Professional Planner Online editor Andrew Starke this week reports from China as part of a group study tour hosted by Portfolio Construction Forum. Since 2006, Portfolio Construction Forum has led more than 80 practitioners on its Study Tour China program with many more attending similar weeks in Brazil, Russia and India.
April 2, 2012
Here be dragons: don’t lose your head in China
Australian companies looking to enter the Chinese market are too often seduced by potential profits into abandoning sound business practices and some are swiftly cut down.
For Beijing-based, Australian lawyer Mathew Alderson, who specializes in media, entertainment and IP-intensive industries for Harris & Moure, it is a scenario that plays out time and again.
“People lose their heads in China,” he told Study Tour China delegates. “They make deals without legal advice and the system here can quickly suck people into a black hole.”
One of the recurrent themes of a prominent blog in the country, China Law Blog, is that if you combine best legal practices with best operational practices, “you’ll do just fine in China”.
However in a recent piece on the website it added the caveat: “And good luck with that.”
While the fledgling Chinese legal system is often no safeguard to enforcing contracts, Alderson says Western investment advisers have done the companies they represent few long-term favours by trying to bypass Chinese regulation.
A Variable Interest Entity (VIE) structure has been used in the past to circumvent China’s rules that ban foreigners from investing in certain sectors such as internet and telecommunication.
The structure is essentially a series of contract agreements that allow foreign investors control over companies operating in China that they do not actually own.
Because such arrangements are technically illegal, they allow the Chinese company to walk away from its VIE contract with foreign partners with few, if any, consequences.
Study Tour China delegates concluded their trip with site visits to two very different companies, IKEA and Baidu, both of which are playing by the rules to combine foreign and Chinese investment.
The Swedish furniture giant began operations in China in 1999 and aspires to 17 stores across the country by 2015.
In particular, the Shanghai high-rise apartment property bubble seems an ideal opportunity to attract Chinese consumers contemplating fit-outs or redesigns to IKEA’s particular brand of European minimalism.
However, in a culture where prospective customers think nothing of hopping into the display beds for a quick nap, posing for photos next to the décor or just enjoying the air conditioning, IKEA management concedes it has much still to do in converting curiosity into consumption.
Baidu, the largest Chinese language search engine and the second largest overall, is a fascinating example of a modern Chinese company: based in Beijing, registered in the Cayman Islands and listed on the Nasdaq.
While it offers many of the same products and services as Google, the company resists allegations that similar presentation makes it a Google clone.
Instead Baidu, like Renren (a social network like Facebook), is part of a practice so common it has a name: Copy to China (C2C), the action of a company in China copying the business model of a successful foreign company, especially web and other IT companies.
March 29, 2012
The Little Emperors: China’s Explosive Pension Plan
It is a scene common throughout the parks of China’s major cities – toddlers cocooned against the late winter chill play as doting grandparents look on approvingly.
While the older generation taking a hand in raising the children is hardly unique to China, this relationship is likely to face increasing scrutiny as the population both ages and urbanizes.
In particular, the government’s “one child” policy, introduced in 1980, is having a massive long-term impact on society with those born under the decree – called “Little Emperors” by the Chinese – now having children of their own.
Anthropologist and documentary maker Richard Hughes, who has lived in China for 12 years, calls this “six parent syndrome” and it recalls another oft repeated saying amongst the financial community that China will grow old before it grows rich.
Left to right Jonathan Ramsay, van Eyk; Krystyna Weston, Portfolio Construction Forum; Caroline Bell, Summerhill Financial Services; Deanne Fuller, Lonsec; Dianne Charman, Jade Financial GroupDespite a recent easing of the one-child policy (if a married couple are both only children they may have two children), the pressure on the latest generation to support both their parents and grandparents will be immense with this obligation now even enshrined into law.
For Dr Victor Yuan, chairman of the independent Horizon Research Consultancy, the social implications are already being seen with the younger generation indulged by their parents and able to influence household purchasing decisions of the whole family.
