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China Merchants Steams in to Compete with SoftBank’s Vision Fund — Financial Times

July 10th, 2018 No comments

 

China Merchants Group has been adopting new technology to resist foreign competitors for nearly 150 years. Founded in the 19th century, the company brought steam shipping to China so it could compete with western traders.

Now an arm of the Chinese state, CMG has been enlisted once again to buy up technology at a time when global private equity is vying for a share of China’s burgeoning tech market.

The country’s largest and oldest state-owned enterprise, CMG said this month it would partner with a London-based firm to raise a Rmb100bn ($15bn) fund mainly focused on investing in Chinese start-ups.

The China New Era Technology Fund will be launched into direct competition with the likes of SoftBank’s $100bn Vision Fund, as well as other huge investment vehicles raised by top global private equity houses such as Sequoia Capital, Carlyle, KKR and Hillhouse Capital Management.

“They have been very important to China in the past, especially in reform,” said Li Wei, a professor of economics at Cheung Kong Graduate School of Business in Beijing. “But you haven’t heard much about them in technology . . . It’s not too surprising to see them moving into this area, upgrading themselves once again.”

CMG is already one of the world’s largest investors. Since the start of 2015 its investment arm China Merchants Capital, which will oversee the New Era fund, has launched 31 funds aiming to raise a combined total of at least $52bn, according to publicly disclosed information.

But experts say little is known about the returns of those funds, most of which have been launched in co-operation with other local governments or state companies.

Before New Era, China Merchants Capital’s largest fund was a Rmb60bn vehicle launched with China Construction Bank in 2016. While almost no information is available on its investment activity, the fund said it would focus on high-tech, manufacturing and medical tech.

CMG’s experience investing directly into Chinese tech groups is limited, although it has taken part in the fundraising of several high-profile companies. In 2015 China Merchants Bank joined Apple, Tencent and Ant Financial to invest a combined $2.5bn into ride-hailing service Didi Chuxing, a company that now touts an $80bn valuation. It also invested in ecommerce logistics provider SF Express in 2013.

Success in Chinese tech investing is set to become increasingly difficult as more capital pours into the sector.

“Fifteen billion dollars can seem like a droplet in China,” said Peter Fuhrman, chairman and chief executive of tech-focused investment banking group China First Capital, based in Shenzhen. “We’re all bobbing in an ocean of risk capital. Still, one can’t but wonder, given the quite so-so cash returns from China high-tech investing, if all this money will find investable opportunities, and if there weren’t more productive uses for at least some of all this bounty.”

CMG, however, has always set itself apart from the rest of the country’s state groups. It is unlike any other company under the control of the Chinese government as it was founded before the Chinese Communist party and is based in Hong Kong, outside mainland China. Recommended Banks China Merchants Bank accused of US discrimination

The business was launched in 1872 as China Merchants Steam Navigation Company, a logistics and shipping joint-stock company formed between Chinese merchants based in China’s bustling port cities and the Qing dynasty court.

Mirroring its New Era fund today, it was designed to compete for technology with foreign rivals. At that time it was focused on obtaining steam transport technology to “counter the inroads of western steam shipping in Chinese coastal trade”, according to research by University of Queensland professor Chi-Kong Lai.

Nearly a century later, after falling under the control of the Chinese government, CMG became the single most important company in the early development of the city of Shenzhen, China’s so-called “window to the world” as it opened to the west.

Then led by former intelligence officer and guerrilla soldier Yuan Geng, the company used its base in Hong Kong to attract some of the first investors from the British-controlled city into the small Chinese town of Shenzhen, which has since grown into one of the world’s largest manufacturing hubs.

Its work in opening China to global investment gained CMG and Yuan, who led the company until the early 1990s, status as leading figures in the country’s reform era.

Today the company is a sprawling state conglomerate with $1.1tn in assets and holdings in real estate, ports, shipping, banking, asset management, toll roads and even healthcare. The company has 46 ports in 18 countries, according to the state-run People’s Daily, with deals last year in the sector including the controversial takeover of the Hambantota terminal in Sri Lanka and the $924m acquisition of Brazilian operator TCP Participações.

CMG did not respond to requests for comment. But one person who has advised it on overseas investments said the Chinese government was using it in the same way the company opened up Shenzhen to the outside world, helping “unlock foreign markets”.

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China aims for greater tech independence as the rift with America and Europe widens. Will it work? — Washington Post

May 30th, 2018 No comments

 

 

Under the Radar — Week In China

May 18th, 2018 1 comment

 

When Google launched its email service in 2004, only people who had been invited to join the network could open Gmail accounts. The invite-only system made Gmail appear exclusive, so naturally more people wanted in. But it wasn’t a marketing ploy. Gmail had to limit membership because it didn’t have sufficient infrastructure to provide the service for everyone.

When OnePlus, a fast-growing Chinese smartphone brand, debuted in 2014, it adopted a similar tactic. Co-founder Carl Pei explained: “The invite system allowed us to scale our operations and manage our risks to help us grow more sustainably.” Essentially, it meant the four year-old company avoided overstocking. But, as with Gmail, by keeping the phone ‘exclusive’, it helped generate buzz.

This week OnePlus launched its seventh iteration, the OnePlus Six. Although it ditched the invite-only sales system in 2016, the company still keeps tight control over its distribution, forcing most purchases to be made online. But in India, where OnePlus made 35% of its total $1.4 billion in sales in 2017, the company has opened 10 physical stores to help sales and aftercare.

Vikas Agarwal, general manager at OnePlus India, claims OnePlus is now the “biggest Android premium smartphone brand” in the country. According to Counterpoint Research, the third and fourth most popular brands in India last year were Vivo and Oppo. Despite being competitors, the three brands are all linked to one man: Duan Yongping, the founder of BBK Electronics.

BBK (or Bu Bu Gao) was set up by Duan in 1995. It was the second household name Chinese brand Duan has created.

Born in 1961, Duan joined Zhongshan Yihua Group in Guangdong province in 1989 as the manager of a small factory. He used his position to establish a unit called Subor, which produced video game consoles in competition with Japan’s Nintendo.

The most memorable product made by Subor was an educational console, which featured a computer keyboard with ports for data cartridges and a couple of adjoining game controllers. The cartridges stored video recorded lessons to enable students to learn the English language by responding to prompts using the controllers.

The cheap console gave many young Chinese an introduction to computing and its popularity was reflected in Subor’s finances. When Duan joined Yihua it was Rmb2 million in debt, but by 1995 annual profit had exceeded Rmb1 billion ($157 million).

Despite the success Duan was only earning a meagre salary. He had lobbied Zhongshan Yihua to spin off Subor and give him a stake in the new enterprise, but he was rejected. It became a very public business dispute. The outcome: Duan left and founded BBK, taking a few promising team members with him.

Given his frustrations at Subor, Duan made sure he carved out a sizeable 70% stake in BBK for himself. The company began producing audio-visual products such as VCD and DVD players.

In 1999 and 2000, Duan became the highest bidder on state broadcaster CCTV’s annual auction of its prime-time advertising slots, splashing out Rmb300 million. The huge gamble paid off. BBK became a household name and subsequently the leading maker of VCD players.

Duan was quick to see the potential of mobile phones and later the mobile internet. BBK’s Oppo and Vivo were initially derided as cheap imitations of Apple’s iPhone. But through smart marketing the pair became amongst the country’s best-selling smartphones (see WiC358 for our analysis of Oppo’s rise). In 2016, sales of the two brands actually bumped the iPhone out of China’s top three positions.

More than a decade earlier Duan had spoken to Harvard China Review about his business philosophy: “I am never afraid to follow others. Actually my business has never been an initiator of an industry. Instead, we analyse vulnerabilities of the leading companies in a certain industry and then try to establish our own stronghold.”

This ethos likely contributed to the establishment of OnePlus, which was co-founded in 2013 by Oppo’s former vice president Pete Lau. The company drew comparisons to Xiaomi at its launch, because both produced low-price premium smartphones with sales made exclusively online.

