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My Salute to China and Shenzhen During the Coronavirus Epidemic

February 22nd, 2020 No comments

过去四个多星期以来我在热爱的深圳家乡跟中国人民一起度过这个特殊时期。 在疫情当中我特别钦佩中国人民的勇气和同舟共济,以及医务人员的奉献精神, 中国老百姓凭借超乎常人的自律、耐心和意志力,平和且又坚定地忍受着各种生活和工作上的不便,共度时艰。我对中国人民和中国政府壮士断腕般坚定地控制疫情表示衷心的感谢。中国一定会打赢这场关键战役。中国加油!

“The Tough Battle to Bring Western Brands to China” the Financial Times

January 27th, 2020 No comments

When John Zhao sealed the £900m takeover of the UK’s PizzaExpress in 2014 he burnished his reputation as a pioneer in China’s private equity industry. Two years later Hony Capital, his buyout firm, ploughed money into WeWork as the New York shared-office provider set its sights on an aggressive expansion in China.


Both deals shared a simple premise: take well-known western brands to China and they will flourish. “We have capital; we have a huge market to give access to,” Mr Zhao said shortly after the capture of PizzaExpress, which set a record for a Chinese buyout deal in the UK.


The acquisition was one of a wave of Chinese private equity investments over the past decade but few firms were as ambitious as Hony in their targets. Spun out of state-backed Legend Holdings in 2003, Hony shot to prominence through a series of restructurings of other state-owned groups. As it grew, so did its appetite for higher-profile, cross-border investments.

However, almost two decades on, Hony’s breezy confidence that China’s increasingly wealthy middle class would be ready-made consumers of all western brands has proved misplaced.


PizzaExpress restaurant openings in China have lagged behind an ambitious goal while local, lowercost competitors have lured customers away. Confidence that middle class would eat up imported names such as PizzaExpress prove misplaced.

This lacklustre start in China, combined with rising costs and a slowing casual dining market in the UK, left PizzaExpress with a £1.1bn debt pile that has set the scene for a restructuring battle between Hony and other bondholders.

After a calamitous 2019 in which WeWork was rescued by Japan’s SoftBank, its biggest backer, the New York-based company has ditched its leasing model in many cities, laid off thousands of staff and struggled with a particularly poor performance in China.

“The ‘can’t-miss’ strategy continues to do just that,” said Peter Fuhrman, chairman and chief executive at Shenzhen-based investment bank China First Capital. “Chinese investors and corporates have mainly fizzled when buying and localising western consumer brands.”

Other Hony investments — including the Beijing-based bike-sharing business Ofo, which collapsed in late 2018 — have soured, causing competitors to rethink importing western brands to China.

Chinese business history is littered with cases of western multinationals making the opposite mistake. UK retailer Marks and Spencer closed its Shanghai stores in 2017 after its combination of clothing and imported food confused local shoppers. US electronics retailer Best Buy retreated from China in 2014 after struggling to compete with cheaper domestic competitors.

But Chinese private equity groups appeared undeterred. They raised $230bn of capital between 2009 and 2014, according to investment bank DC Advisory.

Nanjing-based Sanpower largely flopped with its buyout of high-end retailer House of Fraser in 2014 and its failed attempt to expand the UK retailer across China. Bright Food, the state-owned Chinese group that bought a 60 per cent stake in Weetabix in 2012, failed to make the UK breakfast dish popular in China and eventually had to sell the brand in 2017.

“Four years ago everyone thought [buying foreign brands and bringing them to China] was the best thesis — but a lot of people got burnt,” said Kiki Yang, the partner leading Bain & Co’s Greater China private equity practice. “It’s not easy to bring something with no brand awareness to China. In reality, the success rate is very low.”

People who know Mr Zhao have said he was one of the first serious Chinese investors to have a solid grounding in the way deals were done in the US while also enjoying deep ties to state-owned groups, putting him in an enviable position at the advent of the Chinese private equity industry.

In its early days, that helped Hony become a rare channel connecting investors such as Goldman Sachs and Singapore’s Temasek with lucrative state deals that were otherwise inaccessible to foreign capital.

The PizzaExpress deal was a turning point for Hony and other investors in the sector.

By 2014, the group had completed several successful cross-border deals, including an investment in Italian concrete producer Cifa. But the takeover of a popular British restaurant chain won instant global attention for Hony and Mr Zhao, who had spent most of the 1990s working at Silicon Valley technology companies such as Vadem and Infolio.

Hony’s investment in PizzaExpress came just as the UK’s casual dining market began to suffer from oversupply. It was also beginning to face stronger competition from local restaurants in China, a sign the UK brand name meant little to many Chinese diners.

PizzaExpress originally intended to open 200 outlets over a five-year period. So far it has launched about a dozen restaurants in the mainland, giving it a total of about 38, according to its website. In its annual results in April, the chain admitted it had “experienced challenges in China as we face intensifying competition from local brands”.

Without the promised growth in China to cushion the decline in the UK market, PizzaExpress has been pushed towards a debt restructuring process, cementing the deal’s position as an emblem of troubled Chinese investments overseas.

 “Every time you say ‘China cross-border’, people think of PizzaExpress,” said one senior Chinese private equity executive. “It’s become a laughing stock — and bad for the reputation of China PE.”

PizzaExpress, Mr Zhao and Hony declined to comment.

As it seeks to resolve PizzaExpress’s problems, WeWork’s near collapse has inflicted further damage on Hony’s reputation. Hony and Legend Holdings led a $430m investment round in WeWork in 2016, and Mr Zhao became a member of WeWork’s board and later a consultant to its China business. SoftBank and Hony led a $500m investment round a year later.

With Mr Zhao acting as a consultant, WeWork expanded aggressively across the country, buying Chinese rival Naked Hub for $480m in cash and stock in 2018. Yet demand for office space fell in 2019, leaving some of its new areas of business virtually empty.

For example, in the western Chinese city of Xi’an, nearly 80 per cent of its desks were vacant, the FT reported in October. In the bustling start-up hub of Shenzhen in southern China, 65 per cent of its 8,000 desks were vacant.

WeWork declined to comment.

The poor performance of the business in China has left investors questioning how one of China’s private equity superstars could lead the group so far off course, according to people familiar with the matter.

