China Private Equity

I get asked occasionally by private equity firm guys how CFC gets such stellar clients. At least in one case, the answer is carved fish, or more accurately my ability quickly to identify the two murky objects (similar to the ones above) carved into the bottom of a ceramic dish. It also helped that I could identify where the dish was made and when.

From that flowed a contract to represent as exclusive investment bankers China’s largest and most valuable private GPS equipment company in a USD$30mn fund-raising. It’s in every sense a dream client. They are the most technologically adept in the domestic industry, with a deep strategic partnership with Microsoft, along with highly-efficient and high-quality manufacturing base in South China, high growth and very strong prospects as GPS sales begin to boom in China.

Since we started our work about two months ago, several big-time PE firms have practically fallen over themselves to invest in the company. It looks likely to be one of the fastest, smoothest and most enjoyable deals I’ve worked on.

No fish, no deal. I’m convinced of this. If I hadn’t correctly identified the carved fish, as well as the fact the dish was made in a kiln in the town of Longquan in Zhejiang Province during the Song Dynasty, this company would not have become our client. The first time I met the company’s founder and owner, he got up in the middle of our meeting, left the room and came back a few minutes later with a fine looking pale wooden box. He untied the cord, opened the cover and allowed me to lift out the dish.

I’d never seen it before, but still it was about as familiar as the face of an old teacher. Double fish carved into a blue-tinted celadon dish. The dish’s heavy coated clear glaze reflected the office lights back into my eyes. The fish are as sketchily carved as the pair in the picture here (from a similar dish sold at Sothebys in New York earlier this year), more an expressionist rendering than a precisely incised sculpture.

It’s something of a wonder the fish can be discerned at all. The potter needed to carve fast, in wet slippery clay that was far from an ideal medium to sink a knife into. Next came all that transparent glaze and then the dish had to get quickly into a kiln rich in carbon gas. The amount of carbon, the thickness and composition of the glaze, the minerals dissolved in the clay – all or any of these could have contributed to the slightly blue-ish tint, a slight chromatic shift from the more familiar green celadons of the Song Dynasty.

All that I knew and shared with the company’s boss, along with remarking the dish was “真了不起”, or truly exceptional. It’s the finest celadon piece I’ve seen in China. Few remain. The best surviving examples of Song celadon are in museums and private collection outside China. I’m not lucky enough to own any. But, I’ve handled dozens of Song celadons over the years, at auction previews of Chinese ceramic sales at Sotheby’s and Christie’s in London and New York. The GPS company boss had bought this one from an esteemed collector and dealer in Japan.

The boss and I are kindred spirits.  He and I both adore and collect Chinese antiques. His collection is of a quality and breadth that I never imagined existed still in China. Most antiques of any quality or value in China sadly were destroyed or lost during the turbulent 20^th century, particularly during the Cultural Revolution.

The GPS company boss began doing business in Japan ten years ago, and built his collection slowly by buying beautiful objects there, and bringing them home to China. Of course, the reason Chinese antiques ended up in Japan is also often sad to consider. They were often part of the plunder taken by Japanese soldiers during the fourteen brutal years from 1931 to 1945 when they invaded, occupied and ravaged parts of China.

Along with the celadon dish, the GPS boss has beautiful Liao, Song, Ming and Qing Dynasty porcelains, wood and stone carvings and a set of Song Dynasty paintings of Buddhist Luohan. In the last few months, I’ve spent about 20 hours at the GPS company’s headquarters. At least three-quarters of that time, including a visit this past week, was spent with the boss, in his private office, handling and admiring his antiques, and drinking fine green tea grown on a small personal plantation he owns on Huangshan.

I’ve barely talked business with him. When I tried this past week to discuss which PE firms have offered him money, he showed scant interest. If I have questions about the company, I talk to the CFO. Early on, the boss gifted me a pretty Chinese calligraphy scroll. I reciprocated with an old piece of British Wedgwood, decorated in an ersatz Chinese style.

Deal-sourcing is both the most crucial, as well as the most haphazard aspect of investment banking work. Each of CFC’s clients has come via a different route, a different process – some are introduced, others we go out and find or come to us by word-of-mouth.  Unlike other investment banking guys, I don’t play golf. I don’t belong to any clubs. I don’t advertise.

Chinese antiques, particularly Song ceramics,  are among the few strong interests I have outside of my work.  The same goes for the GPS company boss. His 800-year old dish and my appreciation of it forged a common language and purpose between us, pairing us like the two carved fish. The likely result: his high-tech manufacturing company will now get the capital to double in size and likely IPO within four years, while my company will earn a fee and build its expertise in China’s fast-growing automobile industry.  

If you could be the boss of any company in the world, with your pay package completely tied to performance, which would you choose? If you answered Kweichow Moutai Ltd., congratulations. You couldn’t have made a better choice.

For those who don’t know this company, it is the largest and by far most successful distiller of China’s favored prestige alcoholic drink. There is no faster-growing, large spirits company anywhere in the world. Better still, if you do become boss, there’s just about nothing you could do short of outright criminality that would in any way slow its stupefying growth rate.  In 2010, sales rose by about 20% to over $2.2 billion. So strong and constant is the demand for the company’s product that their major headache is preventing designated retailers from raising the price above the already sky-high levels fixed by the company.

During 2010, the street price of a bottle of Moutai’s highest-end brew, called Feitian, doubled from Rmb 700 ($105) to over Rmb1,300 ($200). The raw material cost? Probably under Rmb10 per bottle.  Getting a fix on its real level of profitability is hard to do. But, in my estimation, there is no more profitable liquid mass-produced anywhere in the world. Make no mistake. Moutai is not 25-year-old Courvoisier. Chinese love the stuff. But, it is a species of what Americans would call “rockgut”, distilled from a low-end grain called sorghum and then diluted with water drawn from springs surrounding the distillery in Guizhou province.

When I first came to China 30 years ago, a bottle of Moutai cost no more than a few dollars. It’s the same stuff today, brewed according to a Qing Dynasty formula. The main difference is that over 30 years, the price has gone up 30-fold. And no, that’s not because sorghum prices have skyrocketed.