Lau was an early BBK employee, joining in 1998. According to Medium, Lau paid a visit to his mentor and former boss Duan to seek advice before initiating OnePlus. Duan’s pedagogical stature is one of the many reasons he’s sometimes dubbed “the Chinese Warren Buffet” and why Lau looked for his backing.

Peter Fuhrman, founder and chairman of Shenzhen-based advisory firm China First Capital, has followed Duan’s business career and admires what he has achieved. As he points out, “No one has succeeded for so long, or so well, in such a brutally tough global industry as Mr Duan. He’s earned a spot among the business immortals of the past century. Only he and Samsung managed the transition that left Blackberry, Nokia, Sony Mobile, Motorola as roadkill. He rose to the top originally by making simple, cheap feature phones, then more or less chucked that whole business away to create and back three new companies for the smartphone industry, Oppo, Vivo and OnePlus. All are doing outstandingly well. Their success is built on another aspect at which Duan excels as few, if any ever have – creating a hugely-efficient, high-quality manufacturing base in Dongguan turning out phones for all three, backed by what may well be the world’s most efficient global electronics supply chain.”

Duan is evidently happy to be compared with Buffett. In 2006, he paid $620,100 to have lunch with the Sage of Omaha. Duan told media after the charity luncheon, “I had already learned a lot from Buffett, so I was hoping for a chance to thank him.”

Having emigrated to the US in 2001, Duan has been taking a more active interest in managing his own money, rapidly growing his equity portfolio.

An initial investment was a $2 million cash injection into NetEase. The firm had almost gone bust following the dotcom crash and its share price had plummeted to just $0.80. According to China Investor, Duan determined that the company still had potential, so he took the plunge. Within two years he’d made a return of 100-times on his investment.

Duan also made a large investment in GE after its shares slumped following the 2008 financial crisis, buying shares at $6 each and quickly doubling his money.

His steely nerves ensured he held onto his stake in Kweichow Moutai when the baijiu maker’s stock price halved in 2014. Duan entered at Rmb180 in 2012; today Moutai trades at over Rmb700.

“The money I’ve earned on the back of investments is so much more than what I earned from 10 years of doing business,” he surmised. According to the latest Hurun report, Duan is now worth $1.3 billion – but there are some in China who think his wealth could be many multiples of that Hurun estimate, and he might even be one of China’s richest men.

It’s hard to know: many of his investments aren’t public. But in Chinese business circles few would disagree that he is shrewd at finding and backing talent.

For instance, also present at the 2006 Buffett lunch was Colin Huang Zheng, who would later found Pinduoduo, one of China’s 164 unlisted unicorns. The e-commerce platform has been described as the fastest growing app in the history of the Chinese internet (see WiC404), and Huang has long been viewed as a key Duan protégé.

“He is above all a great manager and motivator of people, of putting strong people in leadership positions and then letting them get on with their business, with minimal intervention from him at the top,” comments China First Capital’s Fuhrman. “From hands-on executive to hands-off semi-retired chairman, Duan has excelled across his career in very different roles.”

Despite his successes in the business and investment fields, it seems Duan would rather be remembered for his altruism, claiming “Charity is my business, investment is my hobby.” In 2005, Duan and his wife established the Enlight Foundation, through which they’ve provided scholarships to their respective alma maters. In 2006, Duan and NetEase founder Ding Lei made a $40 million donation to Zhejiang University.

But surprisingly the two people who likely won’t be receiving handouts from the magnate are his children. According to Phoenix News, Duan has said: “So much of my happiness in life has come from the process of earning my wealth. I don’t want to deny my children that same happiness.”

As published by Week in China

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China: Qualcomm’s $44 Billion Purchase of NXP Has ‘Hard to Resolve’ Issues — Wall Street Journal

April 19th, 2018 No comments

BEIJING—China’s antitrust regulator gave an initial pessimistic review of Qualcomm Inc.’s $44 billion purchase of NXP Semiconductors NXPI -0.15% NV, raising questions about a critical deal for the American company and whether trade friction with the U.S. is playing a role.

A spokesman for China’s Commerce Ministry said Thursday that a preliminary review turned up “related issues that are hard to resolve, making it difficult to eliminate the negative impact.”

Speaking at a regular media briefing, the spokesman, Gao Feng, didn’t elaborate on the specific findings other than to say the agency looked at the deal’s impact on competitors and the market and examined Qualcomm’s QCOM -0.22% proposed remedies. He didn’t close the door on an eventual approval, promising a fair review of Qualcomm’s application.

“Made in China 2025” is Beijing’s industrial plan to dominate high-tech industries including robotics, aerospace and computer chips. The Trump administration argues China is using the plan to give its tech companies unfair advantage over foreign rivals. But what is it exactly?

Qualcomm didn’t immediately respond to a request for comment.

Mr. Gao’s remarks are the latest move in Qualcomm’s long discussions with Beijing. Still, the bleak initial assessment comes amid a tumultuous back-and-forth between Washington and Beijing that is making the technology sector a flashpoint in the countries’ brewing conflict on trade.

Earlier this week, the U.S. banned a large Chinese telecommunications equipment maker, ZTE Corp. , from purchasing American technology for seven years, saying the company breached an agreement reached last year to settle allegations it violated sanctions by selling gear to North Korea and Iran. The punishment is seen as potentially crippling for ZTE. It is also likely to hurt its American component suppliers, including Qualcomm, which provides chips for smartphones.

“China wants very much to flex its muscles. It can certainly inflict pain on one large U.S. company, Qualcomm,” said Peter Fuhrman, chairman and chief executive officer of investment and advisory firm China First Capital. He said current tensions make this “the fraughtest moment in the 30-year history of U.S.-China technology trade and mutual reliance.”

Ultimately, Mr. Fuhrman said, China’s huge mobile-phone and auto industries in particular depend on Qualcomm and NXP, so an agreement with the regulators is likely to be struck.

Qualcomm has been waiting for China to approve the purchase of the Dutch company NXP, having secured permission from the eight other major antitrust regulators around the globe. The deal is seen as crucial to San Diego-based Qualcomm, which needs to look for growth beyond its dominance in the smartphone sector; NXP specializes in making chips for automobiles, an area that is growing rapidly.

On Wednesday Qualcomm said it began laying off an unspecified number of employees in a move to fulfill a promise to boost profit by shedding $1 billion in expenses. The layoffs are part of a cost-reduction program unveiled in January intended to convince investors of the company’s prospects as it fended off an acquisition from Broadcom Ltd. , which was then based in Singapore, that was later quashed by President Donald Trump.

In recent weeks as Washington and Beijing have traded tit-for-tat threats over trade, the Commerce Ministry has slowed its review of the deal, according to people familiar with the matter.

China wants very much to flex its muscles. It can certainly inflict pain on one large U.S. company, Qualcomm.

—Peter Fuhrman, chairman and chief executive officer of China First Capital

At a 45-minute briefing to a crowded room of reporters, Mr. Gao touched upon ZTE and the trade battle as well as Qualcomm’s application. By going after ZTE, he said, “The action targets China. However, it will ultimately undermine the U.S. itself.” He said the U.S. is risking “tens of thousands of jobs and shaking international confidence in the U.S. business environment.”

Mr. Gao also urged the U.S. government not to misjudge China’s resolve in defending its interests on trade.

The Trump administration has criticized Beijing over what the U.S. says are unfair practices leading to a trade imbalance that last year reached $375 billion in China’s favor. The Trump administration wants the gap reduced by $100 billion and this year placed tariffs on a range of Chinese goods and threatened to impose them on $150 billion more.

Beijing has vowed to respond in kind. This week, it placed temporary penalties on imports of U.S. sorghum, as part of a strategy to target the Farm Belt and other parts of President Trump’s political base. Soybeans, cotton and liquefied propane are also on a target list for tariffs.

Washington and Beijing have tussled over technology in recent years, with both governments alleging that each other’s products might enable espionage and damage national security. Efforts to harden those perceived vulnerabilities have also fed accusations of protectionism, and as overall tensions on trade have risen, technology has taken center stage.

