Category Investing in China

Morgan Stanley obtains China banking license

Oct. 2, 2006 (China Knowledge) – Days after launching the first U.S.-registered fund to invest in China A-shares, Morgan Stanley has made a move to acquire a coveted Chinese commercial banking license.

The world’s largest securities firm by market value has taken over Nan Tung Bank, and in the process, gained a foothold in the China’s US$5.1 trillion banking industry. Now a wholly-owned subsidiary of the New York-based firm, the Zhuhai-based Nan Tung Bank was formerly funded by a Macau-based unit of Bank of China Ltd..

Following an approval by the China Banking Regulatory Commission, the acquisition will give Morgan Stanley a banking license to offer foreign-currency denominated services, including deposits, mortgage loans, and trade finance to individual and corporate customers based primarily in the Pearl River Delta region of Guangdong Province.

Morgan Stanley believes the license would propel it ahead of its investment banking rivals, such as Goldman Sachs Group Inc., Merrill Lynch & Co. Inc. and Lehman Brothers Holdings Inc.

The securities firm is yet to win a license to offer local-currency denominated services. However, by fully acquiring Nan Tung, Morgan Stanley will be eligible to apply for a local-currency license immediately, rather than having to wait for five years should they have started their operations in China from scratch.

Nan Tung Bank, which is one of the few Chinese banks open to foreign ownership, serves customers mainly from Hong Kong and Macau.

Since joining the World Trade Organization in December 2001, China has allowed foreign banks to conduct local-currency business with companies in 25 cities. The government will also remove all geographic and business restrictions on overseas lenders by the end of this year.

Foreign banks are allowed to own up to 25% of local lenders, with a single financial institution restricted to no more than 20%, which is 5% higher than in 2003.

Microsoft to invest 100 mln USD in China over five years

U.S. computer giant Microsoft plans to invest 100 million U.S. dollars in China over the next five years, said Microsoft China chief executive Chen Yongzheng on Wednesday.

The investment plan was widely regarded as a reward for China’s anti-piracy efforts. The U.S. company has already invested 65 million dollars in three Chinese software enterprises this year.

China Business News reported sales of personal computers installed with authorized software systems rose from 25 percent in the last quarter of 2005 to 48 percent in the first quarter of this year in China.

This was partly due to Microsoft’s two-billion-dollar purchasing contract with Chinese PC producers Lenovo, Tsinghua Tongfang, Fangzheng and TCL early this year.

The banning of sales of PCs installed with non-authorized operating systems by China in April also played an important role in this regard.

Microsoft awarded Microsoft China the title of “best subsidiary company” this year, the report said.

Microsoft China has 1,000 staff engaged in research and development and the figure will rise to 3,000 in five years.

Source: Xinhua

Intel Capital invests $40 million in China’s Neusoft

BEIJING : Microchip giant Intel Corp said on September 26 that its investment arm, Intel Capital, had agreed to invest $40 million in China’s Neusoft Group Ltd.

The investment, which was still subject to regulatory approval, was the largest to date from Intel Capital’s $200 million China fund, which was established a year ago, said Intel in a statement.

Intel and Neusoft also signed an agreement to strengthen co-operation in software and hardware integration, education and training, said the statement.

Intel had said earlier that individual Intel Capital investments are typically under $5 million and represent less than a 20 percent equity stake. Intel Capital invested $265 million around the world in 2005, around 60 percent of which went outside the United States, up from 40 percent in 2004.

Fund raising by venture capitalists for China hit a record $4 billion in 2005, according to research company Zero2ipo.com.

China Lures Foreign Retailers With Rule Changes

SHANGHAI, China — Toys “R” Us Inc., Best Buy Co. and Home Depot Inc. are part of a new wave of foreign retailers about to enter China’s quickly developing consumer market.

Over the past year, Chinese authorities have approved more than 1,000 applications by foreign retailers and wholesalers asking to open wholly owned businesses in the booming country of 1.3 billion people. That number of approvals, a sharp surge from previous years, follows a long-awaited liberalization of China’s retail sector in 2005. In line with pledges made when joining the World Trade Organization, Beijing stopped requiring foreign retailers to form joint ventures with local partners.

According to the Shanghai Foreign Investment Commission, the bulk of the new applications are from companies that have a China presence through local partnerships. But some prominent U.S. retailers will be new players in China’s rapidly changing — and increasingly competitive — retail landscape. Closely held Toys “R” Us, for example, will be opening its first mainland China store, a 27,000-square-foot outlet in Shanghai’s Superbrand Mall, in December.

“It’s the start of our entry strategy to grow the market in China,” said Pieter Schats, the company’s Asia chief executive. Toys “R” Us executives said the company will formally announce details of its entry in coming weeks.

