Adventures in oriental finance

May 16, 2008 – 6:27 pm

The economist has an excellent article this week that touches on the myriad problems in the Chinese financial sector:

Hank Paulson, America’s treasury secretary, was not just talking America’s book when he said that opening the Chinese financial system is “absolutely necessary” for China’s own long-term economic success. It would not only provide greater equilibrium to global capital flows, but would also bring more efficiency to China’s industry. Already, manufacturing firms in southern China are struggling to cope with the rising yuan, because there is no currency-futures market for hedging.

Similarly, Chinese firms are forced into inefficient financing arrangements. They can borrow from state-controlled banks at rising rates that may have little to do with their own creditworthiness, let alone what they plan to do with the money. Alternatively, they can join a long, bureaucratic queue to issue shares. Even the largest ones still rely on the state for permission to raise capital: Ping An, the second-largest insurer, recently pulled a vast secondary share offering after what was believed to be a quiet word from the authorities.

A state-driven financial market means state firms tend to do best. Financing for start-ups remains largely informal—loans from friends outside the financial (and tax) system—which stifles entrepreneurship. Worst of all, today’s system provides a truly rotten deal for Chinese citizens trying to put away money for retirement, for their children’s education or other personal needs. They are given a bleak choice of subsidising the financial system through deposits yielding less than inflation or speculating on highly volatile shares.

The only major disagreement I have with the article is its backing of Paulson’s stance on the currency. Paulson puts the opening of the capital account fairly high up on the “to do list” of Chinese financial reforms, whereas it seems to me that that jolts linked with moving to a freely convertible currency would wreak havoc on what is already a weak financial system.

While I’m personally very concerned that the current muck will slow reforms to a standstill, assuming things pick up again I still am guessing 10-15 years before there is direct trading of the RMB. The government would have to have a little more of a stomach for risk, which I think would require a turn around in demographics (less excess labor, which is happening right now), full-to-majority privatization of major banks (particularly ICBC and CCB, I’m not at all optimistic about ABC), and the full development of the capital markets (short selling needs to be introduced as soon as possible).

None of those things will happen any time soon.

Bradley Gardner

Clear as Mud

May 9, 2008 – 11:59 am

So after weeks of wild speculation surrounding visa rules, the Chinese foreign ministry finally broke its silence and acknowledged that the rules had been tightened.

“We have made some arrangements according to usual international practice. That is, in the approval process we are more strict and more serious with the procedure,” Foreign Ministry spokesman Qin Gang told a news conference on Tuesday.

As AP reports, he did not directly link the changes to the Olympics, adding that the policies would “be maintained for a period of time.”

So everything’s cleared up then? Well, no. The general consensus seems to be that between July 1 and sometime in September, foreigners who are not on a full-time work visa (Z visa) will only be issued with 30-day tourist (L) visas. The issuing of F visas seems to have been suspended – but again this has not been confirmed. Other reports suggest that student visas (X visas) will also be suspended from the beginning of July, and that for the duration of the Olympics, any foreigners looking to get hold of a tourist visa will be required to show proof that they have tickets for an event – though this latter rumour appears hard to believe.

Anecdotal evidence is also confusing. I know of foreigners who have used back-street visa dealers to get hold of Z and X visas, but for a hefty fee. Others have targeted less-popular embassies and consulates. While the visa offices in Hong Kong and London appear to be making it extremely difficult for foreigners to get visas of any kind – three friends who are coming out to visit me at the end of this month were required to show proof of hotel bookings and departure flights, procedures – others appear to be more accommodating. A friend of mine was able to get hold of a 60-day L visa from the Chinese consulate in Osaka, Japan, with no questions asked last week, while others have had success targeting embassies in Korea, Thailand and Vietnam.

Given the furore surrounding the torch protests and the strong conflicting opinions about the staging of the Games in Beijing, it is understandable that China is looking to control the flow of people into and out of the country more closely. But by failing to spell out the situation clearly, the authorities run the risk of hurting businesses and of hurting the economy – the Olympics should be a massive boost for the Chinese tourism industry, not just in Beijing but across the country, yet the tighter rules may well dissuade many potential visitors who do not have tickets. It is sad that the atmosphere of ‘us against them’ has become so pronounced that the authorities appear to have become inherently suspicious of all foreigners looking to visit or work in the country.

Rather than letting people experience the real China first-hand, by closing themselves off from the outside world, they risk merely reinforcing the admittedly often over-the-top picture being painted by the foreign media of a country and a government that is increasingly suspicious of and hostile to the outside world.