Huawei Technologies Co., a Chinese national champion and the world’s largest provider of telecom equipment, acknowledged this week that after years of difficulties in the U.S., it is refocusing energies on most of the rest of the world.

The U.S. Federal Communications Commission approved a measure this week that would bar wireless carriers in the U.S. from using government subsidies to buy telecom gear from Chinese manufacturers. The U.S. trade representative’s office also said earlier this week that it is considering retaliation for China’s restrictions on U.S. providers of cloud computing and other services.

Qualcomm has been caught in the middle. The company relies on China for a major part of its business. As the Commerce Ministry’s review of its proposed purchase of NXP, Qualcomm resubmitted its application on Monday ahead of a Tuesday deadline. The move effectively resets a timetable for a decision and gives Chinese regulators an additional 180 days to review the deal, people familiar with the procedure said.

https://www.wsj.com/articles/qualcomms-44-billion-purchase-of-nxp-has-hard-to-resolve-issues-china-1524108990

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China’s Technology Future and What It Means for Silicon Valley — Bay Area Council Research Report

November 29th, 2017 No comments

 

The Bay Area Council Economic Institute, the leading think tank and public policy organization in the Silicon Valley, has just published a comprehensive and timely research report on Chinese innovation, titled “China’s Technology Future and What It Means for Silicon Valley“. The author is Sean Randolph, Senior Director at the Institute.

You can download a copy of the complete report by clicking here.

Sean was kind enough to seek out my views on this topic and we shared a lively dialogue, both in person here in China, and by email once he returned to San Francisco.

The report does an excellent job contrasting China’s overarching future goals in technology and innovation with the current state of affairs. It takes a balanced view: “While recognizing China’s advances, it would be a mistake to think of China as a remorseless juggernaut sweeping everything in its path. Having a plan doesn’t guarantee success, and not everything works.”

The report looks deeply both at some of China’s leading technology companies — including the “BAT” along with Huawei and car-maker Geely — and more broadly at how Chinese companies, both state-owned and private, regions and universities all align themselves with broader national goals to upgrade the level of China’s indigenous innovation.

What does all this mean for Silicon Valley, the world’s most important and successful breeding ground for high-value innovation? It’s here, in offering answers and perspective, that the report achieves its greatest value.

Here are some particularly insightful passages:

“China’s relationship with the Silicon Valley/San Francisco Bay Area is unique, in part due to the deep historical and demographic ties between the Bay Area and China, but also because the region’s technology sector—the world’s largest—most highly concentrates the assets of technology, investment and expertise that relate to China’s goals to accelerate its own technological development.

Bay Area technology companies, such as Intel, Apple, and Cisco, and venture firms, such as Sequoia Capital, DFJ (Draper Fisher Jurvetson), and Kleiner Perkins, have been active investors in China for decades. Now, reversing the historic trend in which virtually all investment flowed from the Bay Area to China, Chinese companies have started sending investment capital and other resources to the Bay Area through mergers and acquisitions, equity investments, and the establishment of research and innovation centers and accelerator programs.”

The attraction of China’s market can be compelling, but [Silicon Valley] companies also must consider whether their core technology can be protected, and whether their position in the Chinese market can be sustained if that technology is compromised by competitors.While few US companies are leaving China, government policies and weak IP protection have caused many to keep their best technology at home and others to stay away.”

The report appears at an especially critical time in the development of US-China technology policy and investment. Congress is moving to tighten the CFIUS controls on Chinese technology investment in the US. China, meanwhile, is pushing ahead with new and more restrictive policies at home, leading to companies like Amazon selling off assets in China.

Let’s hope the tide reverses. A more open and reciprocal trade and investment relationship between China and the US would benefit both, benefit the world.

 

 

 

Amazon Sells Hardware to Cloud Partner in China — The Wall Street Journal

November 15th, 2017 No comments

Amazon Web Services is selling computing equipment used for its cloud services in China for as much as $300.8 million.
Amazon Web Services is selling computing equipment used for its cloud services in China for as much as $300.8 million.

Amazon.com Inc. AMZN 0.68% on Tuesday said it has sold computing equipment used for its cloud services in China to its local partner, Beijing Sinnet Technology Co., in a move analysts said underscores the increasingly chilly atmosphere for foreign companies in the country.

Amazon Web Services said it took the step to meet new Chinese regulations.

”Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services,” AWS said. “As a result, in order to comply with Chinese law, AWS sold certain physical infrastructure assets to Sinnet, its longtime Chinese partner.”

The company said it remains committed to China and that customers would continue to receive AWS cloud services. It also said the deal didn’t involve any transfer of intellectual property.

Peter Fuhrman, chairman of technology investment bank China First Capital, said Amazon’s decision illustrates China’s tightened grip on companies providing internet services.

”The key policy brickwork is now done,” Mr. Fuhrman said. “The Chinese internet, in its broad entirety, will become even more comprehensively managed by the Chinese state.”

Mr. Fuhrman added that such protectionist moves will ultimately limit China’s access to the latest technology and could hurt its competitiveness over the long term.

Jim McGregor, chairman of the Greater China region for public-affairs consultancy APCO Worldwide, said the move should be viewed in light of China’s Made in China 2025 plan to promote domestic enterprises and technologies. ”China has a different plan and it has the power,” he said.

U.S. tech companies in China are dealing with a different world “and it would be corporate suicide not to acknowledge it,” he added.

Beijing Sinnet, in a regulatory filing late Monday, said it was paying up to 2 billion yuan ($300.8 million) for the assets to “comply with our country’s laws and rules and further improve the security and the service quality of the AWS cloud-computing service operated by the company.”

Early this year, China’s Ministry of Industry and Information Technology informed foreign companies with cloud ventures that new operating licenses would be applied by year-end. Amazon’s deal with Sinnet could clear the final obstacles for AWS to get such licenses, analysts from Citic Securities said in a note Tuesday.

Late last year, China’s MIIT also issued draft measures calling for tighter technical cooperation between foreign cloud operators and their local partners. The proposed rule change triggered complaints from more than 50 U.S. lawmakers, who in March protested in a letter to China’s ambassador to the U.S., Cui Tiankai, that the change would force U.S. companies to essentially transfer ownership and operations of their cloud systems to Chinese partners.

Officials with the MIIT had no immediate comment.

Amazon and other U.S. companies, including Apple Inc., have faced increased pressure in the country in recent months in the face of the Chinese government’s desire to control cyberspace.

In July, Apple said it would begin storing cloud data for its Chinese customers on a server run by a government-owned company, to comply with Chinese law. The data include photos, documents, messages and videos uploaded by mainland China users of Apple’s iCloud service.

Since a new cybersecurity law came into effect in June, U.S. tech companies have been constrained in their efforts to operate as they normally would globally, and this has led to inefficiency and a higher risk of cyberthreats, said the U.S.-China Business Council in a statement Tuesday.

In August, AWS was caught up in a Chinese government clampdown on tools that allow internet users to circumvent the country’s vast system of internet filters. In that instance, AWS customers were sent emails by Beijing Sinnet asking them to delete tools enabling them to bypass the filters. Some of the tools that clients use include virtual private networks, or VPNs.

Cloud platforms provide their users with data storage, computing and networking resources over the internet, reducing the need for on-site servers. China’s $2 billion public cloud market is set to grow to a $16 billion by 2020, according to estimates by Morgan Stanley analysts. A government policy push for enterprises to migrate to the cloud, better vendor offerings and falling costs will boost demand for such services, Morgan Stanley said.

In China, AWS faces strong local competition in the form of Alibaba Group Holding Ltd. and China Telecom Corp. Alibaba’s cloud unit held 40% of the country’s cloud infrastructure-as-a-service market, according to International Data Corp. research. Microsoft Corp. , the largest foreign provider in China, had 5%, while AWS has 3.8%.

Still, China’s market is in its nascent stage, and it is too early to crown industry champions, said Kevin Ji, a research director at Gartner, an industry research firm. With their strong product offerings, AWS and Microsoft are likely to prove formidable competitors to Alibaba in the longer run, he said.