So, what explains Moutai’s astounding success? Simple math. More and more Chinese chasing an insufficient supply of the country’s highest-end liquor brand. Consumption of bottled liquor has grown by 20% over the last five years, and shows no sign of slowing. Moutai plans to double its output over the next four years, then double it again by 2020. Overall, the plan is to increase output by 2.5 times in next nine years.

At the start of the year,  Moutai put in a price cap, to try to stop its retailers selling Feitian for over Rmb959 a bottle.  The price immediately shot up over Rmb1,200. Seeing the Moutai fly off the shelves, retailers then imposed limits on the number of bottles a customer could buy at one time. Supply restricted, the price just kept climbing.

Packaging and marketing are pretty much unchanged over the last 30 years. Along withTsingtao beer, it’s one of the few branded products in China to stick to the old and clumsy pre-revolution spelling of its name. The company is called Kweichow Moutai but no one knows it under that name. In China, it is pronounced “Gway-Joe Mao-Tai”.

Good, bad or indifferent, whoever is the CEO of this company (the current incumbent is Yuan Renguo) will certainly succeed in keeping things buoyant. As long as Chinese keep making money, they are going to spend a percentage on Moutai. The company has even achieved some success in export markets lately, with sales rising 55% to $50mn in 2010.

If Mr. Yuan chooses early retirement and wants to bring in some foreign blood at the top, I’m available to take over. I’ve been to Guizhou, most recently just two weeks ago,  and like the scenery and the food. I also know how (thanks to a Guizhou client)  to evaluate the quality of Moutai: you rub a bit between your palms. If it smells like soy sauce, it’s the real thing.

The only snag: I’m not much of a fan of the company’s product. Since moving to China, I’ve had enough of it to pickle a goodly portion of my liver. But, it’s still an unacquired taste. Drinking good cognac or Armagnac familiarizes you with the aromas of peat and oak. Drinking Moutai familiarizes you with how instantaneously alcohol can go from gullet to bloodstream. Most frequently, I can remember drinking Moutai but not how I get home afterward. Maybe that’s the secret to the brand’s success?

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It is certainly the largest annual mass underwear change in the world. This week, as many as 100 million Chinese will take off their red underwear for the first time in a year and change into other colors. Meanwhile, 100 million other Chinese this week will pull on red underwear and wear no other color for the next twelve months.

It’s not fashion that rules this process, but supersition. This week is Chinese New Year. Wearing red underwear is meant to provide protection against misfortunes likely to target the one-in-twelve Chinese who this year will celebrate their 本命年 (“benming nian”), or birth year . This is a Rabbit Year. Everone born during a previous Rabbit year is likely going to take some precautions this year, including the red underwear. A red string bracelet or belt are also commonly worn by people during their birth year.

One’s birth year isn’t automatically going to be unlucky. But, there’s thousands of years of folk tradition that says people should extra mindful. This extends across most aspects of daily life. Many Chinese will try to avoid making larger life changes, or consequential business decisions, during their birth year.  I have one client, for example, whose founder was born 72 years ago, in a Tiger Year. The company is booming. The founder had numerous offers during 2010 to sell his business for a significant sum, or start work on an IPO. He chose to do nothing but wait things out. Now that Rabbit Year is dawning, he is ready to start considering his exit options. And, of course, changing back to a more neutral color of underwear.

As a Westerner, it takes some getting used-to, this notion that one’s birth year may come freighted with potential misfortune. After all, in all belief systems except possibly the Nihilists, one’s birth is considered a blessing.  But, in Chinese tradition, the anniversary of one’s birth year is a time when things can go especially awry. Or worse. The red underwear is meant to act as a kind of lightning rod, attracting an added flow of good luck during the year.

Red, of course, is associated with happiness, prosperity and good fortune in Chinese culture. Two of the more common sights in stores and on streets in China this time of year are crimson-colored envelopes and similarly-colored underwear. The envelopes, of course, are used to hold the cash handed out as New Year gifts to family and coworkers. The new underwear for men, women and children, in all sizes and styles,  is the flight suit for those about to traverse their birth year.

There’s also quite a lot of red underwear on sale this time of year in the US and Europe. But, it’s generally of the skimpy and sexy Victoria’s Secret variety, given by husbands and boyfriends as a Valentine’s Day gift. That custom is catching on rather quickly also in China, where Valentine’s Day is celebrated twice a year, on February 14 and also usually sometime in August (the date changes every year according to the lunar calendar), when the traditional Chinese version known as 亲人节  (“Qinren Jie”) falls.

Underwear is less commonly given as a Valentine’s gift in China. However,  fathers, brothers, husbands and boyfriends are supposed to buy red underwear for the women in their lives about to enter their birth year. Love in China is often expressed as a protective impulse.

I tended to view the mass changeover of one-twelfth of China to red underwear as a quaint superstition, one of the evermore scarce expressions of an antique and thoroughly unscientific traditional culture. But, over the last year, I saw at first hand the kind of mischief and harm that can target people during their birth year.

Last summer, I got word that another client of mine, one of my favorite people in China, was arrested while trying to cross into Hong Kong. He was accused of paying a bribe to a senior government official in one of China’s less developed inland provinces. He was taken from the Hong Kong border to a prison in the province’s capital, then held in detention for over three months while his friends and family raised the money to free him.

Under Chinese law, paying a bribe is treated more leninently than accepting one. But, it also signals rather emphatically the person has money.

I saw him soon after he got out. He was a shambles, gaunt, with a prison buzzcut and clothes that no longer properly fit him. I offered to help out his new venture, unrelated to the one that landed him in jail.

I invited him for lunch again a few weeks ago. He was his old self again, brimming with vigor and good cheer. As soon as the tea was poured, he proposed a toast, “To a happy Year of the Rabbit, and a quick end to the Tiger Year, my birth year.” We never discussed directly his time in prison, or even that I knew about his ordeal. He’s elated to be out of jail – and, by all appearances, almost as happy to be out of his birth year.

