Archive

Archive for the ‘Chinese Culture & History’ Category

Alzheimer’s: China’s Looming Health Challenges — The Diplomat

October 2nd, 2017 No comments

 

 

 

 

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into the U.S. Asia policy. This conversation with Peter Fuhrman Chairman, Founder and Chief Executive Officer of China First Capital, Ltd.is the 109th in “The Trans-Pacific View Insight Series.”  

With 9.5 million diagnosed Alzheimer’s sufferers in China, why is Alzheimer’s the country’s biggest future health problem?

I would broaden it to say that the treatment of chronic diseases, with Alzheimer’s at the forefront, is the largest future challenge to China’s national healthcare system. From a country that in living memory only offered a very rudimentary system of barefoot doctors, who were often nothing more than well-meaning but untrained quacks, China in 20 short years has expanded genuine healthcare coverage to all corners of the country, providing acute care and medications to the vast majority of its citizens. That’s an enormous achievement; one that’s done more good for more people than probably any other government initiative anywhere at any time. Chronic diseases, on the other hand, were never a focus, indeed never much of a problem. But, Chinese life expectancy has lengthened dramatically, thanks in part of the improvement in the delivery of acute health services. Chinese are now living as long as people in Europe and the United States. The result: China is already feeling the strain of millions of older ill folks with no real treatment options in place. The demographic die is already cast. Within 25 years, China will become a more geriatric society, where at least 25 percent of the population is over 65. Chronic disease will become commonplace, more prevalent than in any other country.

What cultural challenges hinder or help Chinese society in managing Alzheimer’s?    

The generation of people now growing old in China had limited expectations, as they mainly grew up in dire poverty. As they aged, they accepted more stoically that society couldn’t provide much assistance except for immediate medical emergencies. Their children and grandchildren, however, are constituted differently. They often have education and expectations similar to people in the West, including that there should be quality treatment options in China for every medical issue, as there are in the U.S., Europe, Japan, and elsewhere. They increasingly want better treatment for their sick parents, and will certainly expect even more for themselves when they grow older and are diagnosed with chronic diseases like dementia and Parkinson’s, or need extended care and rehabilitation after a stroke or heart attack, both quite common in China. There is still so little care available in China to fulfill this growing need.

What can China learn from the United States and Europe?

Probably the key lesson is to not to expect, as too many in the U.S. and Europe did, a big breakthrough in Alzheimer’s care, the development of drugs to arrest the progress or undo the damage of the disease. The sad reality is despite huge sums spent on research, we’re as far away from such a medical miracle as we were 20 years and at least $20 billion ago. Instead, China needs to foster the development of thousands of quality treatment centers for Alzheimer’s patients, to care for them according to the best global standards, to lengthen and enrich their lives. This requires along with lots of new buildings a huge number of trained doctors, geriatricians, specialist nurses, and aides.

Describe differences between Chinese rural and urban treatment of Alzheimer’s.

Quality healthcare in China is still available mainly in large national hospitals located in major cities. Though the number of rural Chinese with Alzheimer’s is large and growing fast, there is virtually no professional care available for them locally. The government is seeking to change this, not only for chronic diseases, to raise the standards of healthcare in small cities and rural townships, to relieve the huge disproportionate burden on the big urban hospitals.

Identify opportunities for the international healthcare industry in addressing China’s looming Alzheimer’s challenge?  

Over the next 40 years in China, there is no single area offering better investment fundamentals than chronic care, including the care of Alzheimer’s. Sober forecasts are, by 2045, there will be over 40 million Chinese with Alzheimer’s, four times the number presently. By then, it’s likely half the total number of Alzheimer’s cases worldwide will be here in China. As of today, there are fewer than 500 beds in China for patients needing specialist Alzheimer’s treatment. A French company, Orpea, has a first mover advantage, having already opened a world-class facility in Nanjing. In financial terms, quality Alzheimer’s and chronic care provides very solid returns. As or more important, though, is that the benefits will be captured also by Chinese society as a whole. This will certainly be one of those areas where investors will do quite well by doing good, by contributing to a China where the diseases of old age will be competently managed and families kept happy and intact for longer.

 

As published by The Diplomat

 

 

 

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

Download PDF version

 

Alzheimer’s Could Be China’s Biggest Health Problem — The Week in China Magazine

May 26th, 2017 No comments

 

 

Alzheimer’s is the fastest-growing, major fatal disease in China. Today there are at least 9.5mn diagnosed sufferers in China with perhaps as many cases undiagnosed. Almost one million Chinese are diagnosed every year with Alzheimer’s, with the number of new cases each year expected to accelerate sharply beginning around 2030.

It is also the major disease in China with the greatest mismatch between the number of patients and the amount of specialized care available. The US has about half the number of Alzheimer’s patients as China, and 73,000 beds in specialist Alzheimer’s treatment centers. China today has fewer than 200 beds. Alz care is a thriving $250bn industry in the US. In China, it’s barely even begun.

The reason for this mismatch is clear. China’s healthcare system is already under strain to reform and improve the quality of care overall, especially for acute and infectious diseases like cancer, hepatitis and serious asthma. Alzheimer’s is not now a top priority either for government policy or for healthcare companies and investors. But, over the coming decades, no disease will likely impact more lives in China or likely cost China more to treat. By 2050, it is projected the number of Alzheimer’s patients in China will exceed 45 million, about half of all those worldwide with the disease.

The total cost of treating all those people is impossible to estimate. Alzheimer’s is already the most expensive disease to treat in the US. The US government pays for more than half, through national health insurance paid through taxes on companies and individuals. With the number of Alzheimer’s cases in the US 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 US budget, larger even than military spending.

China will almost certainly take a different path than the US, with more spending done by patients and their families, rather than through national health insurance. On average, Chinese Alzheimer’s patients will also be cared for longer by relatives, rather than placed in specialized nursing homes.

But, the almost total lack of Alzheimer’s treatment centers, and trained nurses and doctors, is one of the most significant market failures in China’s healthcare industry. While the government, SOEs and private sector have been making significant investments in old age care (what the Chinese refer to as “yanglao”), most of this money has gone towards building and selling apartments in retirement communities, places for older people who are fundamentally still healthy and active. There has been little investment in the area of elderly care with most urgent need now and in the future– providing specialist centers for people with Alzheimer’s and other chronic diseases that afflict old people like Parkinson’s, serious arthritis, recovery from stroke.

In China, Alzheimer’s is still often seen not as a disease but as inevitable and natural outcome of aging, a sad side-effect of the fortunate fact of being long-lived. China’s national broadcaster, CCTV has lately been broadcasting public service ads to raise awareness that Alzheimer’s is a disease. This is the same education process the US and Europe began over 40 years ago.  There were few cases anywhere in the world then. Europe and the US, the private and public sector, began spending heavily to train doctors and nurses, build out its care infrastructure to meet the projected surge in patients.

Alzheimer’s, like diabetes, obesity, colorectal cancer, is a disease of economic success. As a country becomes richer and healthcare standards improve, people live longer. Nowhere has this transformation happened more quickly than in China, meaning nowhere else has ever seen as explosive growth in the number of Alzheimer’s cases. The average life expectancy in China has increased more in the last 30 years than it did in the previous 3,000.  China’s life expectancy is still growing faster than in developed countries. Chinese in Hong Kong recently passed Japan to become the world’s longest-living population.

The facts: Alzheimer’s is an incurable disease that afflicts a large number of older people, but not the majority. 3 percent of people age 65-74, 17% of people between 75 and 85 will develop the disease. For those over 85%, there is a 30% chance of having it.  It is a mystery why some old people get the disease and most others 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. Because China still has a larger percentage of its population living in rural areas,this suggests that the percentage of the +80 year-old population with Alzheimer’s in China may end up higher than in US, Europe or other Asian more urbanized societies including Japan, Korea, Taiwan, Singapore.