 

As published in The Wall Street Journal.

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China Investing, The Pain and the Perks — Harvard Business School Global Alumni Lecture

October 10th, 2017 No comments

 

It was a delight and a privilege to give a talk on China investing to Harvard Business School’s global alumni organization. If you’d like to see the slide deck, please click here. The audio version of the lecture, done by worldwide webcast,  is also up on YouTube.

The topic was a big one — why have China investment returns so often failed to keep pace with the phenomenal growth in the country’s economy, and can investors do anything to improve the odds of success? Given an hour to discuss, I could only really scratch the surface.

A key takeaway: the past needn’t be prologue. Investing in China may prove less vexatious in the future. In part, that’s because of the growth of a mass affluent consumer market in China, a shift that plays to the strengths of many US, European and East Asian companies and institutional investors. Second, of course, everyone now can learn from past mistakes and misperceptions.

As I said in closing, “China will continue to amaze, inspire and stupefy the world. Chinese have done very well and will do better. At same time, those of us investing in China may do a little better here in years to come than we have up to now. More of the newly minted trillions in China just may end up sticking to our palms.”

 

 

 

Venture Fundraising in Yuan Soars as Investors Target Chinese Tech Firms — The New York Times

September 23rd, 2017 No comments

 

HONG KONG (Reuters) – China-focused venture capital funds are increasing their bets on local technology companies and a further opening of Chinese domestic capital markets, raising money in the yuan at the fastest pace in five years.

Fund managers have raised 95.8 billion yuan ($14.54 billion) this year through late September in funds denominated in the Chinese currency, which is also known as the renminbi, compared with 56.7 billion yuan in all of 2016. That puts 2017 on pace to be the biggest year since 2012, when 145.8 billion yuan was raised, according to data provider Preqin.

There are currently 78 funds looking to raise as much as another 1.15 trillion yuan over the next couple of years, Preqin said, most of it coming from mammoth-sized state-owned entities and so-called government guidance funds, which seek to foster domestic innovation in different industries from advanced engineering and robotics to biotechnology and clean energy.

 Those include the 350 billion yuan sought by the China Structural Reform Fund, 200 billion yuan targeted by the China State-Owned Capital Venture Investment Fund and a proposed 150 billion yuan for the state-owned Enterprise National Innovation Fund.

The enormous size of the fundraising ambitions of the Chinese state-backed funds means it may take some time before they reach their final goals. The China Structural Reform Fund, which was launched in 2016, has raised 20 percent of its registered capital and its president said in an interview with Caixin Global that funding will be completed by the end of 2018.

“We’re at the all-time highest of capital-raising high water marks, with a tsunami of government-backed entities seeding incubators, VC funds, locally, provincially, nationally,” said Peter Fuhrman, CEO of China-focused investment bank China First Capital. “China has a lot of money in its government apparatus. It wants to seed innovation and entrepreneurship and this is how it’s doing it.”

The surge contrasts with the slowdown in seed financing for start ups in the United States, which is down for the past two years. It also compares with flat growth expected for U.S. venture capital fundraising in 2017, according to estimates from the National Venture Capital Association (NVCA).

CATCHING ENTREPRENEURS

Firms such as Lightspeed China Partners, Morningside Venture Capital, GGV Capital and investment and merchant bank Ion Pacific that previously only had U.S. dollar funds are launching their first funds in yuan. Others like Hillhouse Capital, Sequoia Capital China and China Renaissance that have raised funds in both currencies are adding to their yuan cash pile with new funds.

Key to those firms is to not lose potential investment opportunities in sectors closed to foreign investors or miss out on investing with the Chinese entrepreneurs who now want to list their companies locally instead of in the United States.

“Catching the right entrepreneurs in the ecosystem is our number one priority, so currencies to us are just tools, those are the tools that I need to catch these entrepreneurs,” said Harry Man, partner at Matrix Partners China, which has funds in both currencies. “That’s why if you don’t have RMB in your hand, ultimately you’ll be missing 50 percent of the deals. Then you’ll be forced to raise an RMB fund and that’s why everybody is doing it.”

Sequoia Capital China, which backed top Chinese technology firms such as Alibaba Group (BABA.N), is looking to raise at least 10 billion yuan for a new fund, while Hillhouse Capital, an early investor in companies including Tencent Holdings Ltd (0700.HK), Baidu Inc (BIDU.O) and JD.com Inc (JD.O), is targeting about 8 billion yuan for its fund, sources told Reuters.

The investment management arm of securities firm China Renaissance is also adding to its yuan reserves with a new fund worth about 6 billion yuan, according to a person familiar with the plans who couldn’t be named because details of the fundraising aren’t yet public. Ion Pacific is raising 1 billion yuan for its debut fund in the Chinese currency, while GGV Capital is about to close fundraising for its first yuan-denominated fund.

“Some sectors don’t allow foreign investors, so for example, in the culture and media industry you need to apply for certain licenses like video licenses and you need to be a local investor,” said Helen Wong, a partner at Qiming Venture Partners.

“Now the IPO window is open for the local stock market, so that encourages a lot of companies to go for a local listing,” she added, in reference to the increase in IPO approvals by regulators in 2017 that is prompting more companies to start preparations to go public. Previously, a slow approval process and long line of companies waiting for clearance dissuaded many from those plans.

The shift would give an added boost to the Shenzhen and Shanghai bourses. China has had 322 new listings this year, raising a combined $22.9 billion, Thomson Reuters data showed. This already surpasses the 252 for all of 2016, even after the country’s securities regulator slowed the number of weekly IPO approvals in May.

It could also reduce the influence of the Nasdaq and New York stock exchanges, where many Chinese technology companies previously flocked when they went public.

“For the RMB side, you see more companies in restricted sectors like healthcare and media and certain parts of cleantech that needs government support to get started,” said Hans Tung, managing partner at GGV Capital. “You also see companies in the fintech space and a lot of them need a license to operate a business in the financial services industry, so they tend to want to list in China.”

 

As published in The New York Times.

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Why Has China’s GDP So Outpaced IRR?

September 22nd, 2017 No comments

It’s the paradox at the core of China investing: why has such a phenomenal economy proved such a disappointing investment destination for so many global institutional investors, PE firms and Fortune 500s.

Financial theory provides a conceptual explanation. Investment returns are not absolutely correlated to GDP growth. China will likely go down in history as the best proof of this theorem. China as certainly delivered exceptional GDP growth. In per capita PPP terms, China is 43 times larger than in 1981, when I first set foot in China as a grad student. No other country has ever grown so fast, for so long and lifted so many people out of poverty and into the consumer middle class.

Commensurate investment returns, however, have been far harder to lock in. Harvard Business School’s global alumni organization invited me to give an hour-long talk on this topic this week. It required a quick gallop through some recent and not always happy history to arrive at the key question — does the future hold m0re promise for global institutional investors looking to deploy capital in China.

 For more detailed look at some reasons for the big disconnect between China’s national GPD growth and investment IRR, and some suggestions how to improve matters, please have a look by clicking here at the HBS talk slide deck.

Publicly-quoted shares in Chinese companies have failed by far and away to keep pace with the growth in overall national income. In the alternative investment arena, global PE and VC firms enjoyed some huge early success in late 1990s and first part of the 2000s. Since then, the situation has worsened, as measured in cash returns paid out to Limited Partners. One major reason — the explosion within China of Renminbi investment funds, now numbering at least 1,000. They’ve bid up valuations, gotten first access to better opportunities, and left the major global PE and VC firms often sitting on the sidelines. With tens of billions in dry powder, these global firms look more and more like deposed financial royalty — rich, nostalgic, melancholy and idle.

China this year will add approximately $1 trillion of new gdp this year – that’s not a lot less than the entire gdp of Russia. Indeed, China gdp growth in 2017 is larger than the entire gdp of all but 15 countries. Who is making all this money? Are all the spoils reserved for local investors and entrepreneurs? Can global investors find a way at last to get a bigger piece of all this new wealth?

