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Archive for June, 2010

Bad Policy, Bad Advice and Bad Reporting from the US on Dollar-Renminbi Exchange Rate

June 27th, 2010 2 comments

Yaozhou bowl in China First Capital blog post
I don’t know the direction of the dollar-renmibi exchange rate. But, I do know most of the American press, led by the
New York Times and Washington Post, got snowed by the announcement last weekend that China would introduce new “flexibility” in its exchange rate.

The immediate media reaction – and that of the Obama administration – was one of hosannas and smug approval. The tone of most coverage was along the lines, “the Chinese have finally seen the error in their mercantilist ways and will now allow their currency to appreciate strongly against the dollar, leading to a new golden age of manufacturing employment in the US.”

A week has gone by and the renminbi has appreciated by exactly 0.5%.  So, a $100 item made in China that previously cost Rmb682 will now cost an importer Rmb685, or $100.50. Factory managers in the US may be waiting for awhile yet before the flood of orders arrives from China.  The President’s union buddies will also not soon see much of an uptick in their membership rolls.

For those without short-term memory impairment, this is, of course, the second time in two months that US press and the Obama administration loudly predicted the imminent upward revaluation of the renminbi. In April, a flurry of reporting, loudest and strongest from the New York Times,  announced the Chinese government was at last ready to accede to US demands and let the renminbi rise.

That time, the press articles were timed to coincide with a visit by the US Secretary of Treasury, Timothy Geithner, to Beijing. He was there, if the Administration and its media allies were to be believed, to talk tough and get the Chinese to fall in line with American wishes. Discernible results? Zero.

This time around, the reporting coincides with the G-20 Summit meeting in Toronto, where we are told, President Obama will use his intelligence and oratorical brilliance to persuade Chinese leader Hu Jintao to do his part for the sagging US economy. Likely results? We’ll see, but the signs are that China will continue to make policy decisions with its own interests to the fore.

There is much both wrong and economically illiterate about all this US pressure to revalue the renminbi. Start with the fact the Chinese currency is not significantly undervalued. Yes, it is tied to the dollar. So are many other currencies with which the US trades, including Mexico, Taiwan, Russia, Singapore, Thailand, Saudi Arabia. The renminbi’s formal peg with the dollar ended in July 2005. It is true that the renminbi, if it were fully convertible and freely floating, would likely appreciate against the dollar. But, by enough to really make an impact on US manufacturing employment? Hardly.

The biggest benefit to China of letting the renminbi rise against the dollar would be to lower the renminbi cost of China’s huge imports of oil, iron ore and other core dollar-denominated raw materials. Weighing against this would be falling margins at many of China’s exporters, which would ultimately have an impact on manufacturing employment.

Creating and maintaining jobs is a paramount concern for a country whose labor force grows by millions every year, and where there is no “social safety net” as in the US.  Fact: every year, six million more Chinese join the migrant labor force, according to recent report by China’s National Population and Family Planning Commission.

It’s a mistake shared by many Americans that at the current exchange rate, China is some kind of low-cost paradise for people with dollars. I live here. Prices here are not low. In fact, most things in China, with exception of fresh vegetables and public transportation, are either on par with US prices or higher.

Most fruit is generally more expensive here, even at the proletarian outdoor market where I do a lot of my shopping. Same goes for beef, chicken and most everything else you fill up a supermarket cart with. Gas, automobiles, computers, TVs, brand-name products are all higher in China than in the US.

I’m writing this in my local Starbucks in Shenzhen. And while this is hardly a perfect bellwether, the cheapest cup of regular brewed coffee here costs Rmb 15, or $2.20. A cappuccino? Rmb 25, or $3.65.  The place is jammed, as it always is, from noon to midnight. Not a seat in the house. Starbucks has over 350 stores in China and growing fast.

Not that long ago, the renminbi was pegged at 8.2 to the dollar. Has this 17% appreciation done anything to impact the decline of manufacturing employment in the US, a decline that began over 30 years ago? No. Will another 17% appreciation of the dollar reverse this trend? I very much doubt it.  Instead, what will likely happen is prices for many products in the US will rise sharply, since so much of what America likes buying is made here.  This will lead to higher unemployment, lower growth and hit hardest the poorer Americans President Obama claims to champion.