Toy “R” Us and others are coming in at a time when Chinese authorities are weighing whether to restrict large-scale expansion of chain-store outlets, which could affect major chains like Wal-Mart Stores Inc. that entered China more than a decade ago.

But because they are just entering the Chinese market, the new retailers aren’t likely to be subject to any possible rule changes. And few plan to go into China’s interior cities, where giants Wal-Mart and Carrefour SA are venturing.

Retail analysts say the newcomers’ entry is likely to improve China’s still-evolving mall industry, where high-end brands are lumped with unknown names and facilities and parking are frequently substandard. For example, Beijing’s Golden Resources Mall — which is larger than the Mall of America in Minnesota — has pools of dirty water on bathroom floors even though it boasts shops selling $15,000 Italian leather sofas.

Although China has some of the world’s largest malls, only about 10% of them are profitable, estimates Morgan Parker, president of shopping-center developer Taubman Asia.

Previously, foreign retailers would leave it to their local Chinese partners to handle real-estate decisions, which often hinged on price, he said. Foreign retailers “tend to be more holistic — they want to know things like tenant mix and facilities, to protect their brand image,” he said.

The 2005 rule change has prompted an influx of foreign retailers. About 80 to 90 foreign retailers applied to open operations in China in the first 20 years after China opened up its economy, according to Simon F. Huang, deputy director at the Shanghai Foreign Economic Relations & Trade Commission. But in 2005, 432 new retail applications were approved by the Ministry of Commerce.

This year, local governments were given the autonomy to approve retail projects, which accelerated the process. Shanghai, China’s major retail hub, approved 496 projects in the past six months alone.

The newly entering retailers say they plan to go slowly, opening outlets only in major cities such as Shanghai or Beijing.

Bob Willett, chief executive of Best Buy International, told reporters in Shanghai this past week, “We’re only going to open when it’s right. This is not a race.” The company will be opening its first outlet in Shanghai by December.

China to see more mergers and acquisitions in retail sector

More mergers and acquisitions are expected in China’s retail sector in the near future, according to Ernst & Young. Ernst & Young, one of the world’s top consultancies, said China’s retail sector is expected to grow 12 to 13 percent in 2006 to reach sales of 7.6 trillion yuan (950 billion U.S. dollars) as consumption hots up.

China saw a total of 417.6 billion yuan (52.2 billion U.S. dollars) of M&A (mergers and acquisitions) activity in 2005, but only 3 percent or 11.1 billion yuan in the retail industry, said the report Retail Revolution–A Look at Mergers and Acquisitions in China’s Retail Industry published here on Wednesday.

The report said mergers and consolidation within the industry will reduce fierce head-to-head price competition among retailers. China’s top 100 retail companies currently only have 10 percent of the retail market. The vast majority of retailers in China are small family-operated businesses, fragmented and often inefficient, that keep costs low by using family labor.

Mergers and acquisitions would lead to a more rational and consolidated landscape and allow the bigger, better-organized groups to increase market share. In developed countries such as the United States, 85 percent of retail activities are highly organized, but the equivalent figure for China is only 20 percent.

According to the report, domestic players Bailian and Gome and foreign retailers Wal-Mart and Carrefour will emerge as market movers and shakers over the next five years, upping their market share. However, other voices suggest that foreign mergers and acquisitions may threaten domestic firms, and even pose threats to national security. Concerns range from the dilution or demise of Chinese brands, reduced incentives for innovation among local retailers and domination by multinationals.

Carrefour hopes to acquire at least 10 local retailers as part of its expansion plan in China, but no specific targets or time frames have been given. Best Buy, the largest consumer electronics chain store in the United States, acquired a 75 percent stake in China’s fourth largest home appliance retailer, Jiangsu Five Star Appliance, in May earlier this year and is reportedly seeking to conclude an 800-million-yuan acquisition of Sanlian Commerce, a retailer in East China’s Jiangsu Province.

The report said mergers and acquisitions enable retailers to reinforce their presence in markets where they do not currently operate or do not have significant market share.

China: Citigroup opens software and technology centre in Dalian

Citigroup has officially opened a new software and technology center in Dalian. The center will form part of Citicorp Software and Technology Services Limited (CSTS), a subsidiary of Citibank N.A.. A ceremony was held to mark the opening, attended by Lee Ah Boon, Country Business Manager for Citibank China, Stephen Bird, CEO of Credit Cards and Consumer Finance Japan, Aaron Ho, General Manager of CSTS, as well as senior Dalian government officials.

The CSTS Dalian center is positioned to support both Software Application Development and Maintenance and Business Process Outsourcing services to a wide range of Citigroup businesses in Asia and around the world. The new center is located in the Development Zone half an hour’s drive from the city, and will have an employment capacity of about 300 professionals.