Women are far more likely to get Alzheimers than men. The reason is women on average live longer.

Despite billions of dollars in scientific and pharmaceutical research in the West, there are no drug or surgical treatments for Alzheimer’s. A drug cure for AD, widely predicted in the West 20 years ago, now seems very unlikely.  Brain chemistry and biology make developing a drug for Alzheimer’s difficult. Since 2002, 244 drugs for Alzheimer’s were tested in clinical trials in the US and Europe. Only one received US FDA approval. It has very limited and short-term impact.

Although there are no drugs to cure Alzheimer’s, there have been remarkable successes in Europe and the US, especially in the last ten years, at Alzheimer’s care facilities managed by specially-trained nurses and doctors. They work together to slow the progress of Alzheimer’s patients, through physical therapy, psychological counseling, special equipment to improve memory and mobility, lots of one-on-one assistance, and a safe living environment designed for care of people gradually losing their ability to think, speak and function. The result: Alzheimer’s patients in the US and Europe now live twice as long after diagnosis as they did 30 years ago, an average of 8-10 years after diagnosis.

The longer Alzheimer’s patients live, the more likely it is they will spend the final years in specialized care facilities. In this final stage, Alzheimer’s patients are often unable to talk, feed or bathe themselves, can remember almost nothing. The body’s immune system gradually stops working. As the brain is overcome by the disease and begins to decompose, even automatic body functions like breathing, digestion and swallowing are disrupted.

In the US and Europe, the average annual cost of caring for an Alzheimer’s patient is about $60,000, with the highest amount coming in the last two years of life. There are dozens of US and European listed companies focused on doing research and providing specialist Alzheimer’s care in nursing homes and clinics. In China, there are none.

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

A French listed company, Orpea, is moving fastest to build a big business in AD care in China. Last year they opened China’s most advanced Alzheimer’s clinic in in Nanjing. Orpea are among the world leaders in Alzheimer’s care. It is their first nursing home in China and they are planning now to expand quickly across the country. They have 775 nursing homes and clinics in Europe. Last year’s total revenues were €2.8 billion.

In Nanjing, Orpea built a 5-star facility, as deluxe as one would find anywhere in the world, with marble floors, an elegant dining room, a huge indoor pool and water therapy center.  In total, it has 140 beds, including 22 in the Alzheimer’s clinic. None of the real estate is for sale. It is a service business, offering specialized care and housing to elderly including even the most challenging patients, those with late-stage Alzheimer’s disease 。

Most of those living in the Nanjing facility are paying about Rmb20,000 a month. Though expensive, that’s still half the price per year of a shared room in a 3-star nursing home in the US. The level of care is as high as any specialized Alzheimer’s care center in the US or Europe. In almost all cases, the children of the patients are paying.

Regardless of culture, Alzheimer’s tends to effect people the same way. Nothing can restore patients’ memory, or stop the progress of a disease that is, in all cases, 100% fatal. The goal of treatment is to slow the disease progression by treating early related health problems and the decline in motor skills.

Most important is keeping patients physically and intellectually active. Orpea is using a new form of treatment known as “psychomotricity”, which rebuilds connections between a patient’s motor and cognitive skills. Successful treatment not only lengthens the lives of people with Alzheimer’s, it makes these patients more content, more social, more self-sufficient than if they were being treated by relatives at home.

Orpea is also quickly learning new things about Alzheimer’s and how to care for patients in China. Among late-stage Alzheimer’s patients, those who have lost the ability to speak, to recognize people or their surroundings, one of the last skills they hold onto and enjoy is the ability to stuff meat dumplings.  There’s a special kitchen and dining room just for Alzheimer’s patients. The Nanjing center has both a KTV and a “memory room” with objects from the 1950s-60s. As Alzheimer’s progresses, patients can’t recall recent events, but often recover older memories for their youth, including old songs.

Orpea plans to open at least two new nursing homes in Beijing this year and add other facilities soon in Shanghai. For now, they still have China’s Alzheimer’s care market, especially at the high-end, largely to themselves. But, they welcome competitors. “The need is so great, and the impact on patients’ lives so positive that we hope China will quickly develop a large, capable group of companies to care for people here,” explains Orpea’s China CEO, Nathaniel Farouz.

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 Chinese with average family income and savings levels.

One likely path will be for Chinese companies to acquire or partner with specialist nursing home companies in the US and Europe. There were rumors recently that one large Chinese investment group, CMIG, was seeking to buy Orpea. Orpea, though, denies any deal is being actively discussed.

If there’s one advantage to getting a late start, it’s that China can learn from the mistakes 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 centers for those still living at home or with relatives. Family members can drop off parents with Alzheimer’s to give caregivers a few hours to rest or run errands – or even for a few nights so they can take a quick vacation.

Home nursing care is also expanding quickly in the West. This too seems to be 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.

The main beneficiaries of professional Alzheimer’s care are the patients, whose lives and health are improved. But, there are also economic benefits for the society as a whole. Alzheimer’s care potentially can offer millions of new, long-term and well-paying jobs in China, for people at all educational levels.

From little spending now on specialized Alzheimer’s care, China will certainly grow into the world’s largest market for Alzheimer’s care. Government, at national, provincial and local level, should play a key policy-making, regulatory and coordinating role. Not only should they set standards and provide more transparent rules on which aspects of AD care will be reimbursed, governments can also do a great deal to foster the growth in urban China of high-quality private-sector nursing homes for chronically-ill old people. As the UN World Health Organization recommended in a recent report, “Central or local governments could adopt preferential tax policies or offer other financial incentives”  for Alzheimer’s care services and education.”

In rural China, the government’s role will be even more important. The number of Alzheimer’s cases among China’s rural population likely will be proportionately higher and financial resources of families and local governments more limited.

It’s hard to think of a business opportunity in China with better long-term investment fundamentals than specialized Alzheimer’s care. But, the industry should not be measured or motivated by profits. Its success and greatest return on investment will be in limiting the suffering, pain, helplessness and sadness of Alzheimer’s patients and their families.

 

Download PDF as published in Week in China

 

John Pomfret’s Majestic New Survey of China-US Relations, “The Beautiful Country and the Middle Kingdom”

December 7th, 2016 No comments

 

John Pomfret

Congratulations to John Pomfret on the publication of his for-the-ages comprehensive summary of the history of China-US relations, “The Beautiful Country and the Middle Kingdom”.

I’m proud to call John my oldest and closest friend. We share a near-40 year history and fascination with China. But, his wisdom far surpasses mine. I’m awed by his achievement and now by the unanimity of praise for the book in the major English-speaking media.

Here are reviews and article about the book from the FT, the New York Times, Wall Street Journal and the Economist:

Financial Times

New York Times

Wall Street Journal

Economist

 

What Alibaba Can Teach G20 Leaders — China Daily OpEd Commentary

September 6th, 2016 No comments

 

China Daily

 

 

Rural Taobao

It’s been 740 years since Hangzhou could rightly claim to be the most important city on earth. Back then, it was the capital of the world’s wealthiest and most developed nation, China during the Southern Song Dynasty. This week Hangzhou will briefly again be the center of the world’s attention and admiration, as the leaders of twenty of the world’s most developed countries arrive in the city to participate in the two-day G20 Summit.