However, he cautions that by wrapping the Little Emperors in cotton wool, parents, schools and the government may be doing them and the society a long-term disservice.
Anecdotal evidence suggests they may be ill-prepared for the workplace and far more questioning of government policy than their parents.
This also has significant implications for China’s fledgling wealth management industry in a culture where it is estimated that more than 200 million people will be over 60, the official retirement age, by 2014.
In 2005, the government announced fundamental pension reform for urban workers but this has remained more of a guideline implemented differently across the country in the various provinces and municipalities.
While this pension takes into account local average wage, lifetime average earning and the interest on one-year bank deposits, it falls woefully short of what is required and does not take into account rapid urbanization.
In 2008, only 17 per cent of migrant workers (about 130 million people) had any sort of pension.
However, most Chinese – and especially the elderly – save to cover the costs of retirement, education and health care.
According to China Daily, the national average monthly pension for the retired reached 1,500 yuan ($A250) in 2011 but varies widely from region to region.
Beijing has said it will soon increase the average to about 2,500 yuan per month ($420).
“In response to the problem, China has just taken the first steps in reforming the way it manages the massive pension fund by beginning a trial investment in the country’s stock market, in a move aimed at better preserving the value of the funds and supporting the country’s aging population,” the newspaper reported yesterday (Wednesday, 28 March).
March 28, 2012
In Shanghai, the pizza guy knows your name
As dusk falls, the skyline of China’s largest city is transformed by a blaze of light illuminating towering buildings and the streets below.
However, many of the tree-lined gardens, sculptures and fountains of the surrounding high-end apartment complexes remain dark, dotted periodically by a yellow glow from the windows of a handful of tenants.
A bubble in Shanghai’s real estate sector has forced the authorities to introduce purchase and credit restrictions to put an end to the speculation that has resulted in a massive oversupply of luxury apartments at the expense of affordable housing.
Out near the airport this has resulted in acres of unoccupied real estate, while some city blocks have an occupancy rate of just 5 per cent.
Or as one local put it: “Even though most of the apartment complexes are over 30 storeys, the pizza delivery guys know everyone by name.”
It is this balance between consumption and investment that is at the heart of China’s economic dilemma and it is a lesson being closely followed by a few Australian financial advisers and an international contingent of bankers and fund managers undertaking a study tour of the world’s second largest economy.
While the experts are in agreement that Shanghai does not represent the rest of the country and that China is only half way through the twin processes of industrialisation and urbanisation, it is there that consensus ends.
The group has heard some fairly pessimistic views on China’s slowdown, but these were not shared by Westpac’s head of Greater China Andrew Whitford.
Flanked by his Chinese compliance manager, Whitford explained the complexity of the local financial services market while taking a dig at the Australian media.
“Monday is usually a bad day for me,” he says. “The Australian media spends the weekend beating up stories about China and then I get the call from headquarters to explain the situation.”
For Whitford, the financial services story in China begins and ends with regulation and the four regulators he must regularly appease.
Describing the bank’s operating environment as well-regulated but onerous, Westpac’s Hong Kong-based general manager (effectively its chief executive officer under the Chinese system) outlined why wealth management – in terms of financial planning, stock market investment and insurance – is almost non-existent in China.
Playing the markets is seen as the only legal form of gambling by many Chinese, leaving investment in property or safekeeping in banks as the only sensible destination for hard-earned renminbi.
March 25, 2012
On the road with PCF
Professional Planner Online editor Andrew Starke will this week report from China as part of a group study tour hosted by Portfolio Construction Forum.
He will join 15 senior wealth management professionals on the seven-day tour which includes briefings, case studies and site visits focused on four core themes: China’s economy, business environment, investment markets and social drivers.
Since 2006, Portfolio Construction Forum has led more than 80 practitioners on its Study Tour China program with many more attending similar weeks in Brazil, Russia and India.
The itinerary includes site visits in both Shanghai and Beijing.
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