Overall, I’m moderately sanguine that lessons have been learned, especially about the large risks of following the Renminbi fund herd into what are meant to be sure-thing “Pre-Ipo” minority deals. Active investment strategies have generally done better. With China’s economy well along in its high-speed transition away from smokestack industries and OEM exports to one powered by consumer spending, there are new, larger and ripe opportunities for global investors. In virtually all major, growing categories of consumer spending, Western brands are doing well, and will likely do better, as Chinese consumers preferences move upmarket to embrace high-quality, well-established global household brand names.

Harvard, its alumni and benefactors have a two hundred year history of investing and operating in China. So, there’s some deep institutional memory and fascination, not least with the risks and moral quandaries that come with the territory. The Cabot family, at one time among America’s richest, provided huge grants to Harvard funded in part by profits made opium running into China.

Harvard Management Company, the university’s $35 billion endowment, was an early and enthusiastic LP investor in China as well as large investor in Chinese quoted companies including Sinopec. Their enthusiasm seems to be waning. Harvard Management is apparently considering selling off many of its LP positions, including those in PE and VC funds investing in China.

This looks to be an acknowledgment that the GP/LP model of China investing has not regularly delivered the kind of risk-adjusted cash-on-cash returns sophisticated, diversified institutional investors demand. While China’s economy is doing great, it’s never been harder to achieve a successful private equity or venture capital investment exit. True, the number of Chinese IPOs has ratcheted up this year, but there are still thousands of unexited deals, especially inside upstart Renminbi funds.

While decent returns on committed capital have been scarce, the Chinese government continues to pour billions of Renminbi into establishing new funds in China. There’s hardly a government department, at local, provincial or national level that isn’t now in the fund creation business. Diversification isn’t a priority. Instead, two investment themes all but monopolize the Chinese government’s time and money — one is to stimulate startups and high-tech industry (with a special focus on voguish sectors like Big Data, robotics, artificial intelligence, biotech) the other is to support the country’s major geostrategic initiative, the One Belt One Road policy.

One would need to be visionary, reckless or brave to add one’s own money to this cash tsunami. Never before has so much government money poured into private equity and venture capital, mainly not in search of returns, but to further policy and employment aims. It’s a first in financial history. The distortions are profound. Valuations and deal activity are high, while returns in the aggregate from China investing will likely plummet, from already rather low levels.

Where should a disciplined investor seek opportunity in China? First, as always, one should follow the money — not all the government capital, but the even larger pools of cash being spent by Chinese consumers.

In China, every major consumer market is in play, and growing fast. This plays to the strengths of foreign capital and foreign operating companies. There are almost unlimited opportunities to bring new and better consumer products and services to China. Let the Chinese government focus on investing in China’s future. High-tech companies in China, ones with globally competitive technology, market share and margins are still extraordinarily rare, as are cash gains from investing here.

Meantime, as I reminded the HBS alumni, plenty of foreign companies and investors are doing well today in China’s consumer market. Not just the well-known ones like Apple and Starbucks. Smaller ventures helping Chinese spend money while traveling globally, or obtain better-quality health care and education options, are building defendable, high-margin niches in China. One company started by an HBS alumnus, a native New Yorker like me, is among the leading non-bank small lending companies in China. It provides small loans to small-scale entrepreneurs, mainly in the consumer market. Few in China know much about Zhongan Credit, and fewer still that it’s started and run by a Caucasian American HBS grad. But, it’s among the most impressive success stories of foreign investment in China.

Of course, such success investing in China is far from guaranteed. Consumer markets in China are tricky, fast-changing, and sometimes skewed to disadvantage foreign investors. For over two hundred years, most foreign investors have seen their fond dreams of a big China payday crash on the rocks of Chinese reality.

The rewards from China’s 35 years of remarkable economic growth has mainly — and rightly — gone to the hard-working people of China. But, there’s reason to believe that in the future, more of the new wealth created each year in China will be captured by smart, pragmatic investors from HBS and elsewhere.

 

As published by China Money Network

As published by SuperReturn

YouTube video of the full lecture to Harvard Business School alumni organization

 

 

 

China Steps Up Warnings Over Debt-Fueled Overseas Acquisitions — The New York Times

August 21st, 2017 No comments

BEIJING — China moved on Friday to curb investment overseas by its companies and conglomerates, issuing its strongest signal yet that it wants to rein in runaway debt that could pose a threat to the country’s slowing economy.

Beijing has stepped up its efforts in recent months to restrict some of its most acquisitive companies from buying overseas assets, worried that a series of purchases by China’s conglomerates around the world has been driven by excessive borrowing.

In the latest move, a statement published by China’s cabinet, the State Council, said the authorities would punish companies for violating foreign investment rules, and establish a blacklist of businesses that did so. The statement was attributed to the National Development and Reform Commission, the commerce ministry, the foreign ministry and the central bank.

The statement pointed to acquisitions in sectors ranging from entertainment and sports clubs to hotels, but it was unclear whether or how the government would block deals.

It reiterated a warning issued in December that restrictions on overseas investments were being imposed because of “irrational” investment trends.

That statement said that the kinds of investments overseas it described were “not in accordance with macro-control policies.” The government wants to “effectively guard against all sorts of risks,” it said. The State Council document said the government nevertheless supported overseas investments in sectors such as oil and gas and in China’s “One Belt, One Road” program, which aims to promote infrastructure projects along the historic Silk Road trading route.

“It’s the loudest yet of wake-up calls that the government holds the keys to the lockbox of the country’s wealth, public and private,” Peter Fuhrman, chairman of China First Capital, an investment bank, said in an emailed response to questions. “Bad M&A is all but criminalized.”

A surge in overseas acquisitions by Chinese investors in recent years has ignited fears that soaring corporate debt levels could destabilize the country’s economy, the world’s second largest, and further weaken its currency.

Companies like Anbang Insurance Group, Fosun International, the HNA Group and Dalian Wanda Group have capitalized on cheap loans provided by state banks to snap up trophy assets such as the Waldorf Astoria hotel in New York and AMC Theaters.

Beijing’s clampdown on overseas investments shows how the interests of private business can collide with those of the Communist Party government. Beijing has made financial stability a priority this year, with the party’s congress scheduled in the fall. Among the party’s top concerns: controlling debt, stemming the flow of capital leaving the country, and China’s opaque “shadow banking” system.

But while the latest statement from the State Council is likely to have an impact on mergers and deals, a lot of Chinese money is already offshore and thus not easily restricted by the government in Beijing, said Alexander Jarvis, chairman of Blackbridge Cross Borders, which has advised Chinese companies on several soccer acquisitions.

“Deals are still going to happen,” Mr. Jarvis said. “There is plenty of Chinese capital overseas in offshore tax havens, in the U.S., across Europe, Hong Kong. I’m not sure they can fully control that capital.”

In a sign of that deal making, a Chinese businessman, Gao Jisheng, struck a deal to buy an 80 percent stake in Southampton Football Club, a soccer team in the English Premier League, for about $271 million. Mr. Gao obtained the loan from a bank in Hong Kong, a special administrative region of China that is administered under separate laws, Bloomberg reported on Thursday.

Geoffrey Sant, a partner at New York-based law firm Dorsey and Whitney, said it is likely that the latest announcement from Beijing will result in a “temporary pause” in overseas acquisitions.

“I think they are thinking there’s a bit of irrational exuberance in the market right now and they just want to cool that off,” said Mr. Sant, who represents Chinese companies. “It doesn’t make sense to permanently ban some of these areas.”

The State Council statement comes amid increased scrutiny of China’s “gray rhinos” — threats that are large and obvious but often neglected even so.

In recent months, the government has said it would increase scrutiny of companies’ balance sheets, warning that some of the largest companies could pose a systemic risk to the economy.

Encouraged by the slew of acquisitions made by some of the country’s most powerful tycoons, many smaller Chinese companies started looking overseas, spurred by China’s slowing economic growth to look for new markets.

Many, however, had no experience running the businesses they were targeting. In one such example, Anhui Xinke New Materials, a copper processing company in central China, made a deal to buy Voltage Pictures, an American film financing and production firm, for $350 million. A month later, Anhui Xinke pulled out of the transaction.