The world’s spotlight will fall both on Hangzhou’s most famous historical landmark, West Lake, as well as its most famous local company, Alibaba, which also happens to be the world’s largest e-commerce company. Alibaba’s founder and chairman Jack Ma, is a Hangzhou native. He has spoken often of his pride that the G20 will be held in his hometown, boasting “Hangzhou has become the driving force of China’s new economy.” He suggests G20 visitors might want to rise one morning at 5am to walk about West Lake, to see Hangzhou scenery ancient and modern.

Alibaba has changed Hangzhou and changed China. But, to really grasp the full and positive extent of that change, world leaders would need to venture out from Hangzhou and visit some of China’s smallest, poorest and most remote rural villages. Here Alibaba’s impact is perhaps the most transformational. That’s because Alibaba has made a special effort to bring the benefits and convenience of online shopping to China’s rural families, the 45% of China’s population that still live on the land.

Since Alibaba listed its shares on the New York Stock Exchange in 2014, the company announced plans to spend RMB 10 billion on rural e-commerce infrastructure, to make it possible for people in over 100,000 Chinese rural villages for the first time to buy and sell on Alibaba’s Taobao marketplace.

It’s impossible to overstate the importance of this effort. E-commerce now offers the fastest and most durable way to improve living standards among China’s traditional peasants. By getting online they can shop more widely and buy more cheaply a vast range of products never before available in village China. In addition, also for the first time, they can sell directly their farm products, both fresh and packaged, to tens of millions of customers living in cities across China.

I’m one of those urban dwellers in China who now does some of his food shopping from tiny rural family businesses on Taobao. In the last week I bought dried chili peppers from Sichuan, apple vinegar from Shanxi, goji berries from Qinghai and dried sweet potato chips from Shandong. Everything I buy from rural folks is great. But, for me and probably many others, the real enjoyment comes from knowing that, thanks to Alibaba, my money can go directly to the people working hard to build a better life for themselves and their families in rural China. This, in turn, helps narrow the income gap between rural and urban.

Unlike the two big US e-commerce companies, Amazon and eBay, Alibaba takes no commission on purchases made on Taobao. This is what economists call “frictionless trade”, where buyers and sellers can transact without any middlemen taking a cut. It’s a dream of farmers worldwide, to sell products directly to customers and so earn more for their hard work.

Online shopping in rural China is now growing far faster than in cities. And yet what’s most exciting, we’re still in the early days. In the future, farmers should be able to save significant money and improve harvests by buying seeds, fertilizer and tools on Taobao and other specialized online sales platforms.

To get there, Alibaba is paying for tens of thousands of “Village Taobao” centers across China. Here, farmers can get free help to buy and sell online. Nowhere else on the planet is e-commerce being as successfully introduced into the lives of small village farmers. The world should take note, and China should take pride.

This year marks the first time China has hosted a G20 summit. Looking at the agenda, the twenty world leaders will hold detailed discussion on trade, fostering innovation and eradicating poverty. Meantime, Alibaba is busy putting such talk into action. Its efforts to spread e-commerce in China’s countryside provide concrete proof of how tech innovation can be both inclusive and helpful to all of society.

By Peter Fuhrman

The author is chairman and CEO of China First Capital.

http://www.chinadaily.com.cn/opinion/2016-09/06/content_26709314.htm

Download PDF version.

 

How China can reclaim its lost cultural heritage — South China Morning Post commentary

August 7th, 2016 No comments

 

SCMP logo good

headline

 

 

 

 

Pic1

I had the kind of childhood I wish more Chinese children could have. I grew up surrounded by exquisite artworks from China’s long and dazzling history. I can still remember as a child holding a Qing dynasty jade vase in my small hands. Cool to the touch even on a hot summer day, the vase was deeply incised with lotus blossoms.

My early encounters with Chinese antiques took place not in China but in my grandfather’s house in New York City. He was a successful businessman and developed a passion for Qing and Ming dynasty jade. I inherited his fondness for Chinese culture and art. In my office today in Shenzhen, eight jade pieces from my grandfather’s collection are displayed.

Chinese antiques – jade carvings, imperial porcelains, paintings, Buddhist sculptures – are all deeply familiar to me. I have lived around them my whole life. This, sadly, is an experience too few Chinese in the People’s Republic will share. It’s not only that private collections are rare. While China has been on a museum-building spree this past decade, only a few of the country’s 3,500 museums have strong and extensive collections. Beijing’s Forbidden City Palace Museum does have some outstanding works of art. Most, though, are newly-built Xanadus with a limited display of works that would never make it into the collection of a minor provincial museum in Europe.

Chinese children grow up with too few opportunities to see up close the beautiful objects made by their ancestors. This should change

This is not only a problem but an unnecessary blemish, especially now that China has the money and global clout to do something about this. Chinese children grow up with too few opportunities to see up close, especially in smaller and less-crowded settings than the Forbidden City, the beautiful objects made by their ancestors. This should change.

In the recent past, the Chinese government has made promises to bring more artistic masterworks back to the country where they were made. But this has mainly involved an occasional effort to halt auction houses from selling objects looted in 1860 from the Summer Palace in Beijing. The result is any object that can be traced back to the Summer Palace is now bought and sold privately, not at auction.

China should continue to try to right this historic wrong. But, in the meantime, something else can be done. China’s government should be out in the international auction market buying Chinese art treasures on behalf of the nation and then distribute these works among museums across the country. The goal: in coming years, every child in China will have frequent opportunities, as I had, to admire, study and be inspired by Chinese art.

The range of Chinese artistic genius is probably more vast than any other civilisation, from Zhou dynasty bronzes cast 3,000 years ago, to Qin, Han and Tang terracotta objects, to fine Song ceramics along with Ming and Qing imperial porcelains, austere huanghuali furniture, florid cloisonné, Buddhist sculptures from the Sui dynasty, Song and Ming paintings, jade objects from Neolithic times all the way through to the 20th century.

Tragically, many of the valuable works of art that remained in China after 1949 were burned or smashed to pieces during the Cultural Revolution, an even more thoroughgoing artistic annihilation than we’ve witnessed recently from Islamic State and the Taliban. As a result, most of the world’s most valuable Chinese art is now outside the People’s Republic, in museums and private collections. It’s said that there are over 17 million Chinese antiques in the US and Europe alone. It’s time more of them made their way back to China and into public collections. Restitution, either voluntary or through international law, is not really an option. Few works other than those from the Summer Palace have a clear provenance showing they were illegally looted.

My humble proposal: the Chinese government could start and manage a national heritage fund to purchase for the nation items of cultural and artistic importance. It would accept cash donations from philanthropic Chinese at home and abroad. At the same time, I’d suggest that every state-owned enterprise voluntarily pay an annual dividend of 0.5 per cent of its profits every year into this national heritage fund. Last year, that tiny dividend would have brought in close to US$2 billion. Chinese private sector companies should be encouraged to match or exceed this pledge. I’m confident many would.

Every year, about US$7 billion worth of Chinese antiques are sold at auction houses in mainland China, Hong Kong, London and New York. Virtually every object sold at the six major Christie’s and Sotheby’s China antiques auctions each year is better than what’s on view now in most Chinese museums.

A Chinese national heritage fund would be a big departure for the government. At the moment, about the closest thing it has is a national lottery. The money is meant to go to support sports and the underprivileged, but where it goes is often hard to trace. A report last year by the National Audit Office suggested that billions of renminbi were misappropriated and bribery rampant.

An art fund, especially if it raised money from public donations, would need to be transparently and professionally managed. Corruption is only one problem. The fund would also need to buy without igniting a big run-up in prices. The Getty Collection in Los Angeles faced a similar problem. It set out to acquire valuable art, and has had more than enough money to do so. It goes to great lengths to buy in ways that don’t cause a huge spike that would price everyone else out of the market.