Make no mistake: if Chinese prices rise, this will not create huge new opportunities either for US manufacturers to reconquer the domestic market or allow lower wage countries like Bangladesh, Nigeria, India, the Dominican Republic or Peru to increase dramatically their exports to the US. Those countries can’t now, nor will they ever in my view, manufacture products to match the quality at the same price of those made in China, even if the cost of Chinese made products rises 15%-20% or more.

True, an economics professor’s models would argue otherwise, and President Obama is surrounded by economics professors. The models are plain wrong. Some textile imports from places other than China will rise. Not much else.

So, the real world result of the “strong renminbi” policy: greater economic hardship in the US.  But, won’t ordinary Chinese benefit from lower import prices? Perhaps a little, but not in any way that will create the desired outcome of much higher manufacturing employment and exports in the US. Maybe the Washington state apples and cherries in my supermarket will become a little cheaper, and become only twice as expensive as they are in the US. Again, not overly likely.

China’s current currency policy has its benefits and drawbacks. The benefit is mainly greater predictability for exporters, which has been somewhat helpful during the economic crisis of the last two years in China’s largest export markets of the US and Europe. Even with the stable exchange rate, a lot of exporters in China went bankrupt over this period, because of a collapse in orders from the US and Europe.

The biggest drawback of current exchange rate policy: $3 trillion in foreign exchange reserves accumulated to soak up all the dollars still pouring into the country. This money is not being put to any direct productive use to improve China’s economy. A higher renminbi will not alter that calculus much, if at all.

I’m troubled in many ways by the direction of American international financial policy. The Obama Administration finds it far easier to scapegoat China’s exchange rate than put their focus on the deepest source of American economic malaise: runaway spending and budget deficits in Washington, with the inevitability of large tax increases to follow.

It’s not likely to happen, but here’s what I’d most like to see is the next time the US media starts braying for a higher renminbi. Chinese newspapers respond with articles, quoting unnamed Chinese government officials,  pleading with the Obama Administration to cut spending, deficits and taxes, and so put more money in the pockets of American consumers. They will certainly choose to spend some of this cash on Chinese-made products and so help boost employment, wages and living standards across China.

As panaceas go, this one would be a lot more effective and all-around helpful than anything the American government and its media allies are peddling.

Train Travel in China Retains Its Special Magic

June 17th, 2010 2 comments

for train

Finally, I’ve found an aspect of modern-day China that has changed little, if at all, from my first time in China almost 30 years ago as a graduate student. Long-distance train travel.

As I write this, I’m occupying a hard-to-come by seat in the dining car of a Beijing-Shenzhen train that left the capital about 30 hours ago. I boarded the train in Ganzhou, a lovely small city in southern Jiangxi, a six hour train trip to Shenzhen.

It was not my plan to take the train. I got to Ganzhou on the plane, and expected to return to Shenzhen the same way. But, the tickets on today’s one daily flight were all sold out, so I rushed with little time to spare to the Ganzhou train station.  A helpful policeman let me slip through a locked door. I joined a mobile throng of other passengers boarding in Ganzhou, during the train’s ten minute stopover.

It was a stroke of good luck. This is the first time I’ve been on a long-distance train in China in a decade. The few times I get to take the train these days it’s always on the new high-speed rail lines that connect more and more of the big cities in China. For example, the new high-speed trains connecting Guangzhou and Shenzhen, as well as Shanghai and Hangzhou,  have airline type seats, no proper dining car, and large antiseptic toilets. These trains travel at around 200mph on specially-designed and newly-laid tracks.

The traditional long-distance trains, by contrast, rumble along at about one-quarter that speed, on rail lines that often were first carved through China by the British, in the 19th century. The toilets are cramped and consist of a perch above a four-inch diameter hole in the floor.

Then and now, most of the cars of the train are what are called “yingwo”, (硬卧)meaning “hard berth”. Each “yingwo” car has 45 narrow bunks, stacked three-high. At the end of each car is a furnace with boiling water for tea.

It was mid-afternoon.  Passengers in the “yingwo” cars were mainly lounging around, or snoozing in their bunks. The sound inside was as I remembered it: of quiet conversation punctuated by the occasional “snap” of a watermelon seed being cracked open.

There was one first class “ruanwo” (软卧) or “soft sleeper” car, as there was when I was took a train from Guangzhou to Beijing in 1981. It was fully occupied by passengers who had boarded the day  before in Beijing. I walked by slowly, remembering that first trip – the snuggly warmth of the cotton duvet, and the anti-macassars on the back of the seats.