I glanced down at his feet.  He was wearing red sox.

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How long would it take an ordinary Chinese peasant to save up and buy a nice apartment in Beijing? You’ll need to brush up on your dynastic history.

1,400 years ago, as the Tang Dynasty dawned in China, a peasant began farming a small plot of decent land 6mu (one acre) in size. Every year, in addition to providing for his family’s needs, he was able to earn a small profit by selling his surplus. His son followed him on the land, and maintained his father’s steady output and steady profit. Same with is children, and children’s children, through the Song, Yuan, Ming, Qing Dynasties into the Republican period and then the modern era marked by the founding of the People’s Republic in 1949, down to present day.

Some 280 generations later, there should now be just about enough in the family bank account for the family to pay cash for a new two-bedroom apartment in Beijing. This is assuming no withdrawals from the bank account during that time, and even more unlikely, no bad years due to floods, famine, locusts, rebellion.

I heard this calculation second hand, and so can’t check the figures. But, it certainly has a ring of truth about it. Property prices in Beijing particularly, but other large cities as well, have reached levels utterly disconnected from average earning levels, especially in rural China.  New apartments can now cost over USD$1 million. Prices continue to rise by over 5% a month, despite aggressive actions by government to curb the increases in residential property prices. According to the Wall Street Journal, “Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.”

The collapse of this “housing price bubble” has been widely predicted for years now  — not since the Tang Dynasty, but it sometimes seems that way. The housing price crash was meant to be imminent two years ago, when prices were about 30% of current levels.

Still, they keep rising, most recently and most dramatically in second and third tier cities in China, places like Lanzhou, a provincial capital in arid Western China, where the cost of a 100 square meter apartment has doubled in price in the last year, to about $300,000.  Some apartment owners in Lanzhou earned as much profit  during 2010 from the sale of their property as a typical peasant in surrounding Gansu Province might make in a century.

My prediction is that housing prices may soon peak relative to incomes, but will keep moving upward. There are a few fundamental factors at work that raise the altitude of housing prices: rising affluence, China’s continuing urbanization and a dearth of alternative investment opportunities. Real estate, despite what can seem like dizzying price levels, is often seen to be a safer long-term bet than buying domestically-quoted shares.

Introducing property taxes, and allowing ordinary Chinese to buy assets outside China, would both alter the balance somewhat.  But, many a hard-working peasant is still going to need a thousand years of savings to join the propertied classes in Beijing.

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In most things to do with China, the “law of big numbers” applies. A population of 1.4 billion mandates that. So, whether it’s the fact there are over 50 cities larger than Rome, provinces with populations larger than any European country, or that more of just about everything is sold every year in China than anywhere else, the reality of China’s huge population is always a hulking presence.

Except for Qinghai Province. Here, the numbers are so small Qinghai can seem like one of the Baltic States. The province is a little larger than France, yet has a population of only 5.2 million, or 0.3% of China’s total. The capital city, Xining, where I’m now writing this, has about one million residents. Tibet to the south and Xinjiang to the north are both autonomous regions, rather than provinces. Both are far more well-known and talked-about, both inside China and out, and benefit from much more investment from the central government.

Qinghai is unlike anywhere I’ve been in China. It is so empty as to be almost desolate. Xining is in the midst of a very rapid transformation from a dusty low-rise backwater to a more obviously modern Chinese city, with high rises, two new expressways, broad boulevards and shiny new shops selling brands familiar in other parts of the country. It sits alongside a tributary of the Yellow River, wedged like a sliver between low barren brown mountains.

Xining is also the most conspicuously multi-cultural city I’ve been to in China, with a Han majority sharing the city with a large contingent of Tibetans, and a very significant population of Hui Moslems. The Dongguan mosque, on the city’s main street, is one of the largest in China. As many as 30,000 people can worship there. Every twenty paces or so you’ll pass a small brazier with a Hui cook barbecuing lamb kebabs.  Most also sell yak milk yogurt. It’s delicious, in case you’re wondering.

The Tibetans are more concentrated outside Xining. Qinghai makes up most of the Tibetan region of Amdo, and much of the province’s landmass is inhabited by Tibetan herdsmen. The current Dalai Lama was born not far from Xining, and had some of his first schooling at Kumbum Monastery, a 450 year-old establishment that has long been among the most important sites of religious worship and study for Tibetan Buddhists.

Kumbum is a half-hour drive from Xining.  I’ve wanted to go there for about 30 years, and finally got the chance on this trip. I always felt a pull towards Kumbum because it was established to venerate Tsongkhapa, the founder of the Gelugpa tradition in Tibetan Buddhism. I’ve lived for the last 15 years with a beautiful thangka of Tsongkhapa, and hang it near where I sleep. Here it is:

If I had a patron saint, it would be him. Tsongkhapa was born where the Monastery now sits, in a small mountain village. The Monastery spreads lengthwise about one mile up a hillside. At its height, it was home to 3,600 monks. Now there are said to be about 500. A lot of the more ancient buildings were destroyed during the Cultural Revolution, and have since been rebuilt. There are also some newer structures in traditional Tibetan monastic style, including one built with a donation from Hong Kong’s richest man, Li Ka-shing.

Tibetan pilgrims circumambulate the important buildings, do their prostrations, and leave offerings of money and butter. They share Kumbum with Chinese tour groups, who are for the most part respectful, attentive.

After visiting the Monastery in a steady drizzle, I went to see a doctor at the nearby hospital. I was feeling just fine, but for a little sleepiness from the high altitude.  I’ve had a long, intense interest in Tibetan medicine, and the hospital here is staffed by lamas educated at Kumbum and graduated with the equivalent of a PhD in Tibetan medicine.

I saw a physician named Lopsang Chunpai, dressed in maroon and yellow monastic robes. He took my pulse, pronounced me healthy, and prescribed a Tibetan herbal medicine called Ratna Sampil, a combination of 70 herbs that is compounded at the hospital. According to the package, it’s used “clearing and activating the channels and collaterals”.