“My impression is that Hony is not doing well these days,” said Liu Jing, a professor of accounting and finance at Cheung Kong Graduate School of Business in Beijing. “The economy has shifted to technology and they have lost their edge.”

https://www.ft.com/content/f735c956-15b6-11ea-9ee4-11f260415385

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TikTok Searches for Global Headquarters Outside of China — Wall Street Journal

December 23rd, 2019 1 comment

Bytedance Inc. is considering setting up a global headquarters for its hit video-sharing app TikTok outside of China, part of continuing efforts to shake off its Chinese image, people familiar with the company said.

Singapore is one city being considered, the people said. Other possible locations include London and Dublin, with no American cities on the shortlist, one person said. TikTok currently doesn’t have a headquarters, although its most-senior executive is based in Shanghai and its main office, which runs U.S. operations, is in Los Angeles.

Senior executives at Beijing-based Bytedance—a startup valued at $75 billion, which owns numerous apps including TikTok—have been brainstorming ideas to rebrand TikTok as it comes under mounting scrutiny from U.S. lawmakers over national-security concerns. A headquarters outside of China would also bring TikTok closer to growing markets either in Southeast Asia or Europe and the U.S.

Known for its viral short videos of lip-syncing teenagers and funny pet antics, TikTok rose from obscurity to the top of U.S. app-store download charts in early 2019, and has also caught fire elsewhere including India and Japan. Global downloads for TikTok outstripped Facebook Inc. ’s Instagram and Snap Inc. ’s Snapchat in 2019, according to mobile-data aggregator App Annie. It had 665 million smartphone monthly active users world-wide in October, up 80% from a year earlier, App Annie said, with about 20 million of those users in the U.S.

The app’s spectacular rise has attracted attention from American senators, concerned that its Chinese roots could lead to it censoring content to appease Beijing. Bytedance’s 2017 acquisition of the startup Musical.ly, a move key to TikTok’s rapid success because of Musical.ly’s popularity in the U.S., is under review by the Committee on Foreign Investment in the United States for potential national-security risks.

The move to establish a global headquarters outside China has been discussed internally for months, one person said. However, the effort is “only accelerating because of the things happening in the U.S.,” the person added, referring to the recent scrutiny of TikTok there.

In response to questions, a TikTok spokeswoman didn’t directly address the search for a global headquarters, but said its teams around the world have increasingly been given more control over local operations.

“We have been very clear that the best way to compete in markets around the globe is to empower local teams,” she said. “TikTok has steadily built out its management in the countries where it operates.”

Locating TikTok’s headquarters outside China is unlikely to relieve pressures on Bytedance in the short term, said Peter Fuhrman, the Shenzhen-based chairman and founder of investment advisory firm China First Capital.

“That’s like dressing a panda in a business suit. It’s unlikely to fool anyone,” said Mr. Fuhrman, who described the firm as a victim of increased U.S.-China political tensions. “They’ll still be in congressional crosshairs and still subject to the same stringent content rules within China itself.” Bytedance has also faced pressures inside China from authorities seeking to restrict content deemed objectionable to the government.

In Singapore, the company has taken up two floors of prime office space in the city state’s central business district, according to real estate consultancy Savills Singapore. The 64,000-square foot space is in the same development housing investment advisory firm Rothschild & Co., and global banks such as UBS and Deutsche Bank. It first started operations in a WeWork office in downtown Singapore in December 2018.

Singapore is popular among foreign technology companies seeking a base in the region, with its large multilingual tech workforce and strong government support. It is the Asia-Pacific home to Alphabet Inc. ’s Google and Facebook, and Chinese technology giant Alibaba Group Holding Ltd. has a large presence there.

Southeast Asia is a top choice for Chinese companies looking to expand globally because of its cultural similarities, said Patrick Cheung, a founding partner at ZWC Partners and investor in Chinese tech startups.

A search on Bytedance’s hiring website on Dec. 23 showed 68 jobs posted for both Bytedance and TikTok in Singapore, the largest number of open positions for any city outside China. A fifth of those roles involved artificial-intelligence research as TikTok seeks to hire scientists in big data and natural-language processing. Bytedance uses AI to power some of TikTok’s recommendation algorithms. Other positions revolve around hiring staff to set content-moderation rules.

The global headquarters for another Bytedance product, a Slack-like corporate messenger app called Lark, is also in Singapore.

In London, where Bytedance was hiring for 38 positions including investment professionals and business-development staff, the company has made moves to poach talent. In October, TikTok hired Ole Obermann, a music industry veteran and former executive vice president at Warner Music Group, to head up its global music division.

Dublin stands out for pairing a favorable tax environment with a deep talent pool. Ireland’s capital is already the site of Facebook’s largest office outside of Menlo Park, and the European base for companies including Google and Twitter.

Bytedance acquired London-based AI music-composition startup Jukedeck this year. The startup’s founder and chief executive, Ed Newton-Rex, currently heads Bytedance’s new AI lab in Europe and wrote on LinkedIn last week that the team is hiring.

Bytedance launched TikTok in international markets in August 2017, modeling the service after its hit Chinese short-video app Douyin. Three months later, the company purchased Musical.ly, which started in China but grew popular in the U.S. It later merged the two apps.

—Yoko Kubota and Georgia Wells contributed to this article.

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China Regulatory Failure to Contain Financial Excesses Putting Off Some Foreign Investors — South China Morning Post

November 7th, 2019 No comments

The inability of Chinese financial regulation to contain financial excesses has put off many foreign investors who would otherwise want to put their money into the country, analysts said.

The key problem is that Beijing has not yet found a way to meet the large demand by small private sector businesses, investors and entrepreneurs for credit through legal and regulatory compatible financing channels, analysts say. Until it does, it will continue to contend with a series of quasi-legal and highly speculative financing channels to meet that funding demand that will pose additional risks to the nation’s financial system.As the examples of the rise and fall of the shadow banking systems and peer-to-peer (P2P) lending platforms show, creative Chinese financiers will continue to push against – and, if needed, circumvent – the bounds of law and regulation to create highly lucrative ways to meet the capital demands of small businesses and investors.

Foreign investors also want to take advantage of the strong need for credit in China, but uncertainty over the regulatory environment has put many of them off.

“There is huge demand and private equity funds in the West are beginning to lend. However, they are demanding sky-high rates due to the huge risk of lending to private corporates in China that often have unstable funding and during a time of slowdown in China. For these reasons, only the larger funds with good research teams will jump in with any strength,” said Andrew Collier, managing director at Orient Capital Research.

