Category Investing in China

Tech Flocks To Shanghai

HONG KONG – Lured by the vast size of China’s domestic market and its lower labor costs, plus a raft of corporate tax breaks, foreign technology companies are setting up shop in Shanghai in droves.

According to a report from Russell Reynolds Associates based on Shanghai government statistics, 144 foreign companies now have their Asia-Pacific headquarters in Shanghai, 48 of which established operations there only in the last year.

Alcatel (nyse: ALA – news – people ) was the first major multinational to make the move in 2001; now there are 11 in Shanghai.

This list includes AlliedSignal, Delphi (nyse: DPH – news – people ), FedEx (nyse: FDX – news – people ), General Electric (nyse: GE – news – people ), General Motors (nyse: GM – news – people ) , Goodyear Tire, IBM (nyse: IBM – news – people ) , Johnson & Johnson (nyse: JNJ – news – people ), Kodak (nyse: EK – news – people ), Rhodia (nyse: RHA – news – people ), Roche and Sharpe.

Russell Reynolds said 15% of the top 50 U.S. tech companies now have their Asia-Pacific headquarters in Shanghai, compared to 40% in Singapore, the city dubbed “Asia for beginners,” and 20% in Hong Kong.

Of the top 50 European technology companies, the executive search firm said 14% have their regional headquarters in Shanghai, 50% are in Singapore and 4% are in Hong Kong.

Beyond the tax breaks, low manufacturing costs and the desire to have executives on the ground in what many believe will soon be one of the most lucrative markets in the world, the report said one of the top reasons companies set up regional HQs in Shanghai is to make a political statement to the Chinese government.

The negatives of operating out of Shanghai include a lack of experienced talent at the executive level and the high cost of expatriate housing and schooling, often higher than comparable cost in Singapore.

Shu-Ching Jean Chen, Forbes

International forum

A MEMBER of the World Bank Technical Assistance team in China, Patrick Dixon, will join other international business leaders and economists on May 28 at Shanghai Marriott Hotel Hongqiao, looking into the future trends and their impact on investors and business in China.

Venture capital jumps 55% on mainland

VENTURE capital investments on the Chinese mainland jumped 55 percent last year, reaching a three-year high, an industry report said yesterday.

Venture capital valued at US$1.89 billion poured into the mainland last year in 214 deals, said a report jointly released by Dow Jones VentureOne and Ernst & Young.

It marked a 37 percent increase in the number of deals year on year.

Information technology remained the dominant industry for investment.

By industry, 131 IT companies were financed last year, receiving US$920.7 million, up 34 percent from 2005 in terms of capital.

Meanwhile, there was significant growth in areas such as healthcare, retail companies and clean technologies.

The business, consumer and retail industry category posted 57 deals and US$613.3 million last year, 20 more deals and 40 percent more capital than in 2005.

The energy segment climbed with 10 deals, up from one in 2005, and US$212.6 million invested, up from US$80 million a year earlier.

“The continuous growth of the Chinese economy and the middle class in China – as well as the increased focus on innovation – are the primary drivers for the significant investment growth in these sectors,” said Bob Partridge, China leader of Ernst & Young’s Venture Capital Advisory Group.

Stephen Harmston, director of global research for VentureOne, said: “Another sign of the strength is that investors are helping their companies to ramp up quickly in the global marketplace by funding them with increasingly larger sums.”

The median deal size in China is now US$5.9 million, up 59 percent from US$3.7 million in 2005.

In addition, the level of second round investment activity illustrates the growing maturity of the venture capital market in China, Harmston said.

“Investors are helping companies to move past the start-up stage into the next phase of development,” he said.

Investment options continue to expand

INSURERS are improving profitability as investment vehicles increase.

The investment returns for the country’s insurers sat at 5.8 percent last year, up 2.2 percentage points from 2005. It marked a three-year high.

Total profit for the industry topped 95.5 billion yuan (US$11.94 billion) last year, according to the China Insurance Regulatory Commission.

The top insurance regulator is considering further expansion of the investment channels insurers can utilize.

“The watchdog is researching the possibility of expanding the upper limit of insurers’ investments in the stock market,” said an official with the commission who asked not to be named.

Domestic insurers were formerly restricted to bank deposits and bonds as main choices. The low returns made it difficult to boost profit.

At present, insurers are allowed to invest up to five percent of their total assets in the stock market. However, the watchdog is also concerned that the strict limit curbs insurers’ investment returns from the stock market, especially now that has entered a period of strong gains.

China’s stock market stepped out of a five-year low last year as the Shanghai Composite Index surged 130 percent. It is expected the bull run will continue for another two years, according to analysts.

Insurers can now invest in stocks, infrastructure and overseas fixed income markets. Insurers invested US$2.46 billion overseas last year while 10 billion yuan alone was invested in the high-speed railway linking Shanghai and Beijing.