In other cases, it was not clear whether many of the big trophy acquisitions were actually good deals.

In 2015, Legendary chalked up a net loss of $540 million, according to a regulatory filing that Wanda Film filed on the Shenzhen Stock Exchange. Fosun International, meanwhile, paid a premium to buy French resort operator Club Med, which was until then an unprofitable company, eventually agreeing to a $1.1 billion price tag in 2015 after a long takeover battle. The firm made a small profit last year, according to Fosun’s filings. And last year, AC Milan, the Italian soccer club that was acquired by a Chinese consortium for about $870 million, made a net loss of about $88 million.

“I agree with the Chinese government. A lot of these deals are bad,” said Mr. Jarvis.

Companies have already started feeling the pinch of Beijing’s clampdown on overseas investments, which started in earnest in December.

The number of newly announced outbound mergers and acquisitions by Chinese firms fell by 20 percent in the first six months of 2017 compared to the same period in 2016, though it picked up in May and June, according to Rhodium Group, a New York-based research firm.

In March, Dalian Wanda, the Chinese conglomerate that owns AMC Theaters and Legendary Entertainment, was forced to abandon its $1 billion deal to buy Dick Clark Productions, the firm behind the Golden Globes and Miss Universe telecast after Beijing tightened its controls on capital outflows. Months later, Wanda sold a majority stake in 13 theme parks to property firm Sunac China Holdings and handed 77 hotels to R&F Properties, another real estate company based in the southern city of Guangzhou, for $9.5 billion.

 

As published in The New York Times.

The New York Times Interview Transcript

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China’s New Plan for Silicon Valley Partnerships — Global Times

August 16th, 2017 No comments

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The once-sizzling romance between China and Silicon Valley has cooled rather dramatically. This has some potentially serious consequences for both sides, but especially for China, which desires to invest in and gain access to some of the hottest new ideas from this cradle of innovation. A new strategy is needed.

Until recently, Chinese investment funds and companies were investing hundreds of millions of dollars every year into promising Silicon Valley start-ups, as part of a strategy to forge closer ties between the US high-technology sector and the large Chinese market. But the flow of funds has largely dried up.

There are two main reasons. First, Chinese regulators imposed new restrictions on large overseas investments. Second, the US government began to take a less friendly attitude toward Chinese technology investment in the US, killing several proposed deals and holding up approval on many others.

There is every sign that things in the US are going to get more restrictive rather than less. As someone convinced of mutual benefits from Chinese investment in US technology, it all seems highly counterproductive. The world needs more deep and extensive ties between the Chinese and the US high-technology world, not just in start-up investing but also in university research and scientific conferences, shared research and development (R&D) labs, and partnerships among large companies working in hot fields like semiconductors, robotics, artificial intelligence and clean energy.

What can China do? Rather than sending money out, it can encourage more US high-technology start-ups to relocate to China. There is a huge amount to be gained, both for China’s continuing industrial upgrading and for innovative US technology companies looking to grow into giants.

China has in abundance the most vital ingredients for technology start-up success:  capital, a market and talented managers and engineers. In many industries, for example advanced manufacturing, robotics and new battery technologies, China often has more to offer technology companies than the US.

China already has lured a lot of Chinese-born scientists and technologists back from Silicon Valley to open start-ups. The next step is to lure some of the best early-stage US technology companies to China. This addresses a big weakness in the US high-technology scene: companies there tend to view the China market as an after-thought. In reality, it is often the market most worth prioritizing.

I’m seeing how well all this can work on the ground. We’re helping a promising US robotics company build its future in China. It is establishing a Chinese company as its main asset and moving some of its core team to China. It expects to add many more staff in China. The breakthrough product it’s now perfecting has a huge potential market in China’s manufacturing industry.

Originally, this company was aiming to find investors in China to help it grow in Ohio. We helped explain why bringing the company to China would make a lot more sense. The company is applying for R&D grants as well as venture capital in China. Within a 100-kilometer radius of its future base in Shenzhen, South China’s Guangdong Province is the largest concentration of potential customers and partners in the world.

We foresee big mutual gains if China can attract many more exciting early-stage technology companies. They  will create jobs, pay taxes and invest in local R&D. The benefits to China should be far larger than just buying some shares in a technology company based in Silicon Valley.

The objective isn’t to evade US rules but to bring start-ups early in their growth stage to the market where the demand is greatest. Technology companies do best when they sit close to the biggest concentration of customers.

The Chinese government has already said it wants to make the country more of a magnet for global technology talent. Shenzhen is a great city for US start-ups to grow big.

The steep drop in Chinese investment in Silicon Valley may actually prove a blessing in disguise. It’s smart to keep more of that capital at home to invest in great technology companies in China. Many US technology start-ups will achieve far more, and far more quickly, if they make China their future home.

The author is Chairman and CEO of China First Capital.

 

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http://www.globaltimes.cn/content/1061519.shtml

 

China Probe of Big Companies Could Redefine Their Role Overseas — VOA News

June 26th, 2017 No comments

China is probing the loan practices of a group of big private sector conglomerates who have been on a high-profile global spending spree over the past few years.And although the review targets only a few of the country’s most politically-connected companies, some analysts see an attempt to increase government control over the role played by the private sector in foreign markets.

“I think this is an attempt to change the direction (of) the role these Chinese companies play in the Chinese economy,” says Paul Gillis, a professor at Peking University’s Guanghua School of Management. “To align them more closely with the policies of the government and to reduce the risks that actions of these private companies could end up having a shock effect on the economy as a whole.”

Chinese authorities say they launched the probe because of worries that highly leveraged overseas deals pose risks to China’s financial system. Officials have already expressed worries over mounting debt among Chinese lenders, some of which may remain hidden by China’s opaque lending networks.

Notable companies targeted

According to media reports, the list of companies under review is a relative who’s who of Chinese enterprises.

Among those reportedly targeted are Dalian Wanda, which owns the AMC Theaters chain in the United States and has been actively courting deals in Hollywood. High-flying insurance company Anbang, which owns New York’s Waldorf Astoria and Essex House hotels. Also on the list is Hainan Airlines, which bought a 25 percent stake in Hilton Hotels last year and another insurance company Fosun, which owns Cirque de Soleil and Club Med.

Over the past few years, China has seen massive amounts of capital moving overseas with companies and wealthy individuals buying assets abroad. Authorities began taking steps late last year to tighten controls. But many big conglomerates view foreign investment as a golden opportunity – given the low global interest rate environment – and worth the risk of highly-leveraged investments.

Peking University’s Gillis says it appears the Chinese government is coming to terms with how to effectively regulate private enterprises, companies that behave more aggressively than their state-owned counterparts. But he also sees the move as a further consolidation of power by President Xi Jinping, bringing companies more under the control of the central government.

“I think many of the companies had a pretty favorable treatment from prior administrations, and I think Xi Jinping is less enamored of these large private companies than some of his predecessors were.”

Expensive acquisitions by companies like Wanda and Anbang have thrust China into the global spotlight. But the news and commentary that followed the companies’ mega-deals has not always been positive.

FILE - People walk past an entrance to the Anbang Insurance Group's offices in Beijing, June 14, 2017.

People walk past an entrance to the Anbang Insurance Group’s offices in Beijing, June 14, 2017.

In some cases, the deals have given China a black eye, says Fraser Howie, author of the Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. Anbang’s attempt last year to purchase Starwood Hotels is one example, he says.

“This is high profile, global Bloomberg headline, Chinese company buys Starwood Group, next week it’s all off because the funding was never there, the due diligence could never be completed there, it made all Chinese bidders look horrible,” said Howie. “It looks dreadful for the party and for the leadership that these private entrepreneurs are running out there and yet China as a country is being impacted by it.”

Earlier this month, the head of Anbang was the latest to be swept up in the ongoing financial crackdown.

Regulating private spending?

Authorities so far have not said specifically what the targeted companies may have done wrong, if anything. Some analysts argue that the probe is just a part of a process that began six month ago to curtail the flight of capital from China.