The soft sleeper car has lost none of its special allure for me. In the years since that first train trip in China, I’ve traveled on Mediterranean yachts, private jets and first-class trains across Europe. But, they just don’t compare to the “soft sleeper” car in China, There is no other transport quite as cozy and rejuvenating.

The dining car has twelve tables a meter long, each of which sits 4 people, shoulder-to-shoulder. Food prices, at around Rmb35 per serving,  are certainly a lot higher than when I first started riding the rail in China in 1981. Back then, you could eat a whole meal and get change back from a one yuan note.

The food isn’t quite as good as I remember it. It was all pre-cooked and served lukewarm. But, it still remains one of the world’s singular travel experiences, dining on proper cuisine at a proper table, as a train trundles gently through China.

Ticket prices remain a bargain. The fare for the six-hour trip from Ganzhou to Shenzhen: Rmb75 ($11). That is about one-tenth the price of the one-way air ticket. The plane is obviously much faster. But, the total time, door-to-door, is not all that different, once you factor in the trip to and from the airport, the 90 minutes spent checking in and waiting for flight departure, and the hour flying time.

Today’s train is right on schedule.  That too, hasn’t changed much. For generations, trains were the primary form of long-distance travel in China, and the trains tracks were the principal meridians along which the country’s population flowed.

These days, long-distance trains are losing out to planes and private cars. But, for me, the chance today to ride the train is a precious and vivid reminder of my own first days in China, and the awesome changes China has undergone during that time.

The most noticeable change on the train, compared to 30 years ago, are staff uniforms. Conductors wear snappy form-fitting dark blue uniforms. In 1981,  train staff and passengers of both sexes mainly wore green and blue Mao jackets.

Back then, railroad workers had a reputation for being rather curt and uninterested in passengers’ comfort. On that front too, not all that much has changed, judging from this one trip. Passengers, for the most part, are treated with a mix of lethargy, disdain and mild despotism.  Trains are perhaps the last place in China where the proletariat still does any dictating.


http://wikitravel.org/en/Ganzhou

The Reverse Merger Minefield

June 8th, 2010 3 comments

Song porcelain from China First Capital blog post

Since 2005, 380 Chinese companies have executed reverse mergers in the US. They did so, in almost all cases, as a first step towards getting listed on a major US exchange, most often the NASDAQ. Yet, as of today, according to a recent article in Dow Jones Investment Banker, only 15% of those Chinese companies successfully “uplisted” to NASDAQ. That’s a failure rate of 85%. 

That’s a rather stunning indictment of the advisers and bankers who promote, organize and profit from these transactions. The Chinese companies are left, overwhelmingly, far worse off than when they started. Their shares are stuck trading on the OTCBB or Pink Sheets, with no liquidity,  steep annual listing and compliance fees, often pathetically low valuations,  and no hope of ever raising additional capital. 

The advisors, on the other hand, are coining it. At a guess, Chinese companies have paid out to advisors, accountants, lawyers and Investor Relations firms roughly $700 million in fees for these US reverse mergers. As a way to lower America’s balance of payments deficit with China, this one is about the most despicable. 

You would think that anyone selling a high-priced service with an 85% failure rate would have a hard time finding customers. Sadly, that isn’t the case. This is an industry that quite literally thrives on failure. The US firms specializing in reverse mergers are a constant, conspicuous presence as sponsors at corporate finance conferences around China, touting their services to Chinese companies.

I was at one this past week in Shenzhen, with over 1,000 participants, and a session on reverse mergers sponsored by one of the more prominent US brokerage houses that does these deals. The pitch is always the same: “we can get your company listed on NASDAQ”. 

I have no doubt these firms know that 85% of the reverse mergers could be classified as expensive failures, because the companies never migrate to NASDAQ.  Equally, I have no doubt they never disclose this fact to the Chinese companies they are soliciting. I know a few “laoban” (Chinese for “company boss”)  who’ve been pitched by the US reverse merger firms. They are told a reverse merger is all but a  “sure thing”. I’ve seen one US reverse merger firm’s Powerpoint presentation for Chinese clients that contained doctored numbers on performance of firms it brought public on OTCBB.  

Accurate disclosure is the single most important component of financial market regulation. Yet, as far as I’ve been able to determine, the financial firms pushing reverse mergers offer clients little to no disclosure of their own. No other IPO process has such a high rate of failure, with such a high price tag attached. 