Though I saw only a very small part of it, Qinghai struck me as an especially lovely place:  a wide, open and arid plateau not unlike parts of the American West. Even accepting the cold winter (with temperatures of 20 to 30 degrees below zero centigrade), it’s hard to understand the high vacancy rate here. It’s population density, at 7 people per square kilometer, is 0.3% of Shanghai’s.

It’s empty, of course, because comparatively few Chinese have emigrated here. That seems likely to change. The air is clean, the economy is booming and the infrastructure improvements of recent years are integrating the province much more closely with the highly-populated parts of China to the east.

Neighboring Tibet and Xinjiang have experienced large Han Chinese migration over the last 60 years. Not so Qinghai. Geography is destiny.  Qinghai, unlike Xinjiang and Tibet, does not border any other country. It has far less military and strategic importance. Xinjiang borders Russia and Tibet borders India. China has fought border wars with both.

Xinjiang and Tibet have also both recently had some serious ethnic conflicts, including anti-Chinese riots in both places in the last two years.  Although its population is about 20% Moslem and 20% Tibetan, Qinghai has stayed peaceful. It is China’s melting pot.

Qinghai is rich in mineral resources, including large seams of high-grade coal. As the transport system improves, more Chinese will migrate there to work in mines. Xining, as small as it is, is the only proper city in all of Qinghai.

The ostensible reason for my visit was to speak at a conference on private equity. The provincial government has a target to increase the number of Qinghai companies going public. The mayor of Xining, who I met briefly, was until recently a successful businessman, running one of the province’s largest state-run companies.

I met a few local entrepreneurs and visited one factory making wine from buckthorn berries, using technology developed by Tsinghua University. It’s a healthier, lower-proof alternative to China’s lethal “baijiu”, the highly alcoholic spirit, mainly distilled from sorghum,  that is widely consumed across China.

Up to now, as far as I can tell,  there’s been no private equity investment in Qinghai. I’d like to change that. It’s a special part of China. Though it’s statistically one of the poorest provinces, Qinghai will continue every year to close the gap. More capital, more opportunity, more prosperity — and more inhabitants. This is Qinghai’s certain future.

Two factors are paramount in explaining the phenomenal economic success of China over the last thirty years: smart government policies and the abundant ingenuity, hard work, talent and entrepreneurial drive of the Chinese people.

A day doesn’t go by without me seeing at first hand that entrepreneurial genius at work in China. The inner workings of government, however, are generally invisible to me as an outsider.

During a recent trip to Shandong, however, I had the privilege of seeing part of China’s government up close, doing what it often does best – constructing and carrying out policies that allow businesses to thrive in China.

In all countries, governments makes the rules and sets the conditions under which business succeed and fail. China is no different. One obvious difference: China’s government clearly must be doing a lot right for the country to deliver the greatest sustained period of economic growth ever recorded.  How was this achieved? The simple answer is that China’s government began 30 years ago to scrap a rigid socialist system for a free market economy.

“Socialism with Chinese characteristics” is the official phrase. It’s no set doctrine, but mainly a pragmatic pursuit of policies to foster global competitiveness, employment and rising living standards in China. China government invites its citizens to evaluate it on this basis, using statistics, to judge how well it manages the economy.

Most would agree, including me,  the government is doing an outstanding job. How it does so,  however, is very much of a mystery.

Over the course of four days, I met with the mayors and Communist Party Secretaries of three of Shandong’s larger and more prosperous cities: Weifang, Laiwu and Linyi. These were working meetings, not diplomatic meet-and-greets. I was the only non-Chinese in these meetings. I was traveling at the invitation of the chairman of one of our clients. This client already has extensive and highly-successful operations in Shandong, with revenues there in the last two years of over Rmb 1 billion.

“We are here to serve you”. This is the statement I heard repeated in each city by the Party Secretary and the Mayor.  This is neither an idle boast nor an empty promise. In every instance where I’ve been in meetings with senior figures in the Chinese government, I’ve been deeply impressed by their competence, directness and sense of purpose in offering to do whatever it takes to help improve the conditions for investment and so raise local living standards.

The meetings with Shandong political leadership had an overlapping two-way purpose: to facilitate my client’s expansion plans in Shandong, and to allow the Party Secretary and Mayor of each city to lay out in plain language the economic development agenda for the next few years. They did this confidently, effectively, forcefully.

I’ve never before heard political leaders speak with such a single-minded focus, as well as evident sincerity,  on their priorities to improve the life, work and leisure of their citizens. There was no self-aggrandizement, no insincere black-slapping, no empty platitudes, indeed nothing that could be construed as expressions of naked self-interest, or the exclusive interest of the party they represent.

There is a good reason for this: political careers in China are made and lost in part on how well the local economy performs, as measured by objective statistics. The metrics include not just local gdp growth, but also the growth in living and recreation space per person, the completion of large local infrastructure projects on time and on budget, urban beautification programs like planting trees and cleaning up local waterways.

Political success in China must be tangible, measureable. And the improvements must come quickly enough – generally within 2-3 years – to boost an official’s chance to continue to climb the rungs.

Arguably, most political careers, including in the US, are determined by how well political leaders deliver for their citizens.  The clear difference in China, from what I can see,  is that it’s a much more data-driven process, more like how management are rewarded or penalized inside a big company. As Peter Drucker, perhaps the wisest thinker about management famously said, “You can only manage what you can measure.”

China is often run by the Communist Party  like one large centralized corporation. The command-and-control methods of management appear similar. While a vastly oversimplifies things, the meetings I attended with political leaders in Shandong were very familiar in many respects to business meetings I’ve attended. The local leaders articulated the goal, which in each case is to keep local gdp growing at well above China’s national average. All three cities are now doing so.

The infrastructure would need to be continuously upgraded to achieve this. As each city gets richer, of course, it gets correspondingly harder to generate such large annual leaps in output. So, projects grow in scale to the truly monumental. In Weifang, for example, the Party Secretary outlines plans to build a new greenfield port and industrial center outside the city that would one day house over one million people in spacious new apartment buildings.