Wealthy Chinese are now active buyers of Chinese antiques at global auctions. Their impact is already felt worldwide. But Chinese plutocrats in general don’t donate to Chinese museums. They keep everything under their own lock and key. Trust of civic institutions doesn’t run deep. Indeed, when I mention to Chinese friends I intend to leave my grandfather’s collection to a museum in China, they often shake their heads disapprovingly. Art objects have been stolen from the Forbidden City. A Guangzhou museum curator was caught selling genuine objects for millions of dollars and replacing them with fakes.

Building museums has proved easier in China than populating them with museum-quality treasures. The sad result is it’s easier for school kids in Kansas City to see Song dynasty celadons than at the art museum in Hangzhou (杭州), the major city closest to where these luminous ceramics were made 800 years ago.

In the last five-year plan, it was stated that Chinese culture is the “spirit and soul of the nation” and a powerful force for the country’s development. It is a noble sentiment. Art is certainly among the most profound expressions of China’s soul and genius. It needs to become more of a living and familiar part in every Chinese child’s life.

Peter Fuhrman is chairman and CEO of China First Capital

http://www.scmp.com/comment/insight-opinion/article/1999199/how-china-can-reclaim-its-lost-cultural-heritage

Download print version.

 –

Reworking a formula for economic success — China Daily Commentary

April 8th, 2016 No comments

 

China Daily logo

Reworking a formula for economic success

By PETER FUHRMAN (China Daily) Updated: 2016-04-08

Reworking a formula for economic success
An assembly line of a Daimler AG venture in Minhou, Fujian province.

My on-the-ground experience in China stretches back to the beginnings of the reform era in 1981. Yet I cannot recall a time when so much pessimism, especially in English-language media, has surrounded the Chinese economy. Yes, it is a time of large, perhaps unprecedented transition and challenge.

But the negative outlook is overdone, and starts from a false premise. China does not need to search for a new economic model to generate further prosperity. Instead, what is happening now is a return to a simple formula that has previously worked extraordinarily well: applying pressure on China’s State-owned enterprises to improve their efficiency and profitability, while also doing more to tap China’s most abundant and valuable “natural resource”-the entrepreneurial spirit of the Chinese people, the talent to start a company, provide new jobs and build a successful new business.

These two together provided the impetus for the economic growth since the 1990s. In the 1990s, SOEs accounted for perhaps as much as 90 percent of China’s total economic output. Today, the SOEs’ share has fallen to below 40 percent by most counts. Once the main engine of growth, SOEs are now more like an anchor. Profits across the SOEs have been sinking, while their debt has risen sharply.

Arresting that slide of SOEs is now vital. SOE reform has long been on the agenda of the Chinese government. But such a reform has become more urgent than ever, as well as more difficult. There are fewer SOEs today than in 1991 when serious SOE reform was first undertaken. Among those that remain, many are now extremely big and rank among the biggest companies in the world. The restructuring of any such large company is always difficult.

China, however, has taken some key first steps in that direction. The Chinese government has divided SOEs into those that will operate entirely based on market principles and those that perform a social function. It is downsizing the coal and steel industries, two of the largest red-ink sectors. Senior managers of some large SOEs have been dismissed or are under investigation for corruption, and experiments linking SOEs’ salaries more directly with profitability are underway.

Less noticed, but in my opinion, as important is a strong push now at some SOEs and SOE-affiliated companies to become not better but among the best in the world at what they do. Tsinghua Unigroup in semiconductors, China National Nuclear Corporation and China General Nuclear Power in building and operating nuclear power plants, and CITIC Group in eldercare are seeking global glory. They are trying to sprint while most other SOEs are limping.

Luckily for China, the overall situation in the entrepreneurial sector is far rosier. All it needs is a more level playing field. Important steps to further free up the private sector are now underway-taxes are being cut, banks pushed to lend more, and markets long closed to protect SOE monopolies are being pried open. Healthcare is a good example in this regard.

All these moves are part of what the government calls its new “supply side” policy. The aim is to demolish barriers to competition and efficiency. Chinese entrepreneurs have shown time and again they have world-class aptitude to spot and seize opportunities. They are leading the charge now into China’s underdeveloped service sector. This, more than manufacturing or exports, is where new jobs, profits and growth will come from.

Opportunities also await smart entrepreneurs in less efficient industries like agriculture, in getting food products to market quickly, cheaply and safely. In cities, traditional retail has been hit hard by online shopping. Struggling shopping malls are becoming giant laboratories where entrepreneurs are incubating new ideas on how Chinese consumers will shop, play, eat and be entertained.

China’s economy is now 30 times larger than what it was in 1991, and far more complex. The private sector 25 years ago was then truly in its infancy. But, there is still huge scope today for China to gain from its original policy prescription: prodding SOEs to get in line for reform while letting entrepreneurs meet the needs of Chinese consumers.

The author is chairman and CEO of China First Capital.

 

http://www.chinadaily.com.cn/opinion/2016-04/08/content_24364851.htm

Download PDF version.

 

New Year gambling hints at Chinese entrepreneurial vigour — The Financial Times

February 23rd, 2016 No comments

FT logo

 

FT beyondbrics

With about every major leading economic indicator in a tailspin, it’s easy, even obvious, to be bearish about China. But, one sign of economic activity could hardly seem more robust: the crowds and cash at gambling tables during this year’s Chinese New Year.

The two-week long lunar New Year celebration finally drew to a close on Monday with the Lantern Festival. Here in Shenzhen, China’s richest city per capita, no sooner do the shops all shut down for the long break than the gambling tables spill out onto the street, like the cork flying out of a bottle.

Gambling, especially in public places with large sums being wagered, is illegal everywhere in China. All the same, the New Year is ready-made for gamblers and street-corner croupiers to gather. For one thing, most police and urban street patrols are also away from their jobs with family.

Along with over-eating and giving cash-stuffed red envelopes, gambling is the other main popular indulgence during the New Year. Most of it happens behind closed doors with families gathered around the mahjong and card table. But parts of Shenzhen soon take on the appearance of an al fresco Macau (see photo).

 

 

 

 

 

 

 

 

 

 

This year, from what I could see, the number of punters and sums being wagered was far higher than years past. This matters not only as a statement of consumer optimism here but also as affirmation of the love of risk-taking that helps make China such a hotbed of entrepreneurial activity.

The two forces operating together – not only at street corner casinos — are perhaps the best reason to be optimistic that China’s economy may yet avoid a “hard landing” and continue to thrive.

In my neighborhood, the favorite game on the street is a form of craps where people bet on which of six auspicious animals and lucky symbols will turn up. Hundreds of renminbi change hands with each roll. No small bets allowed. The gambling goes on from morning until late at night.

It’s a game that requires no skill and one that also gives the house a huge advantage, since winning bets only make four times the sum wagered. This puts it in a somewhat similar league with punto banco baccarat, the casino game Chinese seem to like the most. It’s also game of pure chance, where the house has a built-in edge.

In China, gamblers’ capital flows to games with unfair odds, where dumb luck counts for more than smarts. In this there is cogent parallel with the investment culture in China. China is simply awash in risk-loving risk capital.

Street-side gambling is popular during the New Year break in part because the other more organised mainstream forms of taking a punt are shut down. Top of the list, of course, is the Chinese domestic stock market. It’s rightly called the world’s largest gambling den. Shares bob up and down in unison, prices decoupled from underlying economic factors, a company’s own prospects or comparable valuations elsewhere.

The simple reason is that almost all shares are owned by individual traders. Fed on rumors and goaded by state-owned brokerage houses, they seem to give no more thought to which shares to buy than my neighbors do before betting Rmb200 on which dice will land on the lucky crab.

