecommunications, Arvind Sodhani, the unit's president, said in an interview Tuesday. It is the largest country-focused fund for Intel Capital globally.
Intel plans to fully invest the new fund in three to five years, and is betting China will continue to grow even as other economies slow. When the economy takes a downturn "the natural reaction of investors is not to invest in technology or entrepreneurship," Mr. Sodhani said. But "technology is not really driven by what the state of the markets are at any point in time," he said, adding that "China is on a track all its own. Its economy is growing at a spectacular rate."
Intel Capital has been investing in China for 10 years, and established its first China-focused fund, with $200 million, in 2005. The announcement of its new fund comes as China's technology market is rapidly expanding. The country is the world's largest cellphone market by number of accounts and, by some estimates, surpassed the U.S. this year as the largest Internet population. Personal computer sales are growing at double-digit rates annually, and online services like video-gaming are booming.
Monday, April 7, 2008
What's driving FDI in the US
From the NY Times:
Several factors have propelled the surge of foreign money reaching the United States. The dollar’s weakness against the Japanese yen and European currencies makes American companies cheap for many foreigners looking to invest. The United States remains the world’s largest market, and buying an American company is typically the swiftest way in. And in the wake of the mortgage crisis, American companies are finding credit scarce, making many willing to sell assets to raise cash.
Not least, the United States is living on borrowed money, with the value of imports exceeding exports by more than $700 billion last year. Selling companies to foreigners is one step toward squaring the accounts.
Between 1998 and 2007, foreign companies paid more than $1.7 trillion for major stakes in American firms or to set up operations in the United States, according to the Commerce Department. More than five million Americans work for domestic affiliates of foreign companies.
In 2006, affiliates of foreign companies reinvested $65.4 billion of what they earned in the United States, according to a study by Professor Slaughter underwritten by the Organization for International Investment, a Washington lobbying firm financed by foreign companies. They paid more than $335 billion in wages and salaries, for an average annual compensation of $66,042, nearly a third higher than the average private-sector job.
Friday, March 21, 2008
Wamu target for Chinese banks?
Many Chinese banks are flush with capital and aggressively seeking growth opportunities overseas. The strengthening RMB only makes a U.S. acquisition more appealing. Wamu, despite its potential liabilities, would seem to be a prime target. Why? Here's what Bill Virgin at the P-I has to say:
Here's the entire article from the Seattle P-I.
What would an acquirer get? An established retail banking, credit card and home-loan company with a network of 2,200 branches stretching from California to New York and Seattle to Miami.
Here's the entire article from the Seattle P-I.
Thursday, March 20, 2008
Sportswear goes local
From today's WSJ:
In efforts to woo China's consumers, Nike Inc., the country's market leader in sportswear, and Adidas AG are both aggressively promoting apparel and shoes with designs incorporating Chinese elements -- a departure from the mostly Western-influenced styles they have marketed in the past.
The companies "will do whatever they can to tell the story, 'we were the partner in China's greatest sporting moment,'" says Terry Rhoads, managing director of Zou Marketing, a Shanghai-based sports-marketing firm. "It's a huge battle."
Already this year, Nike and Adidas will each surpass sales of $1 billion in China, their biggest market after the U.S. From 2002 to 2006, sales of athletic shoes and clothing in China by volume doubled, according to market-research firm Euromonitor International. Overall, sportswear sales are expected to grow at an annual rate of 20% for the next five years, and premium brands such as Nike and Adidas can expect increases of 35% to 40%, Mr. Rhoads says.
Wednesday, March 19, 2008
China to launch market for small companies in Shenzhen
The Shenzhen Stock Exchange is starting a "NASDAQ-like growth enterprise market" to help smaller companies raise capital. It plans on competing with NASDAQ, London AIM and other markets. First IPOs could be as early as May 2008. Details from WSJ plus possible IPO candidates and reference data from peers around the world below.
The Shenzhen exchange won't identify early listing candidates for the GEM. Analysts point to several companies operating from a high-technology industrial zone outside Beijing known as Z-Park, for Zhongguancun Science Park.
"We are surely to be in the first batch," said He Yuanping, a vice general manager of Beijing Origin Water Technology Co., which makes industrial sewage-treatment equipment. Mr. He, who is in charge of the GEM listing effort, said Origin Water has received a "positive message" about a listing from officials of the Shenzhen exchange and Z-Park management.
Another hopeful is two-year-old Beijing Techshino Technology Co., which develops fingerprint-, face- and eye-recognition systems. The company should qualify for a listing with annual revenue in the neighborhood of 40 million yuan and is overhauling its shareholding structure, said Zhou Jun, general manager.