In each city, the planning goals were uniformly ambitious. The political leaders left no doubt that private business should and must play a big part in the process.  They pledged not just help removing any administrative obstacles, but also to make land available at concessionary prices for private sector projects that would create large number of jobs.

The three cities I visited – Weifang, Laiwu and Linyi – are all thriving, not just economically, but also in these more human terms. The cities are for the most part clean, pretty, with newly-built urban infrastructure of roads, housing, parks.

Many outside China have likely never heard of these places. But, Linyi and Weifang, with populations of 11 million and 8 million respectively,  are both larger than any city in the US and Europe.

Laiwu, is smaller, with a population of just over 1 million. However, it does like to do things in a big way. At lunch with the Party Secretary and Mayor, I sat at the largest round dining table I’ve ever seen. Sixteen of us ate at a table that was over four meters in diameter – so large that each person was served lunch individually, one small helping at a time, by a large team of waiters. 

Corruption and political chicanery exist in China, of course, as they do in US, Europe, Japan and everywhere else political officials with control over valuable resources interact with businessmen. But, in my experience during my three days meeting officials in Shandong, the local government is far more intent on lending a helping hand, rather than looking for back-handers.

China’s one-party political system is not to the taste of many Americans or Europeans.  But, if judged by standards of effectiveness, rather than electoral accountability, local governments in China routinely outperform their counterparts in the US.  For all the pretentions to public service, accountability and incorruptibility, US politics, especially at the local level, is infested by influence-peddling and political bribery in form of campaign contributions.

As I saw living for many years in Los Angeles, the second biggest city in the US, local officials act mainly in ways that favor a select few, and deliver only scant benefits to the society as a whole. LA is now teetering on the edge of bankruptcy, with degraded infrastructure, failing schools, punishingly high taxes. LA, like China, is also run as a one-party system, with a Democratic machine that pushed through election rules that make it all but impossible for the opposition Republic Party to gain control, no matter how badly the Democratic Party politicians mess up.

Given a choice, I’d take Shandong’s local bosses anytime. They are held to a higher, more transparent standard. Over the course of a four-to-five year term in office, they will often preside over real material improvements in citizens’ lives that few American politicians will deliver over the course of a career.

“Five years ago, all I had to worry about was producing enough to earn a small profit. Now I spend time dealing with employment issues, environmental regulations, tax policies, trying to increase market share and staying ahead of competitors. The pressure is much worse. ”

Welcome to the suddenly changed and increasingly pressured world of Chinese corporate management. 

This comment comes from the boss of a large, integrated chemical factory in Shandong. He and I were talking recently. He is still a relatively young guy of around 40. But, in his 15 year career as first an engineer, then a manager and finally as factory boss, he has seen the purpose, methods, scope, goals and responsibilities of Chinese management change from top to bottom. 

Like much else in China, company management has undergone a lifetime’s worth of change in a matter of a few years. It’s a byproduct of larger forces at work in China’s economy – the withdrawal of direct state planning and control, the ascendancy of the private sector, China’s entry to the WTO and the opening of China’s markets to imports, the rise of a vibrant consumer market. All of these have made planning and decision-making far more intricate and the stakes far higher for Chinese corporate managers, both in state-owned and private companies. 

In the case of my friend in Shandong, he is working for a company majority owned by the state. In theory, that should make his management tasks far easier. In most cases, the Chinese government – whether at national, provincial or local level – is a very lenient shareholder. In fact, they would appear to the ideal owner for any manager who is looking for easy ride. 

In China as elsewhere, when the state is the owner, no one is really in charge. The Chinese government is not looking for dividends. Most profits stay inside the company.  

Here’s the paradox that Chinese managers all live with: as undemanding as the Chinese government is as a shareholder, they are increasingly demanding as a regulator and law-maker. That is a big reason why corporate management has gotten so much more complex in China. In a short space of time, China has gone from a more laissez-faire stance to one with strict environmental, tax and labor laws that rival those of the US and Western Europe. 

True, these tougher regulations are not yet universally applied or enforced. But, any Chinese manager who chooses to act in total disregard of these rules will eventually find himself in deep, deep trouble. Take labor laws. China continues to introduce new forms of workplace protection that give important new rights to hired staff and restrict the prerogatives of management. Any Chinese with a complaint over pay or conditions can complain directly to the Laodong Ju, or Labor Bureau, a quasi-state body that enforces labor laws. 

The process is not without its hiccups. Management can still intimidate and threaten workers who seek redress. But, the system does work. 

Example: a friend of mine worked for several years as a salesperson for an electronics company based in Shenzhen. She was paid part in commission. She did her job well. For months, then years, the boss held back the commission payments, claiming cash flow problems. This is old style China management: don’t pay, offer excuses. This boss assumed he could continue indefinitely with this trickery, in part because the general view is that female workers in China are more easily cowed or mollified. 

Instead, my friend quit without warning,  went right to the Labor Bureau, which made one call to her ex-boss. No investigation. Just a phone call and a stern warning from the Labor Bureau. My friend got her money – about $20,000 in total – within a week. The boss will now have a much harder time doing what he’s always done – pad his own take-home by cheating workers out of what they are entitled to. Tyrannizing workers is no longer a workable HR strategy for a Chinese management team. 

New environmental rules are, if anything,  even more disruptive of old lax ways of managing business in China. Managers who choose to improve margins by ignoring pollution standards are risking an early unpaid retirement. Example: a client of ours is the leading environmentally-friendly paper manufacturer in Shandong. Two years ago, he had 29 competitors in Shandong. Today, he has only three. 

The other 26 were shut down, virtually overnight, for violating environmental standards. The managers at those factories, most of which were around for many years, now likely understand better than most how much the craft of management has changed in China.  

Elsewhere in Shandong, my friend the chemical company boss, is now making another decision that was unimaginable when he began his career: he is working on a plan for a management buyout of the factory. The business is now 65%-owned by a large local coal mine, which in turn, is owned by the provincial government. 