The housing market, too, traces a similar erratic arc, driven far more by short-term speculation than the need to put a roof over one’s head. Billions pour in, bidding up local housing prices in many Chinese cities to a per-square-foot level higher than just about anywhere in the West except London, Paris, New York and San Francisco. Eventually prices do begin to moderate or even fall, as happened in most smaller cities this past twelve months.

The other big pool of risk capital in China goes into direct investment in entrepreneurial ventures of all sizes and calibers. Nowhere in the world is it easier to raise money to start or grow a business than China. In part, because Chinese have a marked preference for being their own boss, so the number of new companies started each year is high. The other big factor, call it the demand side, is that there is both a lot of money available and a great enthusiasm for investing in the new, the untried, the risky.

Before coming here, I used to work in the venture capital industry in California. VCs there are occasionally accused of turning a blind eye toward risk. Compared to venture investing in China, however, even the most starry-eyed venture investor in Silicon Valley looks like a Swiss money manager.

Just about any idea here seems to attract funding, a lot of it institutional. China now almost certainly has more venture firms than the rest of the world combined. No one can keep proper count. Along with all the big global names like Sequoia and Kleiner Perkins, there are thousands of other China-only venture firms operating, along with at least as many angel groups. In addition, just about every Chinese town, city and province, along with most listed companies, have their own venture funds.

I marvel at the ease with which early-stage businesses get funded, the valuations they command and the less than diligent due diligence that takes sometimes place before money moves. Of course, a few of these venture-backed companies hit the jackpot.

Alibaba or Tencent are two that come to mind. But, initial public offering (IPO) exits for Chinese startups remain rare, and so taken as a whole, venture investing returns in China have proved meager. But, activity never seems to wane. Fad follows fad. From group shopping, to what’s known in China as “O2O” (offline-to-online) thousands of companies get started, funded and then often within less than 18 months, go pffft.

With the New Year celebrations winding down, the outdoor gambling tables in my neighborhood are being put away for another year. Work schedules are returning to normal. For all the headwinds China’s economy now faces, Chinese household savings are still apparently growing faster than GDP. This means Chinese will likely go on year-after-year amassing more money to invest, to gamble or to speculate.

 

 byline

 

http://blogs.ft.com/beyond-brics/2016/02/22/new-year-gambling-hints-at-chinese-entrepreneurial-vigour/

Download Financial Times article

 

 

At the hub of China’s “One Belt, One Road” – a visit to Manzhouli, the frozen city where China, Russia and Mongolian converge

December 27th, 2015 No comments

Manzhouli

Where did you spend Christmas? Mine was spent in temperatures reaching 38-below zero on the frozen lakes and grasslands of Northeastern China. I was there to give a speech on Christmas Day at a conference in Manzhouli on Russian, Chinese and Mongolian economic integration.

Manzhouli is a Chinese city but with a unique pedigree and location. First settled around 1900 by the Russians building the Trans-Manchurian spur of the Trans-Siberian Railway, it was then conquered by the Japanese before China took control after World War Two. It sits at the single point on the map where the borders of China, Russia and Mongolia all converge. Manzhouli’s train and road border crossing between Russia and China is the busiest inland port in China, with most of China’s $50 billion in annual exports to Russia passing through here.

China, Russia and Mongolia are now partners in China’s ambitious new strategic trade initiative known as “One Belt, One Road“, or OBOR, as well as the Chinese-sponsored Asia Infrastructure Investment Bank. The conference was meant to encourage closer trade ties among the three. OBOR is designed in part to redirect China’s investment focus away from more developed countries, especially those participating in the US-led Trans-Pacific Partnership.

China’s exclusion from TPP is perhaps the biggest single economic policy setback for China in the last decade. The TPP countries include most of China’s key trading partners. If enacted, TPP will cause trade and investment flows to shift away from China especially towards Vietnam, Malaysia and Philippines. The three are all parties to the TPP agreement, and so will benefit from preferential tariffs. All have aspirations to take market share away from China as a global manufacturing center. TPP will grant them a significant long-term cost and market-access advantages.

OBOR is a consolation prize of China’s own construction. The countries inside the OBOR plan look more like a cast of economic misfits, not dynamic free traders like the TPP nations and China itself. I don’t believe anyone in Beijing policy-making circles believes that increased trading with OBOR nations Pakistan, Myanmar and the Central Asian -stans is a credible substitute. China’s best option is to find a way to persuade TPP countries to allow it to enter the group. There’s not even a remote sign of this happening. China was excluded from TPP by design.

China does not live in a particularly desirable or affluent neighborhood. It shares land borders with fourteen countries. Of these, Russia is by far and away the richest of these countries. Mongolia, with its three million inhabitants most of whom still live in yurts as nomadic herdsmen, ranks third. This gives some sense of how poor many of the places that are now the focus of China’s OBOR are.

Another key component of OBOR, but one often overlooked, is to open up new markets to the most troubled part of China’s industrial economy, the manufacturers of basic products like steel, aluminum, basic machinery and chemicals, turbines, cars, trucks, trains. They all are suffering from acute overcapacity with vanishing profit margins up and down the supply chain.

The Chinese leadership recently announced that dealing with overcapacity in China will be one of its major economic policy priorities for 2016. The problems are most severe among state-owned industrial conglomerates. The Chinese government is their controlling shareholder. Two obvious solutions — shrinking capacity and cutting employment — are, for the time being at least, politically off limits. OBOR is meant to be a lifeline.

China itself cannot absorb this excess domestic capacity. Demand for basic industrial products is already evaporating, never to return, China is already well along in the transition to a service economy. China will pay or lend tens of billions of dollars to poorer OBOR countries to finance their imports of Chinese capital goods. The trade won’t likely be very profitable but it will keep jobs and revenues from deteriorating even more sharply.

You may download the seven-page English-language talking points, map and charts from my speech by clicking here.

At night, there was a banquet for political leaders from the three countries. Afterward, a beauty contest was staged, featuring Chinese, Russian and Mongolian contestants in bikinis and evening gowns. You can see photos here, including ones of me with the Chinese winner and the nine Mongolian contestants. An ice fishing expedition was also organized.

If OBOR does achieve its goal by drawing Russia and Mongolia into a closer economic relationship with China, Manzhouli stands to benefit more than anywhere else in China. As if in readiness, Manzhouli storefronts are in Chinese and Cyrillic, the new airport terminal is in the Russian style, and the main park in the city lorded over by a 10-story Matryoshka doll.

For now, though, no one is seeing much sign of OBOR stimulating greater trade. The main focus for investment in Manzhouli is in tourism facilities to attract Chinese summer vacationers to the surrounding grasslands, China’s finest. This time of year, the cement tourist yurts are empty and the long-haired riding ponies are left to graze and amble in the arctic wind and snow.

 

 

 

 

Shale Gas, China’s Very Buried Treasure — Nikkei Asian Review

November 19th, 2015 1 comment

Nikkei2

 

Water, water not a drop to drink. While that may not precisely sum up China’s dilemma, it is clear that the country with the world’s largest shale gas reserves, and urgent need to extract it,  will have problems achieving its ambitious long-term goals. The newly-finalized Five Year Plan calls for an enormous increases in natural gas output in China. The carbon emission reduction agreement signed by President Obama and Chinese leader Xi Jinping also requires China to diversify away from coal. Shale gas is the obvious replacement.

As of now, virtually all that gas remains trapped in the ground. The two companies given the plum rights to develop the gas, China’s oil giants Sinopec and PetroChina, may not have the technical competence to fully develop the resource. The companies that have the skills, mainly a group of small entrepreneurial US drillers, has so far shown zero inclination to either come to China or come to the aid of the two SOE giants by providing equipment and know-how.

