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Archive for February, 2014

China’s New IPO Regime — manipulation or emancipation? — Reuters

February 20th, 2014 No comments

Reuters

reuters

In English we use the phrase ” bee in one’s bonnet” to explain someone with an obsession for a particular point of view. In Chinese, a similar idiom is 挥之不去, meaning you can’t wipe out the stain.

Have a  look at this article today by Reuters, about the IPO process in China. To me, the reporters started off this story with a bee in their hats, that China’s domestic IPO industry remains a nest of corruption, manipulation and ominous doings by the regulator, the CSRC. They found someone to quote, and then asked me for my opinion. I shared it across several emails. As you’ll see, I end up being quoted in the article providing something of an antidote to all the negativity. I don’t think, to switch back to the Chinese,  I quite wiped away the stain.

Here’s the story that didn’t get reported. In the last five weeks, China’s domestic stock markets had 48 successful IPOs. That is exactly 48 more than China had in all of 2013, and ahead of the successful IPOs so far this year in Hong Kong and the US. In my view, China is on track, as I said in one of those emails to the Reuters reporter, “to shatter all worldwide records for number of IPOs in a year and money raised.”

That’s big news. Instead, the article focuses on a whole lot else that all boils down to dark mutterings, but not a lot of facts, suggesting that insider trading  is or may become rife; that there’s some form of “moral hazard” at work here. Hard to refute. Equally hard to confirm.

The one example cited, of the cancelled Jiangsu Aosaikang, is said by a source to be “most heavily intervened IPO in the history of China”. IPOs, for those keeping score, get pulled all the time, everywhere, most often because investors wouldn’t commit to buying all the shares on offer. What happened with the Jiangsu Aosaikang IPO no one can say for sure. But, the quote is just silly.

Until two months ago, all China IPOs involved a level of direct, disclosed, intensive intervention by the CSRC that covered not only the IPO offering price, but included too the CSRC making decisions on which Chinese companies should IPO, when, with what level of profits. This was intervention on a grand, intentional and absolutist scale.

We’re only in the second month of the new IPO regime in China. Things might degenerate. The CSRC and market participants like underwriters are still feeling their way forward. But, there’s ample room for optimism here: a highly-damaging IPO embargo is over, Rmb 30 billion  ($5 bn) has been raised, and there’s clearly investor appetite for more new issues.

Reuters

China’s Newest Billionaire, My Buddy Laowu — Bloomberg

February 17th, 2014 No comments

Bloomberg

Bloomberg story

It took my friend and client Laowu 20 years to build his business, but less than four months from the IPO in Hong Kong to reach dollar billionaire status. While I hardly doubted he’d someday make it, it certainly happened quicker than I would have hoped or guessed. You can read my account of this remarkable businessman, his humble beginnings and his high-flying real estate development company, by clicking here.

Laowu’s company, Hydoo, has had a torrid run on the Hong Kong exchange. The share price is up over 70% since the listing on the last day of October 2013. That’s lifted the value of his family’s shares to north of $1 billion. I hadn’t kept track of the stock price, so didn’t know my friend had reached the milestone. Bloomberg’s China Billionaires reporter called today to ask if I would comment for the story he’s doing.

That article can be found here and can be downloaded in PDF here.

 

 

A Practical Peasant Revolution in China

February 11th, 2014 1 comment

Ming painting China First Capital

It’s commonly held that the biggest threat to social stability, and therefore continued Chinese Communist Party rule, is a growing gap between rural and urban China. City folks grow prosperous while peasants struggle along in something akin to Neolithic poverty.  It’s a comfortable shorthand for understanding today’s China. But, it’s also increasingly far from the truth.

Rural China is undergoing a very powerful, if little noticed, transformation, as more agricultural production shifts to a system where peasants work for guaranteed cash wage to grow food. This is increasing incomes, as well as removing much of the risk from the traditional system where peasants would live off tilling their own small plot of land, and so be subject to all the hardships and vagaries that frequent unfavorable weather or adverse markets could deliver.

To be sure, there is still a  large gap in cash earnings of city and rural Chinese. This will likely always be true in China, as it is in the US and Europe. But, the gap in living costs is similarly large. You need far less money to live acceptably well in China’s countryside. The health care and education systems in rural China are also undergoing very powerful change, getting both better and cheaper for locals. While you can’t measure it precisely, because of huge differences in relative prices and purchasing power, my view is that the quality-of-life differential between city and rural China is fast getting narrower, rather than wider.