The buy-out plan is still in its early stages. To succeed, he’ll need to persuade several levels of government – no one is quite sure how many – and also take over some significant liabilities, including debts of about $15mn.  It’s not clear if the current management will need to put up cash to buy the government’s controlling stake, or if, as preferred, they can pay in installments, using cash from the business. 

Servicing debt and having most of one’s wealth tied up in illiquid shares of one’s company are other adaptations now being learned by Chinese management. Each year, their working lives grow harder, more pressured and, for the more talented and nimble ones, far more financially rewarding.  Stride-for-stride with the modernization of China’s economy, Chinese corporate managers have gotten better faster than anywhere else, ever.

What is the most international city in China? Shanghai? Beijing? Surely, it must be Hong Kong? No, the most international city in China is one most people outside China have never heard of: Yiwu, in Zhejiang Province. 

Yiwu is about three hours southwest of Shanghai, with no sites of any importance, and a somewhat rundown city center. Few international tourists will ever set foot there. And yet, at this very moment, there are more foreigners thronging there than anywhere else in China. 

Yiwu, you see, is where the Third World comes to shop. In the last ten years, it’s become the nexus of a large, complicated global trade route, the main supply depot for tens of thousands of shops all across the world. Yiwu’s streets and hotels are filled everyday with thousands of traders from Africa, Russia and the Middle East. They come there to make money, which they do by buying goods by the container load in Yiwu to ship back and sell in their home countries.  

This is petty capitalism on a grand scale: thousands of foreign small businessmen buying from thousands of Yiwu merchants, who rent stalls in the huge market centers spread across the center of Yiwu. At a guess, there must be over 15,000 stalls in these market centers, each staffed by a local, each catering mainly to the foreigners who spend most of their days bargain hunting. 

Mainly, the stuff for sale caters to the taste of this foreign market. Little if any of it would find buyers in US, Western Europe or, increasingly, China itself. Indeed, from what I could tell, more of the world’s hideous clothing ends up for sale in Yiwu than anywhere else. There is enough polyester and other petrochemical-derived materials on display to power the world’s ocean shipping fleet for generations.

Besides clothing, there are a large number of stalls selling other basics of poorer economies, like printed plastic bags, cheap carpets, plastic jewelry, lighting and other house wares. If you wanted to know how people dress and furnish their homes in Isfahan, Aleppo, Izmir, Rostock or Accra, you could get a decent impression by walking through the market centers of Yiwu. 

How and why Yiwu became the center of this multi-billion dollar trade remains a mystery to me. Yiwu has no natural advantages of any kind: it’s far from main transports hubs, hemmed in by mountains, and never developed much of an industrial base. The main export ports of Ningbo and Shanghai are both over three hours away by truck.

Clearly, there was no central government diktat saying Yiwu would be China’s “window on the Third World”. It seems to have happened spontaneously. To accommodate all the foreign traders, basic English is much more widely spoken than anywhere else in China. Even the lady at the ticket booth in the Yiwu bus station can use English to sell a one-way bus ticket to Guangzhou to an African on his way home. 

The English is not always correct. Outside one of the many shops selling sex toys, I saw a sign reading  “Aduit uppiies”. I assume, from the customer base inside, they got the Arabic version correct on the sign. 

By the standards of other successful Chinese cities, Yiwu is more down-and-dirty. There are none of the showpiece infrastructure projects like new expressways and elaborate modern skyscrapers that proliferate in other Chinese cities. While clearly all this trade has made many in Yiwu very rich, the city looks like the China of twenty years ago. Its market stalls are not the kind of place where most Chinese care to shop these days. Chinese, especially urban-dwellers, like well-designed brand-name chain stores with higher-quality merchandise and slick packaging. 

Walking around Yiwu, you get the sense that at least 10% of the population is foreign. Nowhere else in China even comes close. The foreigners are mainly Arabs and Persians, but there are also many Africans and Russians crowding the streets, markets, restaurants and hotels. 

Yiwu has more “foreign food” restaurants than anywhere else in China. Most offer Arab and Turkish food. Indeed, much of downtown Yiwu has the feel of a Middle Eastern bazaar, with clutches of men sitting around smoking hookahs and fingering prayer beads.

You are as likely to hear “Salaam Alekum” as “ni hao” walking the streets of Yiwu. All kinds of services have sprung up in Yiwu to cater to the Middle Easterners. There are halal butchers, coffee shops selling Turkish coffee, manufacturers of the long Arab thawb worn by men. Less delightfully, a Chinese street portrait artist displays drawings of Barack Obama, Mahmoud Ahmadinejad and Osama Bin-Laden. 

I like Arab food, and have eaten a lot of it, both in the Middle East in London. Yiwu’s version was actually quite authentic and tasty. Inside the restaurant I went to, the loudspeakers were playing a recitation of the Koran. Arab and African men sat eating their lunch. There are few Arab women to be seen. 

African women, on the other hand, are thick on the ground, fulfilling their reputation as some of the most talented of all the world’s market traders. I spoke to one lady from Ghana, who comes to Yiwu three times a year, and buys enough each time to fill up a 40-foot container – kids and adult clothes, shoes, carpets, blankets. The profit margins are good. After deducting the $2,000 airfare, the $300 for a Chinese visa, food and lodging in China, plus the shipping costs back to Ghana (and the bribes needed to get the goods out of Ghanaian Customs) she still earns a tidy profit on each trip.

Her capitalist Odyssey, repeated thousands of times a week, with containers bound for the world’s most glamourless spots,  is what keeps Yiwu booming. There is nothing petty about the petty traders of Yiwu. 

It’s fair to say that Yiwu has built its wealth, to some extent, on the misfortune of others. The traders who make the long trip to Yiwu do so, mainly because their countries are criminally mismanaged. In these countries of the Middle East and Africa, there are no local manufacturers making goods at a price and quality that can match that of China, even when you factor in the high transport costs to get people and merchandise to and from Yiwu and the bribes and other levies that must be paid to make sure the items reach local store shelves. Prices in Yiwu are not particularly low, more “retail” than “wholesale”. The traders buy in relatively small quantities, meaning Yiwu merchants can charge higher prices and earn fatter margins for themselves.