To attract them to China will likely require a significant shift in the way China’s energy resources are owned and allocated. It will mean creating terms in China every bit as favorable, if not more so, than skilled shale gas drilling companies enjoy in the US and elsewhere.

 

shaleMap

This is why for China’s senior leaders and economic planners, this map is as much a curse as blessing. Knowing that vast quantities of much-needed clean energy is in the ground but not having the domestic infrastructure and technology to get it to market efficiently is about as tough and frustrating as any economic problem China now confronts.

The Chinese policy goal and the on-and-in-the-ground situation in China are on opposite sides of the spectrum. China has said it must quickly increase the share of natural gas as part of total energy consumption to around 8% by the end of 2015 and 10% by 2020 to alleviate high pollution resulting from the country’s heavy coal use.  The original target announced with great fanfare was for shale gas production to increase almost 200-fold between 2012 and the end of the decade. But, this goal was quietly slashed by 30% last year. More slashes may be on the way.

What’s most needed and in shortest supply in China: more commercial competition, more players, more market signals.

Based on the US experience, drilling for shale gas isn’t the kind of thing that big oil companies are good at. Unfortunately for China, all it has are giants. Rather inefficient ones at that. Sinopec, PetroChina are, based on metrics like output-per-employee, perhaps only one-tenth as efficient as the majors like Royal Dutch Shell, Exxon and BP. Note, these big Western companies all pretty much missed the boat with shale gas. In other words, the bigger the oil company the worse it’s been so far at exploiting shale gas. Yes, it’s these big global giants who now seem the most interested to work with Sinopec and PetroChina to develop shale gas China. In fact, Shell is already partnered up with Sinopec. How’s this likely to work out? Think of a pack of elephants ice fishing.

China’s dilemma comes down to this: it’s probably the most entrepreneurially-endowed country on the planet, but entrepreneurs are basically not allowed in the oil and gas extraction businesses. It’s a legacy of old-style Leninism, that the state must hold control over the pillars of the economy. It works okay when the problem is pumping petroleum or natural gas from giant onshore or offshore fields. But, shale gas is another world, with many and smaller wells. A typical one in the Barnett Shale gas region of Texas costs $2mn – $5mn, barely a rounding error for large oil and gas companies. These smaller wells, depending on prevailing price and drilling direction, can achieve a return within one year or less.

Profits are usually much higher for shale wells with horizontal drilling capability. But, it’s also much trickier to do. Production drops off dramatically in most shale gas wells, falling by about 90% during the first two years. So, you need to know how to make money efficiently, quickly, then move on to another opportunity.

The one place where Sinopec is now producing a decent amount of shale gas, at field in Sichuan province, the cost of getting the gas out of the ground is running at least twice the US level. Partly its geography and partly it’s the fact giant state-owned companies operating in a competition-free environment usually need three dollars to do what an entrepreneurial company can do for one.

Ancient Chinese oil well

China was the first country to drill successfully for oil, over 1500 years ago.   It could use more of that native ingenuity to unlock the country’s buried wealth. The shale gas industry is largely the product of one brilliant and stubborn Greek-American entrepreneur, George Mitchell, who began experimenting with horizontal drilling in Texas about 30 years ago. He had his big breakthrough in 1998. Everyone knew the gas was down there, as they do now in China. The trick Mitchell solved was getting it out of the ground at a low-cost. The company he started Mitchell Energy & Development, now part of Devon Energy, remains at the forefront of shale gas exploration and production.

China needs Mitchell Energy as well its own George Mitchells, who can use their pluck and tolerance for risk to make the gas pay. Not only shale gas, but China is also blessed with equally abundant deposits of coalbed methane. Pretty much all this methane is in the hands of big state-owned coal companies. Talk about a wasting asset. The coal miners have zero expertise, and for now it seems zero incentive to go after this fuel in a big way. Just about everything about the oil and gas business in China is state-owned and price-controlled.

The applause was nearly deafening, especially in the US and Europe, when the leaders of the US and China announced the big agreement to reduce carbon emissions. No one can argue with the sentiments, with the policy goal of creating a cleaner world. But, absent from the discussion are specifics on how China will meet its promises. It’s only going to happen if and when natural gas becomes a major part of the energy mix.

China has of course built pipelines to bring gas from Russia and more are on the way. But, even this huge flow of Russian gas, an expected 98 billion cubic meters per year by 2020,  will provide at most 17% of China’s projected gas needs by that year. Clearly then, the most meaningful thing that could happen is for the shale fields in China to be thrown open to all-comers, but especially the mainly-US companies that are experts at doing this. That isn’t happening.

I’ve been in the room with Chinese government officials when the topic was discussed about how to make it enticing for US specialist shale companies to drill in China. There’s a growing understanding this is the right way to go, but still the policy environment remains inhospitable. While China has the most shale gas, there is a lot of it in countries including stalwart US allies like Poland and Australia where the US companies are far more welcome and don’t have to deal with a market rigged in favor of state-owned goliaths. Everyone who wants to see a cleaner China and so a cleaner world should wish above all else that China’s shale and methane fields become a stomping ground rather than a no-go area for great entrepreneurs.

An edited version was published in the Nikkei Asia Review. 

Click here to download article. 

 

 

 

 

One of China’s Best State Enterprises Shows Need for Reform — Financial Times

October 6th, 2015 No comments

FT logo

 

Financial Times article Peter Fuhrman

China’s ruling State Council last month released a much-anticipated plan meant to kick the country’s huge state-owned enterprise (SOE) sector into shape. No small amount of kicking is required. Not all but many of China’s 155,000 SOEs are inefficient and often loss-making. Where SOEs do make money, it’s usually because of markets and lending rules rigged by the government in their favor.

Finding a truly good SOE, one that can take on and outcompete private sector rivals in a fair fight is hard. Gong He Chun is one. Customers throng daily to buy its high-quality products, often forming long queues. The employees, unlike at so many SOEs in China, are helpful and enthusiastic and take evident pride in what they are doing. Though local private sector competitors number in their hundreds, Gong He Chun has them all beat.

Gong He Chun is a small restaurant chain, with just four shops in the ancient and Grand Canal city of Yangzhou, about 300km up the Yangtze river from Shanghai. It specializes in preparing and serving meticulously-prepared versions of dishes that have for over 1,000 years made Yangzhou synonymous with fine eating in China.

It’s a rather long and mouth-watering list, including crab and pork-stuffed xiaolongbao dumplings (below centre), potstickers (below right), steamed shrimp dumplings, shredded tofu and of course Yangzhou’s most famous culinary export, Yangzhou fried rice.

Gong Hechun

Gong He Chun was founded in 1933 as a private concern, but was then, like almost all other private businesses, expropriated in 1949. It’s been an SOE ever since, its shares owned by the Yangzhou government branch of SASAC, the government agency now responsible for holding shares and guiding the management of all SOEs. Gong He Chun somehow held on through the long dark years during Mao Zedong’s rule when most restaurants in China were shuttered, and investment in the SOE sector was directed toward Stalinist heavy industry – steel mills, coal mines, power plants, railroad rolling stock and the like.

Yangzhou, Yangzhou cuisine and places like Gong He Chun represented just about everything that Chairman Mao Zedong most detested. Since at least the Tang Dynasty (618-907), the town has had a reputation for its mercantile traditions, beautiful women and traditional culture. To eradicate such bourgeois roots, Mao and his planners crammed the city in the 1950s and 1960s with ugly sooty chemical factories and smelters.

I remember first visiting Yangzhou in 1981 and being shocked by the sight of once-splendid Ming Dynasty temples and courtyard homes converted to makeshift factories and communal dwellings. In those days, finding anything to eat, even at the few hotels where foreigners were allowed to stay, was no simple matter. All food, including dumplings, was available only with ration coupons.