Insurers are making money from investments in the banking sector. Last year, insurers bought stakes in Industrial and Commercial Bank of China and Bank of China. Both banks’ shares have surged since their debut in Hong Kong and Shanghai.

Authorities are considering giving insurers more options to invest abroad by allowing them to invest up to 15 percent of total assets in overseas markets including stocks, funds, fixed-return products, options, deposits, bonds, commercial bills and other products allowed by the regulator, the top regulator said.

It has been soliciting public opinion on the plan in a draft rule posted in December. More moves are also under way.

Shanghai will test using insurance capital to build apartments in Pudong New Area on a trial basis, the Shanghai Bureau of the CIRC said last week.

“I am expecting wider investment vehicles which will make my job more challenging and exciting,” said Xiao Hua, an official within the investment department of a local insurer. “And I see the trend coming quicker these days.”

Mayfield Fund Ready To Focus On China’s Technology Sector

Mayfield Fund has announced the closing of a US$200 million fund, dedicated to investing in China’s technology sector.

‘We look forward to a deeper relationship with Mayfield Fund and know that our portfolio companies will benefit from the venture capital and sector expertise of their team,’ said Richard Lim of GSR Ventures. ‘Together, we are confident of building the next generation of global Chinese companies.’

The fund, GSR Ventures II, was formed in partnership with GSR Ventures, a China focused fund. The dedicated fund follows a two year affiliation between Mayfield and GSR, during which the firms say they made eleven direct investments in China.

GSR Ventures II was over-subscribed and has a mix of existing Mayfield limited partners and GSR’s limited partners from its first fund. It will target investments in the semiconductor, wireless and Internet media sectors and will have representative offices in Menlo Park and Beijing.

Mayfield Fund reports to have US$2.6 billion under management and a team of twelve investing professionals. Since Mayfield’s founding in 1969, the firm has invested in more than 470 high-growth companies, taken more than 100 public, and more than 150 have merged or were acquired.

Private firms ‘new force’ in overseas investment

Privately owned Chinese enterprises are set to become the new force among China’s overseas investors.

So said Hou Zhirui, an official from the All-China Federation of Industry and Commerce, based on data from an eight-year period.

The organization’s statistics showed that the growth rate of private enterprises has seen more of them become large companies with sales volumes of 300 million yuan. And these firms will be ready to go abroad when they reach a certain level.

“It will not take a long time (for Chinese private enterprises to become a new force in overseas investment). Maybe only three to five years,” he said.

A large number of private Chinese firms have already increased their presence in overseas markets.

Outbound investment includes overseas processing, technology and equipment exports, establishing sales channels, and mergers and acquisitions. But most of the firms still focus on small-scale projects.

The federation’s Zheng Yuewen said the Chinese government should remove restrictions on private enterprises “going out”.

He said the government should, for example, remove the approval process for outbound investment.

The outbound investment of Chinese firms totaled $16.1 billion last year, according to statistics from the commerce ministry. China went from being the 17th largest investor in the world to the 13th in 2005.

Although the figure reflects a 31 percent increase from a year earlier, it is still small compared with the $64.5 billion of foreign investment China attracted last year.

Chinese overseas investors are facing major obstacles such as a lack of core technologies, cultural differences and a lack of well-known brands, according to a report on Chinese transnational corporations by the Research Institute under China’s commerce ministry.

“But enterprises cannot go out until everything is ready,” said Wang Zhile, a researcher with the institute.

The report suggested the Chinese government should offer more policy support to Chinese enterprises for their overseas investments, quoting the successful experience of South Korean companies.

“Only by cultivating a large number of Chinese transnational companies can the country concentrate its limited resources to lay a solid foundation for economic strength,” the report said.

Meanwhile, the report said Chinese enterprises must improve their abilities in overseas investment and management.

“Chinese investors must learn how to shun trade obstacles such as safeguards, tariff barriers and trade conflicts brought by foreign countries,” it said.

Tariff cuts may ease trade surplus

CHINA will further reduce import tariffs on energy, raw materials and advanced technology in a bid to ease the country’s growing trade surplus, Fu Ziying, assistant minister of commerce, said over the weekend.

The rapidly expanding trade surplus is “threatening the economy with the danger of rebounding investment and rising inflation,” Fu said at an economic conference in Beijing.

China aims to narrow the surplus, which jumped 74 percent to a record US$177.5 billion last year, in an effort to adjust economic structure and curb rapid foreign exchange inflow that floods the world’s fourth-largest economy with liquidity and adds pressure on its currency to rise.