Oaktree Capital Group, one of the world’s largest alternative investment firms, told the South China Morning Post last year it would continue to invest in distressed debt and equities in China despite the growth of sour loans.China’s latest efforts to overhaul its deeply troubled billion dollar P2P lending industry are unlikely to dampen the appetite for credit or tackle broader issues of debt and financial risk in the world’s second largest economy, analysts said.

“China’s private sector is as capital starved today as it has been perhaps for 20 years or more,” said Peter Fuhrman, chairman and chief executive of China First Capital, an investment bank based in Shenzhen. “So there are creditworthy Chinese borrowers habituated to paying what by international standards quite high interest [rates]. The challenges remain not inconsiderable. At the top of the list is tougher government regulation on nonbank lending.”

Investors in Chinese online peer-to-peer lender Ezubao chanting slogans during a protest in Beijing after the platform turned out to be a giant Ponzi scheme. Photo: AFP

Investors in Chinese online peer-to-peer lender Ezubao chanting slogans during a protest in Beijing after the platform turned out to be a giant Ponzi scheme. Photo: AFP

Beijing has taken steps to tighten regulation of P2P platforms since 2015 amid a spate of high-profile company collapses and scandals that have rocked the industry and trapped the savings of millions of people.

The internet-based lending platforms match private investors with individuals and small companies that want to borrow, providing a lifeline for entities that have trouble accessing the traditional banking system.

The number of mainland P2P lenders has shrunk significantly over the past four years, from some 6,000 platforms operating in 2015 to just 572 in October this year, according to P2P tracking portal Waidaizhijia. But although the industry’s reputation for risky lending has attracted greater regulatory oversight, P2P lending continues to play an important role in China’s economy.

“P2P has looked like an attractive way to get capital to smaller firms and to regions of the country that have low access to bank lending,” said Collier.

“However, most of the money is going into speculative investments in property, along with established securities such as the better grade corporate bonds. The regulators go back and forth on how much freedom they want to give to this sector.”

To tackle financial risks in the banking system, China has already taken a hard stance against shadow banking, which often involves many forms of off-balance-sheet lending from banks and nonbank financial firms, by rolling out new regulations to focus on supervising asset management businesses and products of commercial banks.

So far China’s effort seems to have made a significant difference to slowing the growth of the shadow banking industry. Rating agency Moody’s estimated that broad shadow banking assets shrank by nearly 1.7 trillion yuan (US$242 billion) in the first half of 2019 to 59.6 trillion yuan (US$8.4 trillion), the lowest level since the end of 2016.

Broad shadow banking assets declined only slightly to 64 per cent of nominal gross domestic production (GDP) at the end of June 2019 from 68 per cent at the end of 2018. But they were down 23 percentage points compared to the peak of 87 per cent of GDP at the end of 2016, Moody’s said.

Despite the crackdown by authorities, P2P lenders are likely to continue filling an important gap in the Chinese economy, according to analysts, although growth would be slower than during 2014 to 2018. Consultants Frost & Sullivan forecast P2P lending to grow in value to 2.17 trillion yuan (US$309.4 billion) by 2023, compared to 789 billion yuan (US$112 billion) in 2018.

“The explosive growth of the P2P industry since 2010 confirms there is huge and unmet demand for capital,” said Fuhrman. “Especially among smaller Chinese private sector companies.”

People protest over losses incurred in peer-to-peer investment schemes in front of the public security ministry of Dongcheng district in Beijing. Photo: Reuters

People protest over losses incurred in peer-to-peer investment schemes in front of the public security ministry of Dongcheng district in Beijing. Photo: Reuters

Part of the problem is that China’s banking system has not evolved to meet the demands of the private sector, which has been the engine of the country’s economic growth. Commercial banks prefer to lend to state-owned enterprises, which have implicit government backing, and are reluctant to lend to private companies because they are seen as being less creditworthy.

“In the past, non-performing [loans] were very high, so lending to small firms was discouraged,” Tian Guoli, the chairman of China Construction Bank, the country’s second biggest lender, said last year.

Squeezed between interest rates at P2P platforms that can be up to four times that charged by Chinese banks, and weak prospects of borrowing from large lenders, many small private companies have struggled to stay on top of debt.

The problem has been particularly acute through formal lending mechanisms such as the bond market. Between January and October this year, 93 private firms have defaulted on 278.7 billion yuan (US$39.6 billion) worth of Chinese bonds.

The overall default rate has now hit 1.51 per cent, a record high for the Chinese bond market since 2014, according to a report published by investment bank China International Capital Corporation last Friday. The default rate of a bond issued by a Chinese private company hit 11.82 per cent this year, nearly doubling from 6.18 per cent in 2018 and more than six times the rate of 1.89 per cent in 2017.

“While the overall liquidity in onshore bond market has improved, weak issuers will continue to face refinancing pressure over the next 12 months, because investors will remain risk averse towards them,” said Ivan Chung, an associate managing director at rating agency Moody’s.

The People’s Bank of China has called for risks associated with the P2P industry to be resolved by the first half of 2020, while some provinces like Hunan in central China have moved to ban the platforms altogether.

However, analysts said that given that much of China’s private sector is in need of cash to repay debt, the industry was unlikely to disappear, even amid growing regulatory scrutiny.

“It’s better to have greater transparency and regulatory oversight,” said Fuhrman. “The lending doesn’t stop, but the money becomes more expensive and risky for borrowers. This has a deadweight cost to the Chinese economy. The sooner the legitimate nonbank lending sector gets cleaned up and back in business the better it will be for China as a whole.”

https://www.scmp.com/print/economy/article/3036608/china-regulatory-failure-contain-financial-excesses-putting-some-foreign

Shadow-Banking-SCMP-Nov-6-2019

China and Ireland: Building a Powerful High-Tech Partnership. Enterprise Ireland Ambition Asia Conference, Dublin June 2019

June 25th, 2019 No comments

Enterprise Ireland, the Irish government export development agency, held a conference in Dublin earlier this month to promote more intensive collaboration between businesses in Ireland and China, particularly in high-technology. I was invited to give a keynote speech, titled “China and Ireland: Building a Powerful High-Tech Partnership”. You can watch the first six minutes by clicking here.

Many thanks to my friend and amateur cinematographer Elaine Coughlan, an Enterprise Ireland board member as well as managing partner at Altantic Bridge Capital. Elaine has an outstanding track record as a tech entrepreneur and investor, in Silicon Valley, Ireland and China. I was also honored to be on a panel Elaine moderated.