 This sad and persistent reality of corruption, economic mismanagement and political tyranny in countries of the Middle East and Africa guarantees that Yiwu will continue to thrive for many years. Yiwu’s market economy was built by catering to places with no real market economy of their own.

Whenever possible on visits to Shanghai, I’ve always chosen to fly into Hongqiao Airport, rather than the larger, newer Pudong Airport. Shanghai is the only major city in China with two major commercial airports, and Hongqiao and Pudong couldn’t be more unalike. Or at least that was the case until a few weeks ago, when the new Hongqiao terminal and runway opened. I just flew in and out of this new building, and while it’s an impressively gleaming facility, I find myself mourning the loss of the old Hongqiao. 

Hongqiao was always a dowdy remnant of a bygone era in China, built over 20 years ago when the western part of Shanghai was still largely farmland. The first time I went to Hongqiao was 1982, to see my friend Fritz off. He was flying on PanAm Airlines to the US, back when there were very few international flights into and out of China. As I remember it, the PanAm 747 came gliding in like a metallic chimera, over the heads of peasants transplanting rice. 

Gradually, the city enveloped the airport and Hongqiao is now one of the few downtown airports in China, a short cab ride to the main business areas in Shanghai about 8 miles away. Its 1980s vintage terminal was also one of my favorite sites in China – a reflection, perhaps, of the fact I rarely get to travel to anywhere very scenic in China, but hop around from booming metropolis to booming metropolis.

The old terminal has a brute, utilitarian ugliness about it, fishhook-shaped, small, cramped and comfortingly ramshackle. It’s so past-its-prime, in fact, it would not be out of place at all in the US, with its outdated urban airports like LAX, Kennedy, LaGuardia, Midway. 

The comparison with Pudong, opened ten years ago 25 miles outside the center of Shanghai, was stark. At Pudong, you whizz along long corridors on motorized walkways, and travel downtown on the world’s only commercial Mag-Lev train. If Pudong is glass and steel, Hongqiao was cement and plastic. 

But, again, all this now belongs to the past tense. The new Hongqiao Terminal is, if anything, more loudly and verbosely modern than Pudong when it opened. I had no idea it was even being built, it’s so far away from the old facility, on what was the back fringe of old Hongqiao. It’s a 20-minute shuttle ride between the two. All domestic flights now operate from the new terminal, and my hunch is that the old terminal will not be standing for very much longer. Civic leaders clearly came to see it as an eyesore, an embarrassingly “Third World” entry-point for a city busily striving to become the world’s next great commercial and financial capital. 

There was a rush to open the new Hongqiao, since next month, the Shanghai Expo opens. The roads leading to the new terminal are still under construction, as is the subway line. Vast expanses of ground in the front and to the sides of the new building are now just barren plots, waiting for parking lots, airport hotels and rental car facilities to populate them. Our cab driver had not been yet to the new terminal and couldn’t find the departures area. 

On entering, the first impression is of a very un-Shanghai-like emptiness. The new terminal must be at least ten times larger and three times taller than the old one. The line of check-in counters stretches for half-a-mile. You get a sense of what Jonah must have felt like entering the whale. Everywhere else in Shanghai is so jam-packed that you are part of a perpetual mob scene, breathing in someone else’s exhaust. Not here. It hints at a Shanghai of the future, a city not defined mainly by its enormous and densely-packed population, but by its modernity, efficiency and polish. 

That’s just it. What’s most special, and worth preserving, about old Hongqiao is that it belongs to the Shanghai that “was”, rather than the China that “will be”.  Even the name itself is a delightful throwback. Hongqiao means “Red Flag”, a name straight out of the Maoist lexicon. 

The old axiom is very apt: “you don’t know where you’re going if you don’t know where you come from”. When Hongqiao’s old terminal goes, so too will the last conspicuous reminder of the Shanghai of thirty years ago, a city,  ever so tentatively, starting down the road of economic reform. 

A tangible part of my own history in China will also disappear. Flying into Shanghai will never be the same.  

What are the most reckless and self-destructive words to use while doing business in China? “Let’s skip lunch and continue our meeting.”  Of course, I’m kidding, at least partly. But, there’s nothing frivolous about the fact food is a vital ingredient of business life in China. This is, after all, the country where people for hundreds of years have greeted each other with not with “Hello” but with the question “Have you eaten?”. 

China is no longer a country where food is in any way scarce. But, perhaps because of memories of years of scarcity or just because Chinese food is so damn delicious, the daily rhythms of life still revolves around mealtimes in a way no other country can quite match. This is as true in professional as personal life. 

It’s a certainty that any business appointment scheduled within 1-2 hours of mealtime inevitably will end up pausing for food. In practical terms, that means the only times during working hours that a meeting can be scheduled without a high probability of a meal being included is 9-10am, and 1:30-2:30pm.

At any other time, it’s understood that the meeting will either be shortened or lengthened so everyone participating can go share a meal together.  Any other outcome is just about inconceivable. Whatever else gets said in a meeting, however contentious it might be, one can always be sure that the words “我们吃饭吧” , or “let’s go eat”, will achieve a perfect level of agreement.  

Everyone happily trudges off to a nearby restaurant, and talk switches to everyone’s favorite topic: “what should we order?” Soon, the food begins to pile up on the table. Laughter and toasts to friendship and shared success are the most common sounds. The host gets the additional satisfaction and “face” of providing abundant hospitality to his guests.  

And yet, there are some modern business people in China that can and do conceive of meetings taking precedence over mealtime. Thankfully, they are quite few in number, probably no more than a handful among the 1.4 billion of us in China. I just happen to know more of them than most people. 

In my experience, those with this heterodox view that meals can be delayed or even skipped are mainly Chinese who’ve spent time at top universities in the US. There, they learn that in the US it’s a sign of serious intent to work through mealtimes. It’s a particularly American form of business machismo, and one I never much liked in my years in businesses there. Americans will readily keep talking, rather than break for food. Or, as common, someone will order takeout food, and the meeting will continue, unbroken, as pizza or sandwiches are spread out on the conference room table. 