MP

Wedding Goldmine

May 7, 2008 – 3:54 pm

Having been away from my hometown for four years, I have no idea how much money I should give for a good friend of mine who is getting married there.

In the most expensive Chinese city, Shanghai, if a colleague invites you to their wedding, the hongbao, or red envelope full of gift money, should be RMB 300-500 (USD 40-70). If it’s a good friend who is getting married, it should be at least RMB 600 Yuan (USD 85). When it comes to a very close friend, then it’s up to the individual’s discretion.

While I was trying to figure out the appropriate hongbao amount for my hometown based on such factors as my friends’ salaries and the cost of living back home, my mother said, “Just pay according to the Shanghai market! If you give her a fat hongbao, she will pay you back at least the same amount when you get married…unless you don’t get married!”

My mother’s words sound too practical for an occasion that is supposed to be full of joy and love. However, I have to say that Chinese weddings, increasingly held in restaurants or hotel banquet halls with at least 100 people sitting around 10 tables waiting impatiently for the dishes they have “paid” for, are not that romantic any more. It is a business, and it’s a good way of making money. Suppose a banquet table seating 10 guests costs RMB 2,500 (USD 360), and each guest at the table gives a hongbao of RMB 300 (USD 40). The wedding couple can make at least RMB 500 (USD 70) from each table. If they book a cheaper banquet, or get a cheaper wedding service company, their profit will be even more. Some couples even send invitations to everyone they know in order to get more hongbao: several friends of mine who work for large companies with a staff of several hundred people complain that they receive wedding invitations from co-workers they barely know – people they only occasionally come across in the corridor, and whose names they hardly remember.

While couples make money the traditional hongbao, banquet halls and wedding companies are making money through newer means: due to the high demand for wedding banquets in 2008, it’s difficult to book any table even if the couple started as early as last year. This, of course, is driving up prices. And if a couple wants to book their banquet on the weekend, on a holiday, or on a lucky date such as “May 18, 2008,” they must pay even more.

This whole business of getting married seems quite lucrative: it’s reported that a wedding banquet scalper from Shenyang made over RMB 10,000 (USD 1,430) from just three wedding banquets he arranged in March, and another in Hangzhou is making RMB 200/table for a banquet he arranged in August at the Hyatt hotel. Meanwhile, the CPI keeps rising, and the cost of banquet weddings has increased by RMB 300-600 per table nationwide.

So for those who plan to get married in 2009 – better act fast!

Claire Li 

Mixed messages

April 18, 2008 – 8:10 pm

A new business website that I ran across while searching “Chinese inflation” on google news, has quite an odd sense of what quote accreditation:

“What’s killing me is the underlying costs,” the billionaire entrepreneur insisted.

Oddly what’s killing me, is not being a billionaire.

BG

Groan…

April 16, 2008 – 11:24 am

The Democrats have gotten on the China bashing wagon… and since this is a big issue for me, I’m beginning to wonder if I’m going to need to start supporting the Iraq war (i.e. vote for McCain).

Obama told workers in Pennsylvania on Monday that China had to respect trade rules if it was to act as “positive force” for the world economy.

“If you are doing the right thing and not trying to manipulate your currencies to our disadvantage then you will have access,” Obama told UGroan… (by which I meannited Steelworkers union members and other industrial workers.

Ignoring the “China not playing by the rules” talk, which has little basis in reality, not giving China “access” to American trade will be more a net negative to the US than it will be to China. The cost of most goods manufactured in Asia (China does assembling for most Asian countries) would rise significantly, which, with inflation already over 4%, and expected to rise in the next few years, is not something that anyone wants. It wouldn’t do anything to save American jobs, because American manufacturing is simply not competitive globally. Our economy is oriented towards high added-value hi-tech and service sector jobs. If we are to be in any way price-competitive with developing economies in manufacturing we would need to drastically reduce the costs of everything in the economy.

Or, we can retrain our labor force to get service sector jobs.

Hillary though not quite as bad as Obama, is competing in the “plans to trash America’s economy.”

“We need solutions to fix our trade laws, build a strong manufacturing base and stand up to China and say that unsafe toys and unfair currency practices are unacceptable.”

Groan…

The F-Visa Blues

April 14, 2008 – 6:40 pm

Being woken up by someone pounding furiously on the door is never a pleasant experience at the best of times but when you’re living in China, it’s 6.30am and the person at the door is yelling “Police, Police”, it must be doubly disturbing.