One primary force behind this change is the shift of more agricultural production to a wage-based system where peasants work as hired labor for the food, landscaping, Chinese medicine industries among others. In most cases, peasants are paid a guaranteed wage and given training as well as free fertilizer and pesticides to grow crops on their own land or fields leased by large companies. Beyond the basic wage, most will also earn bonuses depending on output. The bonuses may either be in cash or in kind: the peasant gets to keep and sell output above a pre-agreed minimum.

In Chinese, this rapidly-spreading agricultural contract production system is called 订单农业,”dingdan nongye“. It means farming done to fulfill fixed orders, at a fixed price, rather than growing things subject to the vagaries of nature and day-to-day market pricing. Deng Xiaoping gave peasants back their own land to farm. This new system is reducing much of the risk and struggle associated with peasant toil.

In Europe and the US, governments guarantee farmers a minimum income. But, their way of doing this is through market-distorting subsidies and protectionism that leads to higher food prices for consumers. The Chinese system is manifestly better.

In the last three years, I’ve visited quite a few companies and farming areas using this system as a key part of their business model. It is working well by all accounts, and spreading very quickly across rural China. From what I’m told, there is never a shortage of local peasants eager to participate in schemes like this. At a stroke, these peasants become fully part of the cash economy. Not only is the risk eliminated of suffering through a bad year, but it’s often possible for these peasants to work on, and profit from, a larger piece of land than their own small family plot.

In effect, this agricultural “putting out” system mirrors the way a lot of the manufacturing industry is organized in China. Manufacturing workers are given a fixed amount of work to do each month in return for a basic salary, and the promise of being paid regular bonuses for all output above the minimum. A similar system, for example, is in place at Foxconn, to encourage and reward all those thousands of workers turning out Apple iPads and iPhones.

In agriculture, this system solves one of a perennial problems both of Chinese farming and the Chinese food processing industry — small farm size, and so a lack of scale production. One example: I’m friendly with the boss of one of China’s largest brand-name “cellophane noodles” companies. They make vermicelli from sweet potato flour, a popular product across a lot of China. They need each year to secure an ever larger quantity of high-quality sweet potatoes. They can’t buy or rent an adequate amount of the land to farm themselves. So, they rely on a large number of Sichuan peasants to grow for them, based on annual contracts, with fixed salary and bonus.

A similar system is used by China’s largest producer of certain roots used commonly in Chinese medicine. The company now has about 35,000 acres under cultivation in an area of Northwestern China most suitable for producing these medicinal herbs. The local peasants have been growing these herbs for centuries, but with variable quality and unpredictable yields. The company has systematized the growing process. The impact on local peasant incomes has been profoundly positive.  In addition, it now means there is a reliable supply of high-quality pharmacologically-active plants being grown every year. The company provides seeds, fertilizer, and what’s known in America as “agricultural extension” — experts who work with local peasants to make sure everything is being grown efficiently, using the correct amount of fertilizer and irrigation.

The owner of this Chinese medicine herbs business also owns the largest beef processing company in this region of China. Here too, the basic production process is the same — peasants raise the cattle for the company, following strict standards, in return for salaries and bonuses.

The Chinese government, which is attentive to the need to improve rural living standards, is generally supportive of this agricultural contracting system. In some cases, they will also rent farm land to companies on condition that they use this wage-based system to employ local peasants. I have no first-hand knowledge of any skullduggery here, of peasants being turfed off their own land, so that they must take jobs working for some giant food company. Does it happen? Might it happen? China is a big country, with half a billion peasants. But, my sense is that overall, this new agricultural production system is an optimal way to increase incomes and decrease the toil and hardships of farming in China.

Along with helping peasants to live better, and drawing more peasants back home from factory jobs in urban areas, it’s also allowing agricultural processing companies to grow larger in scale, and increase the quality and distribution of their products. I have the opportunity to travel quite often in rural and semi-rural parts of China. I’m always struck, as an American, by the contrast between farmland in China and the US. America is blessed with so much fertile, flat and well-irrigated land.

In China, farmland discloses even to an untrained eye the fact it’s been in continuous cultivation for longer than just about anywhere else on the planet. The land looks tapped out, and chopped into parcels too small for machinery or efficient growing.  Nothing is going to change this. But, the new system of guaranteed wages, provided along with the necessary inputs or fertilizer and pesticide, is perhaps the most workable solution, as well as the one providing the most direct benefits to those who work the land.

Thirty-five years on, China’s market economy remains the most successful engine ever for lifting masses of farming people out of poverty.

 

 

Happy Chinese New Year 2014 新年快乐, 万象如意

February 1st, 2014 No comments

 

China First Capital Chinese New Year card