Things have improved over the last twenty-five years. One not-unimportant reason for this is that Jiang Zemin, who ran China from 1989-2002 is a native son of Yangzhou while his successor, Hu Jintao, was raised in the next door town of Taizhou. Jiang still visits Yangzhou at least once a year, usually during Qingming Festival when filial Chinese return to their home to sweep the graves of their ancestors. Yangzhou this year is celebrating with pomp the 2,500th anniversary of its founding.

Gong He Chun (see photo) still hews closely to the recipes and cooking methods perfected in the 1930s by the founder Wang Xuecheng. This means cutting thin soup noodles by hand, preparing the dumplin skins in such a way as to create tiny pores and air pockets that allow flavor to seep in.

Ever wonder exactly how a properly prepared potsticker should look?

At Gong He Chun, as all its many cooks are taught, they must fulfill Wang’s precise prescription: the overall outward appearance of a sparrow’s head, with its slender sides resembling a lotus leaf and its bottom fried to the color of a gold coin. If only the management and workers at China’s huge substandard SOE oil refineries took as much care, China’s polluted skies would surely improve.

While the quality of what comes out of the kitchen is world class, there are places where the dead hand of state ownership can be detected. The toilets are primitive, plastic plates and bowls are old and chipped, and the overall décor looks like a 1950s US high school lunchroom.

Though its brand-name and reputation are known nationally, Gong He Chun has no apparent intention to expand outside Yangzhou. The three-tiered system of SOE management in China, with ownership spread among national, provincial and local branches of SASAC, makes it both rare and difficult for any local SOE like Gong He Chun to expand outside its home base.

Meantime, a Taiwan company, Din Tai Fung, has taken Yangzhou cuisine, especially the crab xiaolongbao, and built a high-end chain of global renown, with Michelin-starred restaurants across East and Southeast Asia as well as the US, Australia and Dubai. Its China outlets sell dumplings at three times the price of Gong He Chun.

I’m lucky to know the China chairman of Din Tai Fung, and have spent time with him inside Din Tai Fung restaurants. Every detail is sweated over by the chairman, from the starched white tablecloths to the polish on the bamboo steamers to the precise number of times a xiaolongbao dumpling should be pinched closed. Gong He Chun’s state owners are utterly devoid of the drive, vision and hunger for profits and expansion that only a private proprietor can bring.

A newly-announced government policy on SOE restructuring has already come in for criticism in China. Xi Jinping and his State Council – once keen to expose SOEs to more market rigor and competition – have opted for a more “softly-softly” approach, with no specific targets for improving the woeful performance of many SOEs. One reason is that a fair chunk of China’s SOE system is in chaos, thanks to a more high-priority policy of the Xi government. Every week brings new reports about bosses and senior management at China’s largest SOEs being investigated or arrested for corruption.

If there was ever an economic rationale for a small chain of traditional dumpling shops to be owned by the state, no one seems able to recall it. What profit Gong He Chun makes is not being reinvested in this rare SOE jewel, but is used instead to prop up SOE losers in Yangzhou. As China’s new SOE reform policy now begins its tentative roll-out, it looks certain Gong He Chun will for years to come remain a rare bright spot in a blighted SOE landscape.

Peter Fuhrman is Chairman & CEO China First Capital. He has no business relationship with Gong He Chun.

 

http://blogs.ft.com/beyond-brics/2015/10/05/one-of-chinas-best-state-enterprises-shows-need-for-reform/

Download Financial Times article

 

The Economist Survey on China Business

September 11th, 2015 No comments

Econ

Econ survey2

With a timing that can only be described as exquisite, the Economist today publishes their in-depth survey of business in China. It appears at a time when the media is brimming with stories, often in my view overblown,  about China’s economic problems and challenges. The Economist survey provides light where there’s been way too much heat of late. I couldn’t recommend more highly taking the time to read it in full.

Please click here to go direct to the survey on the Economist website. It includes nine separate articles, each offering a banquet of analysis, ideas and insights on where China’s economy, both private sector and SOE, is heading.

The author of the survey is Vijay Vaitheeswaran, the China business and finance editor. This is the first Economist China business survey in many years. It was certainly no small undertaking. China’s size, complexity and ever-morphing business environment make a comprehensive future-looking summary of this kind difficult in the extreme to do well.

I got to meet Vijay during his research phase. I took him for Tibetan food in Shenzhen. He ended up quoting me briefly in one of the articles in the survey.

Vijay paid particular attention to accelerating innovation cycles in China’s hardware industry. He spent a few days in Shenzhen including attending a kind of hacker forum for hardware geeks. He calls Shenzhen “the world’s best place to start a hardware firm” and visited my favorite exemplar of this, 18-month-old mobile phone brand OnePlus.

Quick aside, since the launch of its new model, the OnePlus 2 six weeks ago, the waiting list to buy one has grown to over five million people. If OnePlus’s factories can keep pace with the exploding demand, the company is on track to sell over $2 billion of phones in coming twelve months.

While overall highly positive about China’s economic prospects and the ambitions of its vast pool of private sector entrepreneurs, the survey sounds a note of caution. It argues that the less efficient state-owned sector appears more and more like an unevolved creature from a foregone era.  They are, the survey warns, sucking up too much of China’s capital and achieving too little with it, all the while fighting to maintain the cozy monopolies that keep the far more dynamic and efficient private sector shut out.

How much market? How much government control and ownership? All countries struggle to find a balance. China stands out because the private sector has come so far so fast. Thirty years ago when I first set foot in China there was no private sector to speak of. Now, in all but the so-called “commanding heights” of China’s economy, entrepreneurs run rampant. 1.4 billion Chinese benefit from this fact every day.

 

Download PDF version.

Traditional Chinese Medicine — regulated cures or regulated quackery?

August 24th, 2015 No comments

medical diagnosisChina has the world’s second largest drug market and it’s growing fast. Estimates are that by 2020 prescription pharmaceutical sales will top $300 billion a year, second only to the US. Drug sales are regulated by the Chinese FDA, which on the surface, has been modeled after the US FDA.

In fact, though, China’s drug industry and regulation is like nowhere else in the world. The reason: one third of all drug sales in China are of approved traditional Chinese medicines (“TCM”) made from dried leaves, roots, stems, fungi, flowers, and seeds, along with a variety of animal, insect and lizard skins and secretions.

The same Chinese FDA regulatory system that tests and approves Western medicines also approves TCM ingredients and potions. China’s healthcare industry thus stands with one foot planted in 21st century science and one foot in its opposite, a world of age-old popular folklore and folk cures.

Chinese medicine has been around in China for at least 2,000 years. Western drugs and teaching hospitals arrived about a century ago. The two regard one another with almost mutual incomprehension. Pharmaceutical executives will tell you that TCM has utterly failed to prove its efficacy in clinical tests, while many of China’s 400,000 traditional Chinese doctors and practitioners consider most “Xi Yao” (西药), or Western medicine, to be disruptive or toxic to the natural yin-yang balance. At most larger general hospitals in China, one can find doctors separately practicing each type of medicine. On the ground floor, two separate pharmacies dispense prescriptions.

Chinese navigate between the two worlds. When feeling unwell, they will self-diagnose and decide to seek either Western drugs or TCM. Visiting the doctor is one China’s more popular indoor activities. Each year, Chinese make over four billion visits to a clinic, with about one-fifth of those being to see a TCM practitioner.  No surprise, TCM is more popular among older folks in China.

China’s pharmaceutical industry, and the regulations that govern it, are a nice allegory for the state of China’s national genome — part relentlessly modern, part three-thousand year-old archive of analects, customs, superstitions. The two coexist, but the results can sometimes be less than the best-of-both-worlds. Such is the case with drug regulation.