My friend, who suffered such a rude awakening last week, has lived in Beijing for two years and has a genuine Z-type work visa. The policeman at the door demanded to see her passport and papers. Having carefully scrutinized the paperwork to check that everything was in order, he then cheerfully apologized for the disturbance and went on his way. Unsurprisingly, my friend didn’t get back to sleep.

For all that many foreigners like to complain, aside from the language barrier and the occasional brush with bureaucracy, living in China is nowhere near as stressful as many outside the country would imagine it to be. Most expats enjoy a good standard of living and, save for occasional trips to renew residency registrations or to extend visas, generally have relatively few interactions with the authorities.

Yet over the past few months, the authorities are increasingly invading this expat comfort zone. At least three friends have had personal home visits from policemen demanding to see their papers. Another friend’s office was recently raided and all the foreigners present were required to show their documentation. A third friend was stopped randomly while on her bike and asked to produce her passport – when she explained that she didn’t have it on her, the policeman briefly threatened to take her down to the station before eventually relenting and letting her go on her way. The police presence in Beijing has become much more noticeable.

When I came out to Beijing to start working last August, a family friend who lives out here asked me whether my job would provide me with a proper working visa – a Z visa – or whether I would be on a temporary business visa – an F visa. She was concerned because she had heard on the grapevine that the authorities were planning to tighten the visa regulations in the run-up to the Olympics. I reassured her that I was on a Z visa and thought little more of it. But many of my friends here are on F visas – three- or six-month business visas which officially require a letter of introduction from a Chinese registered company but which in practice have been easily obtainable through visa agents of dubious legitimacy who advertise their services to foreigners in cities across China.

Last month, however, a friend of mine went to apply for a six-month multiple entry F visa in Hong Kong and was told that this was no longer available – the most he could apply for was a 30-day double entry visa. Other friends have since been told that they will only be able to obtain 30-day visas when their current F visas expire. Last week, a number of media reports picked up on this apparent clampdown on multi-entry business visas, with trade and industry groups, claiming, rightly that this would have affect tens of thousands of foreign businesspeople who live in or regularly do trade in China. A number of friends have admitted that they may well have to leave the country and only return after the Olympics. The alternative – a Hong Kong or Seoul visa run every 30 days, is just too expensive, not to mention time- and labour-intensive, to be worth their while. As magazine editors, we are bound to feel the pinch – almost all freelance journalists in China operate on F visas.

What is further complicating the issue, however, is the fact that the Chinese authorities are publically denying that there have been any changes whatsoever to the visa process. Calls to the Chinese embassy in London have been met with reassurances that the rules are exactly the same as those listed on the website – ie they haven’t changed since 2006. Jiang Yu, a spokeswoman for the Ministry of Foreign Affairs, told journalists in Beijing last week that there had been no change to China’s visa policy. There is a wealth of evidence to suggest that this is patently not the case. Perhaps, given the current slew of negative publicity surrounding the Olympics, the government is attempting to avoid any further opportunities for the Western media to criticize China. Certainly the recent unrest in Tibet will have made the authorities less inclined to continue to allow foreigners to live in China based on dubious letters of reference from often non-existent employers.

China has comparatively relaxed visa requirements, certainly in comparison to, say, Russia, where the regulations seem designed to actively discourage anyone from even considering visiting the country in the first place. And certainly the F-visa loophole has been readily exploited by tens of thousands of foreigners looking to live in China without securing full-time employment. So in some ways a tightening of the rules is not altogether surprising nor, necessarily should China be criticized for it too heavily. It would certainly have a negative impact on some business activities, but companies and individuals would soon learn to live with the new rules and, probably, to factor in the additional costs and paperwork. Many people who are currently exploiting legal loopholes would have to find a way to stay here legitimately or would be forced to leave.

But the problem is that because officially the authorities are denying it, no-one knows the actual situation, nor whether the current restrictions will, as many expect, be lifted following the Olympics. And without knowing this, neither individuals nor businesses are able to plan ahead for the next few months – everything is based upon assumptions, second-hand stories and rumor. What business fears most is uncertainty. The longer immigration officials continue to deny the situation and claim that it is business as usual when this is patently not the case, the more difficult life will become for businesses and businesspeople and the more money the economy stands to lose.

Perhaps the only people profiting from this whole fiasco are Hong Kong hoteliers. If everyone on F-visas will be forced to make a monthly visa run from now on, expect demand for hotel rooms in Hong Kong to go through the roof.