The Ambition Asia Pacific conference brought together about 300 business leaders from Ireland, China and elsewhere across Asia.

Ireland is the only country in the European Union that has a trade surplus with China. The country stands to benefit greatly from Brexit, as international tech companies move European operations out of the UK and to the only EU Eurozone country with English as its native language. Two other big plusses: Ireland is a business-friendly place with about the lowest corporate taxation rates around.

Enterprise Ireland has a great team in China, led by Mary Kinnane, Tom Cusack and Patrick Yau. I met executives from two of Ireland’s success stories in China, Decawave and Taoglas.

Small country. Big impact.

Adviser Banks Forced to Hold Stakes in IPOs on China Startup Board — Nikkei Asian Review

April 5th, 2019 No comments

HONG KONG — Investment banks bringing companies to list on China’s new board for technology startups are facing an unusual requirement: they will have to keep some of the shares for themselves.

The Shanghai Science and Technology Innovation Board marks a major experiment in the reform of China’s capital markets.

Chinese President Xi Jinping announced plans in November for a Nasdaq-style board for young tech startups, and it is expected to be operational later this year. It aims to attract young companies with fewer regulations and reporting requirements and, unlike China’s main markets, there are to be no limits on pricing and first-day trading movements.

Also unlike the country’s existing boards in Shanghai and Shenzhen, companies that list do not have to be profitable. In some cases, the tech board will not even require companies to have generated revenue.

The board signifies the realization of long-discussed plans to move from a system where Chinese regulators carefully review every applicant and maintain tight control over the flow of listings — leading to a backlog of hundreds of companies waiting years for an official nod — to a more market-driven system like that of major foreign exchanges.

The requirement that underwriters take a stake in initial public offerings, first flagged by officials last month, is an indicator of the authorities’ caution; members of the Chinese financial community say the stakeholding requirement is intended to insure underwriters bring only the companies in which they have confidence to market.

“Having lowered profitability requirements, it further makes sense to have sponsors with skin in the game,” said Brock Silvers, managing director of investment company Kaiyuan Capital in Shanghai.

Executives with two Chinese financial companies said the minimum stake will be “a low single-digit” percentage of the IPO. A lock up rule will block the underwriters from selling their shares within two years of the IPO. The rules have yet to be formally issued.

Victor Wang, executive director of financial sector research at China International Capital Corp., the country’s largest investment bank, said it is still unclear how the stakeholding requirement will be shared among different investment banks involved in an IPO. But the logic is, “if you don’t focus on quality and recommend some low-quality companies, you own money will be lost,” he said.

China Merchants Securities, which is sponsoring two companies preparing to list on the new board, declined to comment about the new rule. However, a local broker, who had not heard of it before, said he was not surprised at the requirement.

“China’s financial legal framework is not flawless and officials at the China Securities Regulatory Commission cannot completely trust sponsors’ due diligence work,” he said. “After all, there have been IPO frauds before. It is no surprise if regulators want some level of assurance by having brokers to share risks.”

Some market observers are wary of the consequences, however.

“The intention is a good one but once again investors are not being forced to make their own decisions and analysis,” said Fraser Howie, a veteran broker and co-author of three books on Chinese financial markets. “By forcing the (investment bank) to come in on every deal, it effectively tells investors, ‘Don’t worry. You don’t need to think for yourselves’.”

Howie also sees the rule as problematic for the banks. “The investment bank’s job is to bring a company fairly to market,” he said. “I think this (rule) conflicts with this. To me, they are creating a needless conflict of interest and additional risk for the bank.”

The burden of the requirement will favor larger investment banks, in the view of Yang Yingfei, a partner handling IPOs at Baker McKenzie FenXun Joint Operation Office in Beijing.

“Sponsors that are relatively stronger overall will become more competitive, whereas small and medium-sized securities firms may gradually lose the ability to sponsor tech board enterprises,” she said. “The effect of concentration in the sector will become conspicuous.”

Though the Innovation Board’s approach is unusual, other market regulators have also been wrestling with the question of how to ensure that underwriters take responsibility for companies they bring to market.

Last month, the Securities and Futures Commission of Hong Kong reprimanded and fined UBS, Merrill Lynch, Morgan Stanley and the securities arm of Standard Chartered Bank over their handling of IPOs.

UBS received the heaviest penalty, a fine of 375 million Hong Kong dollars ($47.78 million) and a one-year suspension from sponsoring listings on the Hong Kong market. The SFC said the bank had failed to confirm the existence of key claimed assets and customers of China Forestry Holdings before bringing it to market in 2009 and found problems with its work on two other IPOs.

China Forestry raised $216 million in its IPO but its shares stopped trading in 2011 after its auditor reported the discovery of accounting irregularities.

Preparations for the Shanghai Innovation Board have moved unusually quickly since it was first mooted in November. The authorities are keen to have “unicorns” — unlisted startups valued at $1 billion or more — list on domestic markets rather than offshore. After several abortive efforts, they are hoping they have created an attractive alternative at last.

As of yet, the country’s most valuable companies, online services companies Alibaba Group Holding and Tencent Holdings, are listed in New York and Hong Kong, respectively.

“There are certainly signals that the tech board’s IPO procedures will be more market-driven, with a less onerous process of CSRC approval and monitoring,” said Peter Fuhrman, chairman of investment bank China First Capital in Shenzhen. “That should be a positive development.”

Nine companies are set to launch on the new board as soon as June, but none are unicorns; combined, they are expected to raise only about $1.6 billion. Financiers say bigger startups are waiting for the board to work through its initial launch pains before moving forward themselves.

One Hong Kong-based banker who works with mainland Chinese companies said “a lot” of his clients were waiting in the wings.

https://asia.nikkei.com/Business/Markets/Adviser-banks-forced-to-hold-stakes-in-IPOs-on-China-startup-board

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Chinese Education Startup Puts Western Teachers on Notice — Wall Street Journal

March 21st, 2019 No comments

A Chinese education company backed by U.S. investors including Kobe Bryant is cracking down on how its Western teachers cover politically fraught topics.

VIPKid, one of China’s most valuable online education startups, has put hundreds of its mostly American teachers on notice for using certain maps in their classes with Chinese students, and has severed two teachers’ contracts for discussing Taiwan and Tiananmen Square in ways at odds with Chinese government preferences, people familiar with the company say. Since last fall, teachers’ contracts state that discussing “politically contentious” topics could be cause for dismissal, according to one reviewed by The Wall Street Journal.