Tuesday, March 18, 2008
The price of pork in China
Inflation is becoming an increasingly important problem in China. The price of pork in particular is crucial.
Consumer prices in China rose by 8.7% in the year to February, the highest rate for more than 12 years. Food prices were 23.3% higher than a year earlier.
Pork has been a cornerstone of the Chinese diet for centuries. Rows of 2,100-year-old terra cotta pigs were recently discovered near Xian, a city better known for terra cotta warriors. China’s 1.3 billion people eat more than 92 billion pounds of pork a year — a fifth of a pound a day for every man, woman and child.
And just as higher gasoline prices can lead to a political reaction in the United States, the Chinese government is particularly worried about soaring pork prices because of their impact on household budgets and the way they can exacerbate income inequality.
Haier in the US: Struggling but undaunted
Haier launches new high end refrigerator at its US plant just as economy hits the skids. But adapting to US business culture has also posed challenges. Yet, Zhang Ruiming, Haier's CEO, intends to persevere. "First the hard, then smooth. That's the way to win," he says.
From today's WSJ:
The new refrigerator, which allows consumers to set specific temperatures for individual compartments, was designed and built at Haier's South Carolina factory, at 10 times what it would cost the company to make in China.
The downturn in the U.S. economy crimped consumer demand just as the company's most-expensive U.S.-made products came on the market.
At the same time, Haier's rigid, top-down management structure fell flat with American workers accustomed to a less-authoritarian style.
For Haier, which had $15 billion in revenue world-wide last year, a delay in getting its new refrigerator to market meant that it arrived just as the U.S. economy was turning south. A series of recalls for China-made products last year, which have heightened quality concerns about Chinese manufacturing, compounded the company's challenges. And the new fridge's design simply hasn't set it apart from models by better-known competitors, appliance buyers say.
Known for sage-like sayings and for idiosyncrasies such as the flying-saucer-shaped tower he had built at one of his plants, Mr. Zhang insisted that Haier press on with its global expansion. "First the hard, then smooth. That's the way to win," he says.
It's Official: Bear Citic deal nixed
From today's WSJ:
HONG KONG -- China's Citic Securities Co. Tuesday dropped plans for a $1 billion cross-investment with Bear Stearns Cos. in the wake of J.P. Morgan Chase & Co.'s deal to take over Bear.
Monday, March 17, 2008
Medical tourism starts gaining traction
China should be an important player in this as well.
From BusinessWeek:
From BusinessWeek:
Yes, just like manufacturing facilities and call centers, health care is moving offshore. "All of the largest U.S. insurers are starting to educate themselves or are putting [offshore] programs in place," says Jonathan Edelheit, president of the Medical Tourism Assn., an industry group formed just last year. Companies that self-insure are also bombarding Edelheit's group with requests for information.
Getting covered employees to leave the U.S. won't be that hard, says Edelheit. An insurance company could waive all deductibles and co-pays, offer to cover travel costs for the patient and family members, even throw in a cash incentive, and still save tens of thousands of dollars. After all, a heart procedure that costs $100,000 in the U.S. runs only $10,000 to $20,000 at some of the best private hospitals in Asia. And the quality of care? Foreign hospitals in such arrangements are typically approved by Joint Commission International, part of the same nonprofit organization that accredits American hospitals.
Blue Cross took the lead in medical offshoring when it formed its first partnership, with Bumrungrad Hospital, in February. Since then the insurer has signed similar pacts with the Parkway Group Healthcare, owner of three hospitals in Singapore, and hospitals in Turkey, Ireland, and Costa Rica. Three members of India's Apollo Hospitals Group are also joining the network. And another large Indian chain, Wockhardt Hospitals, is talking with U.S. insurers as well. "Americans haven't come to grips with having their heart surgery in Thailand," says Curtis Schroeder, the American CEO of Bumrungrad. "But that will change."
Friday, March 14, 2008
Commodities "Supercycle" - The Long Boom
Imports of both soya beans and oil increased 35x since 1999. Wow!
From the Economist:
From the Economist:
China, with about a fifth of the world's population, now consumes half of its cement, a third of its steel and over a quarter of its aluminium. Its imports of many natural resources are growing even faster than its bounding economy. Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years.
Chinese demand for raw materials of all sorts is growing so fast and creating such a bonanza for farmers, miners and oilmen that phrases such as “bull market” or “cyclical expansion” do not seem to do it justice. Instead, bankers have coined a new word: supercycle.
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