China’s exports rose 27 percent, and imports gained 20 percent in 2006, according to government data cited by Bloomberg News. To slow exports, China raised export taxes on oil, steel and nonferrous metals in November. In the same month, it cut import tariffs for alumina, the raw material for aluminum.

In September, it cut export incentives for steel and textiles.

The commerce ministry will further cut export rebates, Fu said, without elaborating. It will also adjust toll policies on companies that import raw materials and then export processed products, he added, without providing further details.

A more flexible currency is helping the government’s effort to ease the trade surplus, Fu said. The yuan rose 0.31 percent to 7.7739 against the United States dollar in Shanghai last week, according to the China Foreign Exchange Trade System. It has risen 6.3 percent since a fixed exchange rate of 8.28 to the dollar ended in July 2005.

The government has asked the Export and Import Bank of China, a state-owned policy lender, to increase lending to importers, Liang Xiang, assistant president of the bank, told reporters on Saturday.

SAIC and GM plan to raise JV output

THE Shanghai Automotive Industry Corp and partner General Motors Corp plan to invest US$650 million in their Chinese joint venture to expand production and increase market competitiveness.

The capital injection is part of SAIC’s 9.2 billion yuan (US$1.15 billion) investment plan to introduce new models, add capacity in its joint ventures and boost research and development of its self-branded vehicles.

As part of the plan, SAIC and GM intend to spend a combined US$217 million to increase the registered capital of their equally owned Shanghai General Motors Automobile Co Ltd, according to a statement from Shanghai Automotive Co Ltd, the listed unit of SAIC.

General Motors Corp and SAIC will retain their existing shareholdings under the deal.

Communications officials did not provide details on the capacity expansion. But a company source said the investment would be used to upgrade existing assembly lines for future products rather than build new plants.

GM said earlier that the company plans to launch production of a hybrid vehicle that uses gas and electricity next year at Shanghai GM.

Shanghai GM is also expected to roll out a new version of the Buick Regal and other models under the Chevrolet brand.

SAIC also announced a series of investments in auto parts makers as well as a research and development institution to support the development of Shanghai GM and its self-branded models.

SAIC, the Chinese partner of GM and Volkswagen AG, ranked first among Chinese car makers in sales last year.

Shanghai plans to open service sector further

SHANGHAI: The municipality will further open its service sector and aims to lure more foreign investment, Vice-Mayor Zhou Yupeng said yesterday.

The service sector attracted the largest share of Shanghai’s contractual foreign capital last year $9.76 billion, or 67 percent, of the total $14.57 billion invested. The investment was mainly in commerce and real estate.

Total contractual foreign investment in Shanghai surged 5.4 percent year-on-year in 2006.

During yesterday’s briefing on Shanghai’s foreign trade and investment, the vice-mayor said Shanghai would intensify the process of opening-up in 2007, especially in the service sector.

“The municipality will attract more institutions including multinational companies’ global headquarters and regional centers, research and development centers, investment firms and operating centers,” he said.

To further boost investment in the modern and manufacturing-based service industries, foreign-funded financial institutions, forwarders, shipping service providers as well as professional service providers are welcome in Shanghai, he added.

One of the first “service outsourcing base cities” in China, Shanghai will take measures to enhance its service outsourcing business and attract investors.

Foreign-invested enterprises have contributed a lot to the municipality’s economic growth, according to figures from the Shanghai Economic Relations and Trade Commission.

Active participation in the region’s economy in turn has brought considerable profits. In the first 11 months of last year, foreign-funded enterprises in Shanghai reported a combined 1.4 trillion yuan in sales revenue, a year-on-year jump of 12.8 percent, with total profit surging 30 percent.

The foreign-invested companies were major contributors to the municipality’s total output.

In 2006, the combined output value of overseas players accounted for 63.5 percent of the municipality’s total, 66.8 percent of exports and 28 percent of local revenue.

They are also major employers in Shanghai foreign companies had hired 1.68 million personnel by the end of November, about a quarter of the municipality’s total.

Foreign trade volume reaches US$500 bln in Guangdong

Chinanews, Guangzhou, Jan. 4 ¨C Statistics show that foreign trade volume of Guangdong Province reached US$500 billion in 2006, compared with $400 billion in 2005.

Private enterprises in Guangdong also developed well last year, and the total number reached 500 thousand. Their industrial value-added had surpassed state-owned enterprises, ranking second among all kinds of enterprises.

Private enterprises also have helped to change the foreign trade style of Guangdong Province. The head of Guangdong Foreign Trade Bureau said that private enterprises have helped to boost the provincial export. Related statistics show that the export volume of private enterprises has reached $41.93 billion from Jan. to Nov. 2006, an increase by 57.7 percent.

Export in Guangdong was dramatic in 2006, with the export volume to Middle East, South America and Africa increasing by 48.9 percent, 59.9 percent and 51.4 percent respectively.