The moves highlight the balance a Chinese company must strike in fulfilling global aspirations while toeing Beijing’s line. Five-year-old VIPKid is currently in talks to raise as much as $500 million in new funding from U.S. and other investors that could value the company at roughly $6 billion, people familiar with the fundraising said.

 “A company must keep good relations with the government and ideology,” said Peter Fuhrman, chief executive of investment firm China First Capital . “But that can cause friction when you’re also courting foreign investors, expanding business overseas and employing a large American workforce.”

Beijing-based VIPKid says it has more than 60,000 teachers in the U.S. and Canada who teach English to more than 500,000 children ages 4 through 15, who live mostly in China. Teachers work as independent contractors and can earn between $14 and $22 an hour. They must have a bachelor’s degree, at least one year of teaching experience and eligibility to work in the U.S. or Canada.

Curricula are provided, and teachers give English-language instruction, sometimes using geography or historical figures. VIPKid’s approach is consistent with maps and materials in the Chinese education curriculum, which calls Taiwan a part of China. Textbooks don’t mention the military’s suppression of the Tiananmen Square pro-democracy demonstrators in 1989, and discussion of it is forbidden.

A spokesman said VIPKid has “an elevated level of responsibility to protect the safety and emotional development of the young children on our platform.” The company expects teachers to understand cultural expectations, he said, adding it had to “make a difficult decision” to terminate the contracts of “an exceptionally small number of teachers” who “decided to ignore the needs of their students” and “the preference of their parents.”

Western companies including Gap Inc. and hotel giant Marriott International Inc. have been forced to apologize in the past for online communications, websites or merchandise that angered Beijing or Chinese consumers on issues including Taiwan and Tibet.

Chinese education technology attracted $5.3 billion in investment last year, double the amount a year earlier, according to Dow Jones VentureSource data. VIPKid’s investors include U.S. hedge-fund firm Coatue Management LLC, venture-capital firm Sequoia Capital, Chinese social giant Tencent Holdings Ltd. and a venture fund co-launched by retired NBA star Kobe Bryant.

The company’s actions have rankled some teachers. Typically, these instructors have displayed maps of the world, including China, that they found on their own. Starting last fall, hundreds began receiving emails or calls from VIPKid stating their maps weren’t aligned with Chinese education standards, people familiar with the matter said. Teachers who refuse to adhere to the map standards could have their contracts terminated, after conversations with VIPKid. Map-related dismissals haven’t happened, said a person familiar with the company.

Will Rodgers, a 26-year-old American teacher based in Thailand, said he discussed Tiananmen Square twice during VIPKid lessons about famous Chinese landmarks. First, he told a 12-year-old student “the Chinese government jailed and killed many people just for protesting.” He then showed a 15-year-old student photos and video footage of the protest, and his contract was terminated. Mr. Rodgers said he doesn’t agree with VIPKid’s stance, but doesn’t blame the company for ending his contract.

Another American teacher’s contract was terminated earlier this year after he told students that Taiwan was a separate country, according to people familiar with his case. A third teacher received a call from VIPKid after telling a student that Tibet, an autonomous region in China with a history of separatist activity, is a country, during a lesson on China’s neighbors, according to a person familiar with the matter. He was told on the call he should refer to Tibet as part of China.

People familiar with VIPKid say it monitors classes for missteps over political content. Another person familiar with the matter said the company uses artificial intelligence to determine material students find engaging and to protect them from inappropriate behavior.

Some teachers and VIPKid investors say that education from foreign teachers, even if it is screened, can benefit students because they get exposed to other cultures. Rob Hutter, a founder and managing partner of Learn Capital, an early investor in VIPKid, said the company is trying to take a common-sense approach by teaching uncontroversial content.

“No matter what nation you’re teaching in, there are going to be things that we need to be thoughtful about,” he said. “Even in American classrooms, there are things you cannot discuss.”

“No matter what nation you’re teaching in, there are going to be things that we need to be thoughtful about,” he said. “Even in American classrooms, there are things you cannot discuss.”

https://www.wsj.com/articles/chinese-education-startup-puts-western-teachers-on-notice-11553160602?mod=hp_lista_pos3

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Chinese Private Equity Funding Hit By Sharp Downturn — Financial Times

March 15th, 2019 No comments

Fundraising by renminbi-denominated private equity groups in China plummeted 86 per cent last year, squeezed by a tighter availability of credit and a slower initial public offering market.

The fall — revealed in a new report published on Friday — underlines how the Chinese private equity market has gone into reverse from the boom times of a few of years ago, when scores of new funds were launched and the country’s technology companies attracted sky-high valuations.

Hundreds of small, inexperienced Chinese private equity funds that rushed into investments in technology and new economy companies have begun to suffer from a sharp contraction in fundraising and tougher environment for exiting investments.

Private equity houses raised about $13bn in renminbi-denominated funds in 2018, down about 86 per cent from the $93bn raised the year before, according to data compiled by the consultants Bain & Co.

At the same time, small Chinese private equity groups struggled to cash in on their investments in 2018. Sales and initial public offerings worth less than $100m fell by about 64 per cent last year compared to a five-year average.

“The level of optimism and fervour for investing in the tech sector foreshadowed what we are seeing now,” said Usman Akhtar, a partner at Bain & Co, referring to how many small private equity houses are struggling to exit from investments at expected prices. “It’s the start of this and it may take a few years to pan out.”

The tightening of credit in China is a broad trend with an impact far beyond private equity. Banks, trusts and other sources of capital have been squeezed during China’s attempt to slow the growth of debt.

So-called shadow banking has been an important source of funds for small private equity groups. Without these channels to fresh cash, many of the imperilled funds are simply shutting down, raising doubts over whether investors will be paid.

China’s woes are mirrored across Asia where large private equity is sucking up most of the available capital while also finding means to exit their investments, Mr Akhtar said. Hong Kong-based PAG, which is run by former TPG and JPMorgan executive Shan Weijian, raised a $6bn fund in November, following a more than $9bn fund raised by Hillhouse, the Beijing and Hong Kong-based group.

Large exits of more than $500m clearly diverged from smaller deals in 2018 by rising just over a quarter on the year before.

Global demand for Chinese technology IPOs started 2018 with a bang but quickly showed signs of fizzling out, leading to a bottleneck of private equity seeking to exit their investments.