Of course, the Chinese companies are often also culpable. They fail to do adequate due diligence on their own. Chinese bosses are often too fixated on getting a quick IPO, rather than waiting two to three years, at a minimum, to IPO in China. There’s little Chinese-language material available on the dangers of reverse mergers. These kinds of reverse mergers cannot be done on China’s own stock exchanges. Overall knowledge about the US capital markets is limited. 

These are the points cited by the reverse merger firms to justify what they’re doing. But, these justifications ring false. Just because someone wants a vacation house in Florida doesn’t make it OK to sell them swampland in the Everglades. 

The reverse mergers cost China dear. Good Chinese SME are often bled to death. That hurts China’s overall economy. China’s government probably can’t outlaw the process, since it’s subject to US, not Chinese, securities laws. But, I’d like to see the Chinese Securities Regulatory Commission (中国证监会), China’s version of the SEC, publish empirical data about US reverse mergers, SPACs, OTCBB listings. 

There is not much that can be done for the 325 Chinese companies that have already completed a US reverse merger and failed to get uplisted to NASDAQ. They will continue to waste millions of dollars a year in fees just to remain listed on the OTCBB or Pink Sheets, with no realistic prospect of ever moving to the NASDAQ market.

For these companies, the US reverse merger is the capital markets’ version of , or death by a thousand slices.

Meet China’s Newest — and Maybe Most Deserving — Billionaire

June 2nd, 2010 No comments

Aisidi

According to the most recent calculation by Forbes Magazine, there are about 800 dollar billionaires in the world. As of last week, there may be one more, Huang Shaowu.  And he’s a friend of mine.

On Friday, trading began on the Shenzhen Stock Exchange of mobile phone distributor and retailer Aisidi (爱施德) (Ticker: 002416) The IPO raised over RMB1.8 billion for the company, at a price-earnings multiple of 50. It leaves Shaowu’s holding company still in control of about 70% of the shares, now worth a little over $2 billion.

I was at the party to celebrate the IPO at the Hyatt in Shenzhen, along with about 300 others. The last time I saw Shaowu was about three weeks ago, after traveling around Shandong together for four days. Shaowu is a modest and sincerely warm man. He would never brag about his business. But make no mistake, he has a lot to brag about.

Aisidi is a leading distributor and retailer of mobile phones and Apple products in China. Its 2009 revenues were Rmb 8.75 billion (USD$1. 28bn), while net income reached Rmb875mn ($128mn). In the first quarter of 2010 net income rose by 70% over first quarter of 2009.

Aisidi got its start back in 1998, at a time when the mobile phone market in China was a fraction of its current size. That year, China Mobile had 25 million subscribers. As of now, they have over 700 million. In 1998, China was still then considered a poorer, developing nation. Shaowu took a big gamble back then, to begin distributing only brand-name mobile phones, and sell them at full market price. Shaowu saw more clearly than most the direction China’s mobile phone industry would take.

Aisidi’s business has grown enormously since 1998.  It acts as the trusted distributor for many of the top mobile phone brands, including Samsung, Sony Ericsson as well as Apple’s iPhone. It also has partnerships with China Mobile, China Telecom, China Unicom.

Aisidi doesn’t distribute, sell or otherwise transact in any way with shanzhai manufacturers. Only the genuine articles. Aisidi is also the key part of Apple’s retail strategy in China, with a market share of 45% of all Apple products sold in China.

The boss of Apple China was at Aisidi’s IPO party last week. I chatted with him, and for those who are wondering, there is still no timetable for when Apple’s new iPad will go on sale in China. When it does, it is certain to add significantly to Aisidi’s revenues and profits.

Way ahead of the pack, Shaowu saw that there was a market – and it turns out a truly enormous one – serving the Chinese who would pay top-dollar for phones they knew came straight from manufacturers, and would be repaired professionally and promptly if anything went wrong.

Shaowu built Aisidi to have the products and prices that allowed it to make money from the start and to become one of the larger private corporate tax-payers in China. Now as a public company, Aisidi has the resources to grow into one of China’s biggest entrepreneur-founded companies.

Shaowu  made his money doing something that took guts and insight. It was a real joy helping him celebrate Aisidi’s IPO. His success is deserved. He is both a nice guy and a helluva businessman.