Matthew Plowright

The most successful IPO of the year

April 8, 2008 – 3:30 pm

This isn’t actually the most successful IPO of the year, I think its more of a stastical fluke. But playing around with Yahoo finance I came across a page with “the best IPOs of the year. Number 1 is the “Asia Special Situation Acquistion Corp.” Which, despite having shares with 100$, did a secondary share offering for 10$ a share (at least that’s how I read the graphs). Meaning that the shares they sold made a 900% gain.

The company is a special purpose investment vehicle for the Ho family (Macau gaming tycoons):

We intend to identify prospective acquisitions that are either located in Asia, provide products or services to customers located in Asia, or invest in Asia. Our efforts to identify a prospective target business will not be limited to a particular industry or area in Asia, although we initially intend to focus our efforts on acquiring an operating business in the leisure and hospitality or financial services industries, that invest in, is located in or provides products or services to customers in China.

Angela Ho has served as our Co-Chief Executive Officer and Chairman of the Board of Directors since our inception in March 2007. From 2002 to the present, Ms. Ho has managed real property portfolios, including for Dragonballz Trust and Sponge Bob Trust, which are each engaged in the business of real estate, for investors in Macau and the United States. From 1996 to 2006, Ms. Ho has also been active in managing various family businesses controlled by her father, Dr. Stanley Ho, including Jet Asia Ltd., HoGaming.com and drho888.com, which are engaged in the business of aviation, computer software and Asian gaming operations, respectively. From 1980 to 1987, she worked as a sculptress exhibiting in a number of major galleries and museums, and was employed at Sotheby’s Fine Arts Department, New York.

God I wish I was part of the Ho family.

Bob Dylan on inflation

April 5, 2008 – 6:54 pm

I was playing with a title for my Abacus article for next month, and remembering Bob Dylan’s statement that he tries to have a song for every occasion thought to name it “High Water Rising.” I picked the song out on my iPod and discovered.

“High water rising, rising night and day, all the gold and silver are being stolen away”

“High water rising, the shacks are sliding down, folks lose their possessions folks are leaving town.”

and of course

“They got Charles Darwin trapped out there on Highway 5, judge says to the high sheriff I want him dead or alive. Either one I don’t care. High water everywhere.”

All of which seem perfectly applicable.

Bradley Gardner

Google jokes about the Chinese Economy

April 2, 2008 – 3:22 pm

The site is in Chinese, but here is the Wikipedia entry about it:

[On April 1, 2008], Google launches Manpower Search (谷歌人肉搜索) in China (google.cn). This new feature is powered by 25 million volunteers who do the searching around the clock. When the user entered a keyword, volunteers will search any possible answers from a mass of paper documents as well as online resources. The user is expected to get the search result within 32 seconds.

Hilarious!

I Love Taobao

April 2, 2008 – 10:42 am

Online spending in China last year totaled RMB 59.4 billion. Of that, 43.3 billion alone was spent on Chinese online retailer Taobao.com. For comparison, Taobao points out that gross profits for international grocery chain Carrefour last year were 24.8 billion – that is, people are spending more through an online retailer than a traditional store.

Taobao had 50 million users in 2007, with 116 million different products for sale online. And on average, every user of Taobao spent RMB 817.

I was one of those 50 million users last year, and though modest, my own Taobao spending was higher than the amount mentioned above. I have bought a pair of gloves, a wallet, one pair of shoes, two scarves, three pairs of socks, 10 items of clothing, over 10 kawaii Japanese things (from a pink puffy coin-purse to cosmetics bags), some snacks, and lots of China Mobile credit charging services. In total, I spent more than RMB 2,500 on Taobao last year.

Of course, my own spending is a drop in the bucket compared to what I have seen online. Everyday I see new posts from people sharing their experiences shopping through Taobao; some with pictures of what they buy. Lots of these posters spent at least RMB 20,000 within six months. The most impressive was someone who spent RMB 200,000 on designer bags on Taobao within a six-month period.

It’s no wonder that Taobao is so popular. Especially with the fast-rising price of goods in China, discounted products on Taobao attract lots of people. Nowadays, after fans of Taobao try on the clothes and shoes they like at department stores or small shops in markets, they go online immediately when they get home and start their virtual shopping journey – typing in the brand name or a description, comparing the discounted prices, then making their final decisions after factoring in sellers’ credits and courier fees. With luck, they may get some of the exact same products for 60% less.

With Taobao, people can also get ahold of things they can’t find in stores and save themselves time spent searching on the streets. Online brokers can help buy products abroad and ship them to you. You can even find fortune tellers offering their services online. Users can have their fortunes told by people clear across the country . . . and meanwhile, Taobao makes a fortune.

Claire Li