Over the past year several large, private equity-backed groups have been forced to scale back their IPOs or delay them indefinitely.

Tencent Music, which is partly owned by private equity, was last year targeting a $4bn float but ended up raising only $1.1bn after several delays.

“The reality is that all PE and VC investing in China has been an unhedged bet that the IPO process in China would liberalise and institutional investors in US and Hong Kong would show consistent, strong interest in Chinese IPOs. Neither is true,” said Peter Fuhrman, chairman of China First Capital, a Shenzhen-based investment bank.

https://www.ft.com/content/c0cf8c6e-4634-11e9-a965-23d669740bfb

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Global Investment in Aviation Summit (GIAS), Dubai

February 28th, 2019 No comments

In splendid Dubai to attend the Global Investment in Aviation Summit and share data and outlook for China’s fast-growing and even faster-evolving aviation sector.

Here is the presentation I used during my talk.

My thanks to the kind invitation from the United Arab Emirates General Civil Aviation Authority. Anyone flying in and out of the Emirates will know that it is a benchmark for worldwide best practices in aviation and airport management.

Someday, I’d like to see the UAE’s second largest export to China, after petroleum products, will be aviation services, consulting, management.

Are US and China Decoupling? Guest Lecture at University of Michigan Ross School of Business

February 20th, 2019 No comments

I was honored and delighted to teach a class via video lecture at the University of Michigan Ross School of Business for third year, this time on the potential decoupling between the US and China, the competitive realignments as well as investment opportunities.

The lecture’s title: “Chimerica No More: Are China and the US Decoupling? How Will This Alter World Economics and Commerce?”

Thanks to Professor David Brophy and his class on Global Private Equity for the invitation an incisive questions.

This is a video link to the presentation. (Click here.)

This is a video link to the full two hour class. (Click here.)

This is the PDF of the presentation — without the animations. (Click here.)

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”.

https://www.ft.com/content/e7e81928-7f57-11e8-bc55-50daf11b720d

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University of Michigan Ross School of Business — Guest Lecture on China Investment, the Perils & Attractions

January 15th, 2018 No comments

 

 

I was in Ann Arbor this past week to guest lecture at the University of Michigan Ross Business School. The full video can be accessed by clicking here.

I was invited to speak at the business school by Professor David Brophy, who introduces me at the start. Professor Brophy teaches a winter semester class in Global Private Equity. He began researching and teaching PE at Michigan in the mid-1970s, not long after the field was invented by firms like KKR.

Along with speaking in person to students at the school, my talk was also streamed live to the Michigan Venture Capital Association.

 

Maurice Greenberg, Wall Street Journal.

 

In Today’s China, Paradoxes Still Abound. But So Do Opportunities — Site Selection Magazine

November 21st, 2017 No comments

 

In September, China First Capital Chairman and CEO Peter Fuhrman, familiar to attendees at the World Forum for FDI in Shanghai last year, delivered a talk from China to Harvard Business School alumni. Here, with Mr. Fuhrman’s permission, we present excerpts from his remarks.

————–

GDP growth has never and will never absolutely correlate with investment returns.

Any questions? No? Great. Thanks for your time.

Of course I’m joking. But that key reality of successful investing is all too often overlooked, and China has provided all of us over these last 30-some-odd years with a vivid reminder that IRR and GDP are by no means the same animal.

China is, was and will likely long remain a phenomenal economy. The growth that’s taken place here since I first set foot in China in 1981 has been something almost beyond human reckoning. Since I first came to China as a postgrad in 1981, per-capita GDP (PPP) has risen 43X, from $352 to $15,417. China achieved so much more than anyone dare hope, a billion people lifted out of poverty, freed to pursue their dreams, to make and spend a bundle.

China this year will add about $1 trillion of new GDP. Just to put that in context, $1 trillion is not a lot less than the entire GDP of Russia. So who is making all this newly minted money? And how can any of us hope to get a piece of it? Another question: Why, if China is such a great economy, has it proved such a disaster area for so many of the world’s largest, most sophisticated global institutional investors, private equity firms and Fortune 500s?

Turning Inward

Let’s start with the fact that China is a part of the World Trade Organization, but not entirely of it — not fully subscribed in any way to the notion that reciprocity, openness, free trade, level playing fields and equal treatment are positive ends unto themselves. As China has gotten richer it has seen even less and less need to attract foreign capital and foreign investment. That’s a tendency we see in other countries, including obviously some of the rhetoric we now hear in the U.S. — that more of the gains of the national economy should belong to its citizens. But China’s way is different.

The renminbi is a closed non-tradable currency, so getting US dollars into and out of China has always been difficult. China now has the world’s second-largest stock and bond markets, but those markets are largely closed to any investors other than Chinese domestic ones. But China also continues to provide companies going public with by far the highest multiples anywhere in the world.

When I first came to China 36 years ago China was a 100-percent state-owned economy. Twenty years ago the first rules were put in place to allow a private sector to function. Today, according to anyone’s best estimate, it’s about 70 percent private and 30 percent state, and most of the value creation is being provided by that private-sector economy. So in theory there should be very interesting M&A opportunities. But it’s been exceedingly difficult to get successful transactions done. One of the core reasons is that by and large all private-sector companies in China, large and small, are family-owned.

The other thing important to consider is a Mandarin term: guifan. It’s the Chinese way of explaining the extent to which a company in China is abiding by all the rules of the road — the taxes you should pay, the environmental and labor laws you should follow. It’s not at all uncommon that successful private-sector companies in China are successful by virtue of having negotiated to pay little or no corporate tax on profits.

For foreign-owned companies in China it’s an entirely different story. They are by and large 100-percent compliant with the written rules. This has an enormous impact on the operating performance of any company, so you can imagine how potentially skewed the competitive environment becomes. And keep in mind that corporate taxation in China in the aggregate is, if not the highest in the developed world, then among the highest, and the environmental and labor laws are every bit as difficult, rigorous, tough and expensive to implement as they are in the U.S.

China is a country where local government officials are scored on the measurable success of their time in office, and success is overwhelmingly attributed to GDP growth. So it should be no surprise if what they’re trying to do is optimize GDP growth, the percentage of a company’s income that goes back to the government in taxation can have an adverse effect on that. Instead the government will continue to urge its local companies to take the money and, rather than pay tax, continue to invest, expand and therefore build local GDP.