“If cross-border M&A deals make sense, if they deliver strong returns, then there should be no problem either for bankers or those doing the buying. But, if Chinese groups overpay and get the money to do so from Chinese banks providing risky or underpriced loans, then Chinese regulators have an obligation to step in,” Peter Fuhrman, Chairman and Chief Executive Officer of China First Capital tells VOA in an emailed response.

Others see a deeper message about Xi Jinping’s view on the role that private companies should serve broader national goals.

Howie says the probe challenges assumptions about the role of private enterprises in China.

“If anyone ever thought these companies were truly private in the sense of being independent or beyond government reach. Clearly that was never true,” he says. “Everyone operates at the discretion of the Communist Party, even if you’ve done nothing wrong and clearly even if you are wealthy.”

 

https://www.voanews.com/a/china-probes-big-comanys-overseas-loan-practices/3913190.html

China’s Millions of Alzheimer’s Patients Cannot Wait Any Longer for Specialised Care — South China Morning Post

June 16th, 2017 No comments

 

No health care problem looms larger in China than Alzheimer’s disease. It is the fastest-growing major disease on the mainland, with at least 9.5 million ­sufferers and perhaps as many undiagnosed cases. Almost a million Chinese are diagnosed every year with Alzheimer’s, with the number of new cases expected to rise sharply by around 2030.

Of the major diseases in China, Alzheimer’s also has the greatest mismatch between the number of patients and amount of specialised care available. The US has about half the number of Alzheimer’s patients, and 73,000 beds in specialist treatment centres. China has fewer than 200 beds. Alzheimer’s care is a US$250 billion industry in the US. In China, it has barely even begun.

By 2050, the number of Alzheimer’s patients in China is expected to reach 45 million, about half the number worldwide

The reason for this mismatch is clear. China’s health care system is already under strain to improve the quality of care overall, especially for diseases like cancer and hepatitis. Alzheimer’s is not a top priority, either for government policy or health care companies and investors.

But, over the coming decades, no disease will possibly impact more lives in China or possibly cost the country more to treat. By 2050, the number of Alzheimer’s patients in China is expected to reach 45 million, about half the number worldwide.

The total cost of treating all of them is impossible to estimate. Alzheimer’s is already the most expensive disease to treat in the US. With the number of cases there expected to double in the next 20 years, US government spending on Alzheimer’s care is on course to become the single most expensive part of the national budget, topping even military spending.

China is likely to take a different path, with more spending done by patients and their families, rather than through national health ­insurance. But the near-total lack of ­Alzheimer’s treatment centres, and trained nurses and doctors, is one of the most significant market failures in China’s health care industry.

 While the government, SOEs and private sector have been making significant investments in old age care, most of it has gone towards flats in retirement communities, for older people fundamentally still healthy and active. There has been little investment in elderly care. The urgent need is to provide specialist centres for people with Alzheimer’s and other chronic diseases that afflict the elderly, like Parkinson’s, arthritis, and post-stroke conditions.
In China, Alzheimer’s is still often seen not as a disease but as an inevitable and natural part of ageing

In China, Alzheimer’s is still often seen not as a disease but as an inevitable and natural part of ageing, a sad side effect of enjoying a long life. The national broadcaster, CCTV, has of late been airing public service advertisements to raise awareness about Alzheimer’s as a disease. This is the same education process the US and Europe began over 40 years ago.

Alzheimer’s, like diabetes, obesity or colorectal cancer, is a disease of economic success. As a country becomes richer and health care standards improve, people live longer. Nowhere has this transformation happened more quickly than in China, meaning an explosive growth in the number of Alzheimer’s cases as has never been seen before.

The average life expectancy in China has ­increased more in the past 30 years than in the previous 3,000. China’s life expectancy is still growing faster than that of developed countries.

The facts: Alzheimer’s is an incurable disease that afflicts a large number of older people, but not the majority. About 3 per cent of people aged 65 to 74, and 17 per cent of those between 75 and 85, will develop the disease. Those over 85 have a 30 per cent chance of getting it. It is a mystery why some old people get Alzheimer’s and most do not.

One interesting correlation: people with higher education levels are less likely to get the disease. The more you use your brain in complex ways, the more you may inoculate yourself against Alzheimer’s.

Rural people are more susceptible than city-dwellers. With a larger percentage of Chinese living in rural areas, the percentage of over-80s with the disease may end up higher than in the US, Europe or other more urbanised Asian societies of Japan, Korea, Taiwan or Singapore. Women are more likely to get Alzheimer’s, as they live longer on average.

Despite billions of dollars spent on scientific and pharmaceutical research in the West, there are no drug or surgical treatments for Alzheimer’s. Brain chemistry and biology make developing a drug for Alzheimer’s difficult.

Brain chemistry and biology make developing a drug for Alzheimer’s difficult

Despite this, there have been remarkable successes in Europe and the US, especially in the past 10 years, at care facilities managed by specially trained nurses and doctors. They work together to slow the progress of the disease in patients, through physical therapy, psychological counselling, special equipment to improve memory and mobility, one-on-one assistance, and a safe living environment designed for the care of people gradually losing their ability to think, speak and function.

The result: Alzheimer’s patients in Europe and the US now live twice as long after diagnosis than 30 years ago, an average of eight to 10 years.

Dozens of US and European-listed companies are focused on research and specialist Alzheimer’s care in nursing homes and clinics. China has none.

Traditionally in China, more money has been spent on children’s education than on medical care for older people. But, as Chinese live longer, the way money is spent across three generations is likely to change. The grandchildren of people in their 80s will have usually already been through college and are working. That leaves more money, both in the hands of older people and their children, to provide more high-quality care for those at the end of their lives.

Alzheimer’s care will also ­become a huge source of new employment in China

How should China build its Alzheimer’s treatment infrastructure and bring it quickly up to global standards? The biggest need will be providing care to those with average family income and savings levels.

If there’s one advantage to getting a late start, it’s that China can learn from the mistakes of, and adopt the best ideas developed in, the US, Europe and Asia. Japan, for example, is not only building specialist nursing homes for Alzheimer’s patients in the final years of their lives, but also community centres for those still living at home or with relatives.

Home nursing care is expanding in the West, ­improving and lengthening the lives of Alzheimer’s patients. Home nursing is still at a very early stage in China, but it is the fastest growing industry and largest source of new jobs in the US.

From little spending now on specialised Alzheimer’s care, China will certainly grow into the world’s largest market for it. Alzheimer’s care will also ­become a huge source of new employment in China.

It’s hard to think of a business opportunity in China with better long-term investment fundamentals than specialised Alzheimer’s care. But the greatest return on investment would be in limiting the suffering of Alzheimer’s patients and their families.

Peter Fuhrman is CEO and Dr Wang Yansong, is COO, respectively, of China First Capital. This article is adapted from a version originally published in The Week In China

http://www.scmp.com/comment/insight-opinion/article/2098539/chinas-millions-alzheimers-patients-cannot-wait-any-longer

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WikiLeaks Dump Adds to China’s Foreign-Tech Wariness — Wall Street Journal

March 10th, 2017 No comments

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While the purported CIA documents leaked this week by WikiLeaks focus on the likes of Apple and Samsung, Chinese companies like Huawei do get some coverage. 

While the purported CIA documents leaked this week by WikiLeaks focus on the likes of Apple and Samsung, Chinese companies like Huawei do get some coverage.  

BEIJING—The latest WikiLeaks trove hands fresh ammunition to China’s cyberspace hawks, already pushing to reduce dependence on foreign products that could be vulnerable to espionage, observers say.

“The level of alarm in China will certainly increase, and with it a renewed determination to clamp down still further on U.S. technology companies’ operations in China,” said Peter Fuhrman, chairman of Shenzhen-based advisory firm China First Capital, which follows China’s tech sector.

The documents released this week—more than 8,000 pages in all—purport to show how the U.S. Central Intelligence Agency breaks into computers, smartphones, TVs and other electronics for surveillance. Many documents deal with leading non-Chinese brands like Apple Inc. and Samsung Electronics Co., though there is some coverage of Chinese products, including routers from Huawei Technologies Inc. and Baidu Inc.’s search engine.