For all Western-style pharmaceuticals now seeking approval in China, there are well-established standards, based on multi-phase clinical trials and double-blind studies. With TCM, such standards that do exist are not so much the product of rigorous evidence-based medical science. If it doesn’t poison your system and the ingredients have been used for centuries in China then it’s likely going to get approved.

The result is, as one CEO of a Chinese pharmaceutical company explained to me recently, “down the hall at the China FDA from scientists with PhDs in biology and chemistry are a bunch of guys giving the green light to TCM substances that have not been proved by accepted scientific standards to have any medical benefit whatsoever. How can these things be regulated, sold and labeled as medicines? ”

This CEO then makes a larger point. The Chinese FDA’s split personality, of administering both a clinical drug approval regime for Western drugs and one for TCM that doesn’t demand any proof of efficacy is likely part of the reason China’s pharmaceutical industry has yet to come up with any genuine breakthroughs.

In his mind, TCM should be only sold and regulated as foods.  A government agency, in other words, shouldn’t be telling people something is a medicine on the basis of nothing more than a history of people believing it to be.

One famous case in point: Yunnan Baiyao. It is among the most famous and widely-sold TCM formulations. It’s also big business. The eponymous publicly-traded company has a nearly $12 billion market cap. It is sold as a medicine, but its ingredients are a state-secret. No one, perhaps not even the regulators, knows what’s in it. Could any of its ingredients be bad for you or harvested and processed in less-than-sanitary conditions? No one knows and yet Chinese keep relying on it.

Among the best-selling TCM cold cures is a packaged potion called 999 made in Shenzhen. Many Chinese swear by it. The US FDA says its recent on-site inspection of the facility where it’s made revealed “significant violations of current good manufacturing practice (CGMP) regulations for finished pharmaceuticals.”

The official correspondence is quite damning. The makers of 999, according to the US FDA inspectors, “failed to establish laboratory controls that include scientifically sound and appropriate specifications, standards, sampling plans, and test procedures designed to assure that components, drug product containers, closures, in-process materials, labeling, and drug products conform to appropriate standards of identity, strength, quality, and purity.“ But, as far as can be determined, China’s own FDA has never visited the factory or never found any problems with the way 999 is being made.

Over the last five years, China’s ruling Communist Party has moved decisively to create and manage a large First World-scale regulatory apparatus. Transportation, hiring and firing, air and water quality, foods and medicines are all now subject to very clear-cut rules, often as tight as those as in the US. Enforcement grows more strict every year.

At the apex of this new regulatory system is China’s FDA. It was remade from top-to-bottom, beginning seven years ago when its one-time chief was arrested and then executed for corruption and approving tainted products for sale in China. In 2013, standards were toughened up again, the old agency disbanded and the newly-constituted CFDA was created and elevated to ministerial level.

The Chinese public is being told this new agency will be a fierce, powerful and incorruptible guardian of the national health. But, the tough cop seems to have a big blind spot when it comes to TCM.

 

Trials and tribulations: China’s shifting business landscape highlighted in new report — Financier Worldwide

July 23rd, 2015 No comments

Financier

Trials and tribulations: China’s shifting business landscape highlighted in new report

BY Fraser Tennant

The deeper trends reshaping the business and investment environment in China today are the focus of a new report – ‘China 2015: China’s shifting landscape’ – by the boutique investment bank and advisory firm, China First Capital.

As well as highlighting slowing growth and a gyrating stock market as the two most obvious sources of turbulence in China at the midway point of 2015, the report also delves into the deeper trends radically reshaping the country’s overall business environment.

Chief among these trends is the steady erosion in margins and competitiveness among many, if not most, companies operating in China’s industrial and service economy. As the report makes abundantly clear, there are few sectors and few companies enjoying growth and profit expansion to match that seen in previous years.

The China First Capital report, quite simply, paints a none too rosy picture of China’s long-term development prospects.

“China’s consumer market, while healthy overall, is also becoming a more difficult place for businesses to earn decent returns,” explains Peter Fuhrman, China First Capital’s chairman and chief executive. “Relentless competition is one part, as are problematic rising costs and inefficient poorly-evolved management systems.”

To read complete article, click here.

China 2015 — China’s Shifting Landscape — China First Capital new research report published

July 20th, 2015 No comments

China First Capital research report

 

Slowing growth and a gyrating stock market are the two most obvious sources of turbulence in China at the midway point of 2015. Less noticed, perhaps, but certainly no less important for China’s long-term development are deeper trends radically reshaping the overall business environment. Among these are a steady erosion in margins and competitiveness in many, if not most, of China’s industrial and service economy. There are few sectors and few companies that are enjoying growth and profit expansion to match last year and the years before.

China’s consumer market, while healthy overall, is also becoming a more difficult place for businesses to earn decent returns. Relentless competition is one part. As problematic are rising costs and inefficient poorly-evolved management systems.  From a producer economy dominated by large SOEs, China is shifting fast to one where consumers enjoy vastly more choice, more pricing leverage and more opportunities to buy better and buy cheaper. Online shopping is one helpful factor, since it allows Chinese to escape from the poor service and high prices that characterize so much of the traditional bricks-and-mortar retail sector. It’s hard to find anything positive to say about either the current state or future prospects for China’s “offline economy”.

Meanwhile, more Chinese are taking their spending money elsewhere, traveling and buying abroad in record numbers. They have the money to buy premium products, both at home and abroad. But, too much of what’s made and sold within China, belongs to an earlier age. Too many domestic Chinese companies are left manufacturing products no longer quite meet current demands. Adapting and changing is difficult because so many companies gorged themselves previously on bank loans. Declining margins mean that debt service every year swallows up more and more available cash flow. When the economy was still purring along, it was easier for companies and their banks to pretend debt levels were manageable. In 2015, across much of the industrial economy, the strained position of many corporate borrowers has become brutally obvious.

These are a few of the broad themes discussed in our latest research report, “China 2015 — China’s Shifting Landscape”. To download a copy click here.

Inside, you will not find much discussion of GDP growth or the stock market. Instead, we try here to illuminate some less-seen, but relevant, aspects of China’s changing business and investment environment.

For those interested in the stock market’s current woes, I can recommend this article (click here) published in The New York Times, with a good summary of how and why the Chinese stock market arrived at its current difficult state. I’m quoted about the preference among many of China’s better, bigger and more dynamic private sector companies to IPO outside China.

In our new report, I can point to a few articles that may be of special interest, for the signals they provide about future opportunities for growth and profit in China:

  1. China’s most successful cross-border M&A ever, General Mills of the USA acquisition and development of dumpling brand Wanchai Ferry (湾仔码头), using a strategy also favored by Nestle in China
  2. China’s new rules and rationale for domestic M&A – “buy first and pay later”
  3. China’s most successful, if little known, recent start-up, mobile phone brand OnePlus – in its first full year of operations, 2015 worldwide revenues should reach $1 billion, while redefining positively the way Chinese brand manufacturers are viewed in the US and Europe
  4. Shale gas – by shutting out most private sector investment, will China fail to create conditions to exploit the vast reserves, larger than America’s, buried under its soil?
  5. Nanjing – left behind during the early years of Chinese economic reform and development, it is emerging as a core of China’s “inland economy”, linking prosperous Jiangsu and Shanghai with less developed heavily-populated Hubei, Anhui, Sichuan

We’re at a fascinating moment in China’s story of 35 years of rapid and remarkable economic transformation. The report’s conclusion: for businesses and investors both global and China-based, it will take ever more insight, guts and focus to outsmart the competition and succeed.