The Hum of Consumerism

The reasons to stay engaged and find a viable investment angle include GDP growth. China’s GDP is likely to continue to grow by at least 6 percent a year. Second, across my 25 years of involvement in China, every one of the predictions of imminent collapse — financial catastrophe, local government debt, bad bank loans, real estate bubbles — have proved to be false. It appears China has some resiliency, and it’s certainly the case that the government has the tools and financial resources to ride out most challenges.

Third has been how effortlessly it’s made the transition that still bedevils lots of Europe, from a smokestack economy to a consumer-spending paradise. At this moment every major consumer market in China is booming both online and offline. Alibaba, Baidu and Tencent are now operating as three of the most profitable companies in the world.

How does China have a robust, booming consumer economy and an enormous appetite for luxury brands, yet on average salary levels that are still one-fifth or one-sixth the levels in the US? The simple answer is that almost all the Chinese now living in urban China — about half the population, compared to about 15 percent when I first got here — owns at least a single apartment if not multiple, which is more and more common. The single best-performing asset in history has probably been Chinese urban real estate over the last 30 years. It’s fair to say the average appreciation over the last 10 years is at least 300 percent.

Though China has a population whose incomes on paper look like those of people flipping burgers at McDonald’s, they seem to have the spending power and love of luxury goods like the people summering in East Hampton. Even Apple itself has no idea how big its market is here in China. It’s likely that at least 100 million iPhone 8s will be sold to Chinese over the next year. The retail price here in China is at least 30 to 40 percent higher than in the US, with most phones bought for cash, without a carrier subsidy.

‘You’ll Be Older Too’

So where is it possible to make money in China? One message above all: Active investing beats passive investing every time. What you need to do is either be the owner-operator or be a close strategic partner with one, and stay actively engaged.

There are four major areas of opportunity: Tech, health-care services, leisure and education (see graphic below). The potential for building out a chronic care business in China is enormous. Looking ahead 25 to 30 years, sadly China will likely suffer a demographic disaster. This country will become a very old society very quickly. That’s the inevitable product of 30 years of a one-child-per-family policy. By 2040 or 2050, 25 percent of China will be over the age of 65.

The overall rate of GDP growth is unlikely to ever rival that of a few years ago at 10 to 12 percent a year, but overall what we have is higher-quality growth. People in China are living well. Things should continue to motor along very smoothly at least for one more generation — a generation whose members are better educated, more skilled, ambitious and globalized than their parents.

There’s no denying the reality of what a better, happier, freer, richer country China has become since I first set foot here. I marvel every day at the China that I now live in, even while I occasionally curse some of the unwanted byproducts like heavy pollution in most parts of the country, overcrowding at tourist attractions, bad traffic, and a pushy culture that’s lost touch with some of China’s ancient glories.

China will continue to amaze, inspire and stupefy the world. The Chinese have done very well and will do better. At the same time, those of us investing in China may do a little better 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.

 –

China’s Soccer Push Puts a Storied Team Under Murky Ownership — The New York Times

November 17th, 2017 No comments

 

 

 

 

 

 

By SUI-LEE WEE, RYAN McMORROW and TARIQ PANJA

NOV. 16,    2017

Li Yonghong in April with David Han Li, left, of Rossoneri Sport Investment, part of A.C. Milan’s new ownership group, and Marco Fassone, the club’s chief executive.

BEIJING — When the Chinese businessman Li Yonghong bought A.C. Milan, the world-famous Italian soccer club, virtually nobody in Italy had heard of him.

Virtually nobody in China had, either.

Mr. Li had never been named to one of China’s lists of the country’s richest people. The mining empire he described to Italian soccer officials was hardly known even in mining circles.

Nevertheless, Mr. Li seemed to have what mattered most: money. He bought the club in April for $860 million from Silvio Berlusconi, the former Italian prime minister, to clinch China’s biggest-ever soccer deal.

Today, Mr. Li’s acquisition of A.C. Milan appears to be emblematic of a string of troubled Chinese deals.

The soccer club, bleeding money after a spending spree on star players, is seeking new investors or a refinancing of the high-interest loan that Mr. Li took to buy the club. That loan comes due in a year.

Chinese corporate records show that — on paper, at least — someone else owns his mining empire. That company’s offices were empty on a recent visit, and a sign on the door from the landlord cited unpaid rent. A spokesman for A.C. Milan said Mr. Li’s control of the mining business had been verified by lawyers and banks involved in the transaction.

Chinese records also show a series of business disputes and run-ins between Mr. Li and Chinese regulators.

China’s emergence as a world economic power came with a ready checkbook for major brand names. Chinese owners now control the Waldorf Astoria hotel in New York, AMC theaters, the Hollywood production company Legendary Entertainment and A.C. Milan.

Then Chinese officials began to worry that the spending was simply part of an exodus of money from China so vast that it once threatened to destabilize the country’s economy, the world’s second largest. This summer, the government ordered its banks to scrutinize lending to some of the country’s biggest deal makers.

Outside China, some of the deals led regulators to ask questions about the tycoons behind them. Some wealthy people in China list their holdings under the names of relatives or associates to avoid scrutiny, a practice that has attracted criticism inside and outside the country.

In the case of Mr. Li, the mines that he told A.C. Milan he controlled have been owned by four different people since last year, according to Chinese corporate records. The business changed hands twice for no money, the documents show.

Mr. Li declined an interview request through A.C. Milan. The club spokesman defended Mr. Li on his business disputes, saying that sometimes he was a victim and that sometimes he was not aware of complicated rules. The spokesman also said the club was evaluating several refinancing proposals and was confident it could cover the loan.

Chinese spending on soccer totaled $1.8 billion over the past five years, according to Dealogic, a data provider, but Chinese officials are putting a stop to the spree amid concerns about the flight of money abroad.

“There’s a lot of ways to invest in football and the sports industry for much less money,” said Mark Dreyer, who tracks Chinese soccer investments on his website, China Sports Insider. “People were basically using the government’s previous push for sports as a way to diversify into different industries and get their money out of China.”

Mr. Li had plenty of reasons to buy A.C. Milan. President Xi Jinping had professed his love for soccer and wanted China to be a superpower in the sport by 2050. The Chinese government had laid out a plan for increasing sports investment.

An acquisition of A.C. Milan would be a marquee deal. A decade ago, the club was home to some of soccer’s biggest talents, including Ricardo Izecson dos Santos Leite, who is known as Kaká, and Andrea Pirlo. It was a seven-time European champion.