The Chinese-product references are relatively sparse—and, in some cases, obscure. An undated list of CIA internal hacking demonstrations, for example, includes the “Panda Poke-Huawei credless exploit”—which one cybersecurity specialist says may be a method for taking advantage of vulnerabilities without logins or other “credentials.” There is also the “Huawei VOIP Collection,” a reference to “voice over internet Protocol,” making phone calls over the internet.

The document doesn’t say whether these methods were used for intelligence gathering. Huawei declined to comment.

A file titled “Small Routers Research-work in progress” lists router models from Huawei and ZTE Corp. It also mentions China’s three state-owned telecom companies and Baidu’s search engine, without further details.

The telecom companies and Baidu declined to comment.

The leak also offered what seem to be workaday notes among colleagues, including one CIA worker’s complaint about one piece of software’s default-language setting. “I don’t speak Chinese,” he griped.

WikiLeaks’ website is blocked in China, but Chinese state-run media reported the document leak, focusing on U.S. companies. Overall response has been muted, possibly because the official spotlight this week is on Beijing’s annual legislative gathering.

Cybersecurity experts say China maintains its own robust cyberhacking apparatus, though Beijing characterizes itself as purely a hacking victim, not a perpetrator.

“China is opposed to any form of cyberattack,” foreign ministry spokesman Geng Shuang said Thursday. “We urge the U.S. side to stop its wiretapping, surveillance, espionage and cyberattacks on China and other countries. China will firmly safeguard its own cybersecurity.”

In recent years, China has seized on leaks about U.S. surveillance to fan public support for its domestic tech products. U.S. tech brands felt a chill after former U.S. National Security Agency contractor Edward Snowden revealed NSA surveillance methods in 2013.

“It is like snow on more snow,” one China executive of a U.S. technology company said of the potential sales impact of the latest leaks.

These leaks could help countries counter CIA tapping and develop their own capabilities, said Nigel Inkster, former deputy chief of U.K. spy agency MI6.

“China, Russia et al will now both be better attuned to the risks posed by these capabilities,” he said, “and will no doubt seek to use them themselves.”

 

https://www.wsj.com/articles/wikileaks-dump-adds-to-chinas-foreign-tech-wariness-1489061414

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Turbulence and Paralysis: the Year Ahead in US-China Relations — Financial Times

December 13th, 2016 No comments

 

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trumpxi

A month before his official inauguration, Donald Trump is already tossing diplomatic grenades in China’s direction. It is a sign of things to come. 2017 is shaping up to be a highly eventful, taut and precarious year for China-US relations. This is partly due to a simple scheduling coincidence.

2017 will be the first time ever when both the US and the PRC in the same year will usher in new governments. The US will kick things off on January 20th by swearing in Donald Trump as President. China, meanwhile, will undertake its own large political upheaval, its five-yearly change in political leadership, culminating in the 19th Communist Party Congress sometime late in the year. Virtually the entire government hierarchy, from local mayors on up, will be changed in a monumental job-swapping exercise orchestrated by Xi Jinping, China’s president.

The US under Mr Trump, with a Republican Congress at his back, seems intent to challenge China more assertively in trade, investment and as a currency manipulator while intensifying the military rivalry. China’s leadership, meantime, will become deeply absorbed in its own highly secretive, inward-looking and internecine political maneuvering. While Mr Xi tries to further consolidate his power, Mr Trump will likely be asserting his, leading to a globally ambitious US and an introspective China. This would represent something of a role reversal from recent precedent.

With the chess pieces all in motion, businesses should be plotting their moves in China with caution. The proposed Trans Pacific Partnership (TPP) trade deal is dead, leaving China’s still-evolving “One Belt,One Road” initiative as the main impetus for new trade flows in Asia. Donald Trump says he will push for what he claims to be more “more fair” bilateral trade deals. China, with its $365bn trade surplus with the US and high barriers to much inward investment, is clearly in his sights.

How will China react? The only certainty is that as the year progresses, China’s government apparatus will slow, and with it decision-making at policy-making bodies and many State-owned enterprises (SoEs). All will wait to hear what new tunes to march to, once the new ruling Politburo is revealed to the public in the fourth quarter.

Chinese officials at all levels are already jockeying for promotion. That means falling into line with Mr Xi’s anti-corruption campaign. The Party Secretary in Jiangsu province, one of China’s wealthiest, got an early head start. He instituted his own form of localized prohibition, ordering that government officials could no longer drink alcohol at any time, in any kind of setting, anywhere in Jiangsu.

The booze embargo did include one loophole. If senior foreign guests are present, alcohol can flow as before, like an undammed torrent.

As the Party Congress approaches, it will be even harder to get a deal with a Chinese SoE lined up and closed within any kind of reasonable time frame. Even after the Party Congress ends, it will likely take more months for any real deal momentum to return. Investment banking bonuses along with billings at global law, accounting and consulting firms are all likely to take a hit.

One other certainty: the renminbi will come under increasing pressure as the US ratchets up its moves to apply tariffs to Chinese exports and China’s own economy remains, relatively speaking, in the doldrums. How much pressure, though, is another question.

Anyone making predictions about the speed and degree of the renminbi’s decline is playing with a loaded weapon. A year ago some of the world’s biggest and loudest hedge fund bosses, including Kyle Bass, David Tepper and Bill Ackman, were proclaiming the imminent collapse of the renminbi. The renminbi, despite slipping by about 6 per cent during 2016, has yet to behave as the money guys predicted.

The Chinese government uses non-market mechanisms to slow the renminbi’s decline. A recent example: its abrupt move in November to tightly control outbound investment and M&A. But shoring up the currency will undercut one of China’s larger economic imperatives, the need to upgrade the country’s industrial and technological base. That will require a prodigious volume of dollars to acquire US and European technology companies such as recent Chinese deals to acquire German robot-maker Kuka and US semiconductor company Omnivision.

Chinese investors and acquirers not only face tighter controls on the outflow of US dollars. The US is also becoming more antagonistic toward Chinese acquisitions in the US and globally. Deals of any significant size need to pass a national security review overseen by a shadowy interagency body known as the Committee on Foreign Investment in the United States, or CFIUS.

CFIUS works in secret. In recent months, it has blocked Chinese investment in everything from a San Diego hotel, to Dutch LED light bulbs as well as US and European companies more explicitly involved in high-tech industry including semiconductor design and manufacturing. The strong likelihood is CFIUS will become even more restrictive once Mr Trump takes over.

Unlike most areas of bilateral tension between the US and China, this is one area where the Chinese have no room to retaliate in kind. China already has a blanket prohibition on investment by US, indeed all foreign companies, into multiple sectors of the Chinese economy, from tech industries like the internet and e-commerce all the way to innocuous ones like movies, cigarettes and steel smelting. So, for now, China quietly seethes as the US intensifies moves to prevent China investment deals from being concluded.

China will probably need to regroup and start playing the long game. That means investing more in earlier stage tech companies, especially in the Silicon Valley, and hoping some then strike it big. These venture capital investments generally fall outside the tightening CFIUS net. China wants to spend big and spend fast, but will find it often impossible to do so.

Even as political and military tensions rise between the US and China in 2017, one ironic certainty will be that a record number of Chinese are likely to go to the US as tourists, home buyers or students and spend ever more there. China’s ardour for all things American – its clean air, high-tech, good universities, relatively cheap housing, and retail therapy – is all but unbounded.

If informal online surveys are to be believed, ordinary Chinese seem to like and admire Mr Trump, especially for his business acumen. Mr Xi, understandably, may view the new US President in a harsher light. Xi faces cascading complexities as well as factional opposition within China. He could most use a US leader cast in the previous mold, committed to constructive cooperation with China. Instead, he’s likely to contend with an unpredictable, disapproving and distrustful adversary.

 

https://www.ft.com/content/b1801637-4219-3222-9f45-658740aa1187

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