Heaven help the fool who tries to change the subject, as the takeout food is passed around, to something not strictly related to the business matters under discussion. If as Americans will often remind you, “time is money”, the time spent eating is often regarded as uncompensated, devoid of value and anything but the most utilitarian of purposes. 

Is it any wonder I’m so happy working in China? I love food generally, and Chinese food above all else. It’s been that way since I was a kid. These days, I often tell Chinese that adjusting to life in China has had its challenges for me, but I know that every day I will have at least two opportunities for transcendent happiness: lunch and dinner. 

So, not only do I accept that business meetings will usually include a break for a nice meal, I consider it one of the primary perks of my job. But, I do meet occasionally these US-educated Chinese who don’t share my view. They will ask if meetings can be scheduled so there won’t be the need to break for a meal, or if not, to make the mealtime as short and functional as possible, so “work can resume quickly”. 

This is misguided on so many levels that I worry how these folks, who I otherwise usually like and admire, will ever achieve real career success in China. The meals are often the most valuable and important part of a business meeting – precisely because they are unrushed, convivial and free of any intense discussion of business. 

Trust is a particularly vital component of business in China. Without it, most business transactions will never succeed, be it a private equity investment, a joint venture, a vendor-supplier relationship. Contracts are generally unenforceable. The most certain way to build that trust is to share a meal together — or, preferably, many meals together. 

To propose skipping a meal is a little like proposing to use sign language as the primary form of negotiation for a complex business deal: it’s possible, but likely to lead to first to misunderstanding, frustration and then, inevitably, to failure.

“Do Not Drive Tiredly”  That’s the message, in English, on large highway signs spanning the roadway in Jiangxi. I was charmed by the idiosyncratic English, and even more by the fact that almost all highway signs in China, including mundane ones announcing upcoming exits or defining the hard shoulder, are all bilingual, Chinese and English.

Based on my recent highway travels through part of Jiangxi Province, I was probably the only one who could get much value from the English. That’s because almost all the other traffic on the highway consisted of very large and heavily-loaded long-distance Chinese trucks. Passenger cars are few and far between. 

Highways are a recent phenomenon in China, of course. I’ve never seen anything quite like them, in my +30 years of driving around the US and lot of the rest of the developed world. The Chinese highways are mainly well-built and usually in pristine condition. Besides the English-language signs, another source of frequent delight are the life-size plastic policemen, pointing plastic radar guns at oncoming traffic. They’re planted in the highway’s central meridian as not-so-subtle reminders to avoid speeding– or as the sign calls it, again in English, “Overspeeding”.

It’s those large trucks, though, that really define for me the current experience of highway driving in China. Despite their huge size – the trailers often have 20-wheels, and seem to stretch the length of seven or eight passenger cars – the trucks are often buckling under the weight of their loads. Most of the time, the cargo hold is open at the top, and covered with a very large tarpaulin, in various colors, intricately tried to the bottom of the flatbed. The trucks have a tendency to wobble and weave as they move along the road – the result of either unbalanced loads or, more likely, less-skilled drivers.

Long-distance trucking may be among the fastest-growing new professions in China. It’s a safe bet few of today’s drivers have been behind the wheel for more than two or three years. Many have their own particular style of driving. Heavy, slow-moving trucks often canter along, 30mph below the speed limit,  in the left-hand passing lane. Their side-view mirrors – the only way the drivers can see traffic behind or alongside them – are often tilted at angles that seem to defeat the purpose.  

Few of the trucks have any kind of marking on them. The concept of a truck as a moving billboard is still an alien one in China. Not so the ordinary highway billboard, which is very common, as are advertisements posted on overpasses. 

China produces so much, including a huge percentage of the world’s manufactured goods, that it’s hard to imagine how all this stuff moved around before the expressway network was built. The traffic on many expressways, including the ones I was on in Jiangxi, must be over 90% trucks. That’s only going to increase, as more production in China is moved to cheaper, inland areas.

The expressways are already quite crowded. Often, they are only two lanes wide in each direction – which may have seemed more-than-adequate 10 years ago when first designed, but now seem to belong in the Pleistocene Age. Within ten years, these roads will almost certainly all need to be widened. That can cost almost as much, per kilometer, as building new expressways. 

China’s toll fees are among the highest ones I’ve seen. In Jiangxi, it’s 0.4 Renminbi ( or around five US cents) per kilometer for passenger cars, and more for trucks. So, financing all this construction won’t necessarily put a big dent in state revenues.  

Even with all the slow-moving truck traffic, the expressway network in China is a godsend. It makes distances much less foreboding than they used to be in China. It’s possible to average over 100 kilometers-an-hour. On the older, ordinary road network, you’d be lucky to average half that speed. Where the trucks thin out, you can “overspeed” at around 160kph, and rustle the plastic policemen in your backdraft.

Courage. Determination. Tenacity. These are all qualities I find in abundance among the SME bosses I work with.

Their resolve and hard work, in building private companies of significant size and importance, seem super-human. Most of these companies were started a decade or more ago, when China was much less hospitable to private business, and the market economy was still in its infancy. The risks, at every stage, were large and close-to-hand. Still, they persevered, and eventually prospered. 

How did they do it?  I have no clear answer or insight, beyond the fact that all these men have uncommon intelligence and confidence. While firmly part of “the new China”, they are also, in one important respect, representative of the most classic of Chinese virtues.

These entrepreneurs personify an ideal beautifully described over 2,200 years ago, by the philosopher Mencius. 

 So it is whenever Heaven invests a person with great responsibilities, it first tries his resolve, exhausts his muscles and bones, starves his body, leaves him destitute and confounds his every endeavor. In this way, his patience and endurance are developed and his weaknesses are overcome.” *(see Chinese below)

*”天降大任于斯人也必先苦其心志劳其筋骨饿其体肤空乏其身行指乱其所为所以动心忍性曾益其所不能.” Thanks to my friend Cao Zhen for providing this.