But it has not won an Italian championship for six years or a European title for 10. Fans welcomed Mr. Li’s arrival as a potential catalyst. This summer, A.C. Milan began to spend on new players in a way that seemed to signal a desire to compete again.

Still, Mr. Li and Mr. Berlusconi struck the deal at a difficult time. Beijing, spooked by the unprecedented capital outflows and a weakening currency, had imposed restrictions on overseas investment at the end of last year.

Mr. Li set up companies in the British Virgin Islands and Luxembourg that would put the club’s legal ownership outside China, according to Marco Fassone, A.C. Milan’s chief executive officer. Mr. Li also borrowed about $354 million from the hedge fund firm Elliott Management, a loan he must pay back by October 2018. A spokeswoman for Elliott declined to comment.

A.C. Milan remains debt laden and unprofitable, and could have trouble repaying what it owes on its own. It spent about $274 million to sign 11 players this summer, according to the club spokesman, making it among the biggest spenders in European soccer.

In August, A.C. Milan had to wait for the transfer of two players it had signed from other teams because it had not deposited the required bank bonds. The club blamed a timing issue for the delay, and the transfers were eventually completed. The team is in seventh place but, with more than two-thirds of the season left to play, must finish among the top four to earn a spot in European soccer’s elite Champions League next season. The team could lose valuable television revenue if it fails to reach that level.

It is unclear how much Mr. Li’s wealth might help the club address its troubles.

He was initially unknown to the deal makers trying to sell the club, the people involved in the transaction said. He was originally part of a group that included Sonny Wu, a well-known investor who is chairman of the private equity firm GSR Capital, these people said. But Mr. Wu pulled out of the deal.

In an email, Mr. Wu said he had not talked to bankers about Mr. Li or his consortium. Rothschild & Company, the investment bank that advised Mr. Li, declined to comment.

Mr. Li told A.C. Milan that his holdings included phosphate mining operations in the city of Fuquan in Guizhou Province.

But Chinese corporate filings show that the mines are owned by another party: Guangdong Lion Asset Management, an investment company. And Guangdong Lion has had a complicated ownership record over the past two years, involving a number of people with similar family names. (One court proceeding suggests Mr. Li has a relationship with Guangdong Lion, although it is not clear what kind.)

Originally, Guangdong Lion was ultimately owned by two investors, Li Shangbing and Li Shangsong, according to filings. Like Li Yonghong, the two men come from the same area of Maoming, a city on China’s southern coast, according to the documents. But in a phone interview, Li Shangbing said he did not know Li Yonghong.

Li Shangsong, who declined to comment, sold his interest in Guangdong Lion in 2015 to a person named Li Qianru, according to the documents. The documents did not include personal information about Li Qianru, who could not be reached for comment.

In May 2016, according to the filings, Li Shangbing and Li Qianru, sold Guangdong Lion to yet another Li: Li Yalu. The sale price: $0. The filings do not provide personal information about Li Yalu.

Three weeks later, Li Yalu sold a half stake in Guangdong Lion to a similarly obscure investor, Zhang Zhiling. The price: $0. Neither could be reached for comment.

Li is a common surname in China, and the relationships among the various Lis are unclear. The A.C. Milan spokesman declined to comment.

Li Yonghong, the A.C. Milan owner, and Li Shangbing have two things in common.

The first is a relationship with Guangdong Lion. A Chinese court cited Li Yonghong and Guangdong Lion in April for failing to resolve a loan dispute with another Chinese company, saying both parties had disappeared. The court did not specify the relationship. The A.C. Milan spokesman said that Li Yonghong had merely guaranteed the loan and that “he is a victim in this case.”

The second is an interest in investing in European sports.

In May 2016, a day before Li Shangbing sold Guangdong Lion for no money, he started a company called Sino-Europe Sports Asset Management Changxing Company, according to China’s corporate database.

Two days after he registered the Sino-Europe firm, another person registered a new company with a strikingly similar name: Sino-Europe Sports Investment Management Changxing Company. The two companies’ headquarters were in the same building in the city of Huzhou.

Sino-Europe Sports Investment owns a stake in A.C. Milan as a result of its role as a shareholder in Rossoneri Sport Investment, a Chinese company that is part of the group led by Li Yonghong that owns the soccer club.

In the phone interview, Li Shangbing denied setting up either Sino-Europe company and said he did not own any part of A.C. Milan. He declined to answer further questions. A.C. Milan declined to comment on Li Shangbing. The listed owner of the Sino-Europe Sports Investment Management Changxing Company, Chen Huashan, could not be reached for comment.

Guangdong Lion’s listed headquarters are in a fancy skyscraper in Guangzhou. In August, the offices were closed, with an eviction notice on the door. Inside, desks and chairs were in disarray, computers were missing hard drives, and maggots festered in a trash can.

The phone number listed for Guangdong Lion connects to a woman who said she helped companies register with Chinese regulators.

Li Yonghong has an extensive business history, but Chinese records show it includes disputes with regulators and others.

In 2013, China’s securities watchdog fined Mr. Li $90,250 for failing to report the sale of $51.1 million in shares of a real estate company. A.C. Milan said Mr. Li had simply been unfamiliar with listing rules.

In 2011, that same real estate company said in a stock filing that Mr. Li was the chairman of Grand Dragon International Holding Company, a Chinese aviation company. Grand Dragon said in June that he had no present or past association with the company. The A.C. Milan spokesman said he had no knowledge of this.

In 2004, Mr. Li’s family business, the Guangdong Green River Company, teamed up with two other companies to bilk more than 5,000 investors out of as much as $68.3 million, according to The Shanghai Securities News, the official newspaper of China’s financial watchdogs. They had sold contracts for lychee and longan orchards and promised investors hefty returns, according to the report.

Mr. Li’s father and brother were sentenced to jail. Mr. Li was investigated but not accused of wrongdoing, the report said.

A.C. Milan said the episode had nothing to do with Mr. Li, adding that “he was not aware of the situation until the investigation.”

Amid Chinese concerns about deals abroad, China’s purchases of soccer teams with prestige names is likely to slow considerably for some time to come.

“If outbound investment should have the purpose of ‘strengthening the nation,’ even within the broadest of definitions,” Peter Fuhrman, chairman of the investment bank China First Capital, said in an email, “buying a soccer team in the U.K. or Italy would hardly seem to qualify.”

 

As published in The New York Times

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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.”