On foreign investment into China:
The most recent piece of legislation, revision of the Catalog for the Guidance of Foreign Invested Enterprises, covered in an earlier post and covered extensively in a post by Steve Dickinson at China Law Blog, suggests that Beijing is becoming pickier about what sort of foreign investment will be allowed into China. And some of the provisions in the new catalog simply do not make sense: are they now teaching golf course design classes at Fudan University? Also: private equity firms are rolling back the scale of their investments in individual enterprises in China; the China Securities Regulatory Commission has submitted a draft to cap foreign brokerages at a 20% stake in publicly traded China brokerage houses, Goldman Sachs and UBS exempt because the law will not have retroactive effect. And, Michael Hartnett at Merrill Lynch in last week’s Economist, says that the investment action is shifting away from the emerging markets of China, Poland, India, Brazil and Pakistan, and towards the “emerging emerging markets,” such as Botswana and Kazakhstan.
Despite this, China still has a lot going for it for foreign investors:
- The market potential is immense. Yes, China has a lot of very poor people. But, take a look at Intel: Intel sells 15m-20m chips per year in the US. To equal this in China, Intel only needs to sell chips to the equivalent of 1-2% of the population per year. The meaning behind the per capita GDP purchasing power of the Chinese consumer is misleading when there are ~1.3 billion capita.
- Vast human capital. Skilled workers are on the increase and unskilled workers are plentiful. Even with the rise in the pool of skilled workers and the evaporation of unskilled workers, the supply and demand curve in employment on a global scale favors investing in China.
- Despite tax law reform, breaks in the local income tax can still be negotiated, especially in more remote provinces.
- Legal enforcement is on the rise, but damages are not yet comparable with the West.
- For institutional investors, results are always in demand and results can be easy to come by in a market with a bubble. But please, could we see some restraint and foresight? As the head of a bank, you always get a nice severance package. Could you please preserve your dignity this time around?
Now this is the big one. A lot of wealth has been built domestically in China over the past few years and the government is making it easier to get that wealth beyond the borders. Look at the other AML, the Anti-Money Laundering law. Less dramatic than THE AML, but getting your yuan out of China is going to become much easier than exchanging gold in the back room of a Macau casino. And, Chinese investors are eyeing foreign markets as destinations for their cash. I don't actually know the reasons why Chinese are seeking to invest elsewhere, but Chinese investors may be searching for less volatile markets than the Shanghai Index to diversify their wealth in to.
Attorneys and business should expect more and more money coming from China into the USA. Maybe they'll adjust accordingly.
3 comments:
You ask why Chinese investors are looking elsewhere to put their money. I am assuming that you mean the little guys and other small institutionals. You are close that it is to escape the volatile Shanghai stockmarket. The Shanghai market is more of a bubble than volatile (volatile is the American markets haha) The main reason is because of the lack of investment opportunities in the China stockmarket. Take for example Petrochina's recent Shanghai IPO. One reason it is valued so highly with only a rounded up 3% float of its shares is because Chinese mainland money is trapped. Now, you would think that this kind of operations will only create more of a bubble in the market. So the CCP decided to let the "through train" happen, where mainland money will be allowed to funnel into the Hong Kong Hang Seng market. That was announced back in August and the Hang Seng went up from 20000 to 30000. Then last week Wen Jiabao announced that maybe its not such a good idea yet to let the through train happen. That caused a 5% drop in the Hang Seng since everyone's expecting the capital to flow in from China.
Now, why did the CCP decide to delay the process at the risk of continuing to inflate the bubble in Shanghai? Somewhere during the 17th Congress someone with enough political clout thought it was better to protect Chinese savings from the volatility happening in the world capital markets than to let Chinese money be affected by a true market system.
I see it as kind of a serve in heaven vs. rule in hell kind of decisions. The CCP is nervous about letting capital out of its direct control and work in a true capitalist equity market. Perhaps the CCP is being honestly patriarchal and do not think that mainland traders are savvy or mature enough or too irrationally exuberant to survive in Hong Kong. Or it may just be they saw the effects of the current credit crunch from the subprime crisis swirling around the world and its a bad time for Chinese investor capital to flow out.
We're seeing the Big Boys coming over to play at an ever increasing rate, too. Chinese companies have been securitizing in US markets for a few years now. Merchants Bank just got approved for a New York branch. There was the failed buyout of Unocal. Firms are even adapting their strategy to match that of what they're requiring foreigners to do in China: they're stepping down complete takeovers of foreign companies and restricting their investments so as to leave a smaller footprint. Sophistication is on the up and up.
You are absolutely right about the big institutionals coming out to play. I mean that $1.4 trillion in dollar reserves got to be put to use somewhere right? According to The Economist China is looking for skills and expertise in all sectors from banking to oil. Since they aren't allowed politically to outright eat an American corporation settling for a minority stake is just as good for now.
At this rate, hopefully I can put my culture and language skills to use here in the comfort of the US than going over to China.
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