“It is exciting to be expanding our presence to the vibrant city of Dalian, an important city in which we look forward to playing an active role as we continue to consolidate our presence in China,” said Mr. Lee Ah-Boon.

In the next three years the CSTS Dalian center is expected to expand to support different Citigroup business units throughout the region and globally, especially those requiring Japanese or Korean language capabilities. Aaron Ho, General Manager of CSTS, said, “We are very pleased to be opening this state-of-the-art center in Dalian. With its strong language capability, professional talent pool, and its support for foreign investment, Dalian represents a great fit with our business.”

Lin Hua, Deputy-Secretary General, said, “We are very pleased to have Citigroup opening a new center in our city and our Development Zone. We believe Citigroup’s presence here will provide a significant boost to our reputation as a technology sector and will help train and nurture local IT talent. We are committed to providing an excellent environment for CSTS Dalian center, and we wish it all the best of success.”

The establishment of the Dalian center reflects Citigroup’s continued efforts to contribute to the development of Chinese IT industry. In April 2004 the Citigroup Financial IT Education Program was established, designed to increase local financial IT talent and support the development of China’s finance sector. The program benefits students from 20 major universities in China, including Dalian University of Foreign Languages and Dalian University of Technology. CSTS also provides internship opportunities for participating students and offers them outstanding career and growth opportunities.

CSTS was established in 2002 to provide software development and related technical services with the goal to participate in and support the development of China’s information technology industry. Headquartered in Shanghai, CSTS has branches in Guangzhou and Zhuhai in addition to Dalian. CSTS currently has more than 1600 employees in all three branches, about 75% of whom are software developers.
Re-disseminated by The Asian Banker

Avon powers ahead with China recruitment

Having received the first license for a foreign-owned company to resume direct sales of cosmetic products in China, Avon added more than 33,000 new sales staff to its workforce there last month, according to data from the Chinese Ministry of Commerce.

The data, which was cited by Morgan Stanley in a note to investors, stated that the 33,339 new representatives were added to the work force in the month of August, bringing the total number of representatives to 188,273.
The figures indicates that the company is recruiting at an even faster rate than it had originally expected. Back in July the company said that its China sales force had reached 114,000 and that it was hoping to recruit a further 31,000 new employees.

Avon received the go ahead to resume door-to-door sales back in January of this year. The move followed the government lifting a total ban on direct sales implemented in 1998 in an attempt to quash pyramid schemes and other scams that were being offered on a door-to-door basis in the country.

Morgan Stanley reiterated in its note to investors that China remains Avon’s brightest hope for future growth at the moment, with the recruitment drive likely to boost sales for the second half of the year and helping to buoy the company’s overall results in the Asia Pacific market.

Although the general trend in the company’s global sales has been positive, the Asia Pacific region has proved particularly disappointing for the company as a whole. With the exception of China, the company reported a poor performance in other countries in the region, contributing to a 10 per cent drop in sales during the second quarter of the year.

But where other Asian markets are showing slow retail sales, the China market remains robust. Currently China is seeing some of the largest industry growth in the world, with almost all cosmetic and toiletry categories reporting sales growth well into double figures – figures that are in line with GDP that continues to exceed 10 per cent.

This growth could prove the key to getting Avon out of a difficult situation. Restructuring charges have hit the company hard of late, forcing investors to shy away from its shares. Following the announcement of its second quarter results at the beginning of August, the Avon share price fell over $5 to reach $27.40 on August 8. Since then the share price has leveled off and finished trading at $29.54 this week.

But the downward trend in the company’s share price reflects a general loss of confidence. The company’s latest results showed that sales had gone up, but underlying growth was below analyst’s expectations, due mainly to the heavy restructuring charges the company incurred.

During its second quarter net income dropped 54 per cent to reach $150.9m on the back $2.1bn in sales, up 5 per cent on the same period last year.

This figure was impacted by a $49m charge, as part of its massive $500m restructuring program, introduced in the last quarter of 2005. The scheme has seen profits tumble by 54 per cent but eventually could save the company $100m a year.

The restructuring costs have included organizational realignments and a reduction in the workforce, particularly in its middle management that has seen the elimination of more than 25 per cent of its management positions and lowered the number of management tiers from 15 to eight.

To date the company has now eliminated 10 per cent of its 43,000 worldwide workforce, however the expansion into China is helping to reverse that trend, emphasizing just how important the upturn in the China market is to the company.

About.com Eyes China

China, which is likely to become the largest broadband nation sometime in 2007, is attracting the attention of overseas Internet giants recently. Last week it was Rupert Murdoch’s MySpace1 plans, and their talks with China Mobile.2 This week it is The New York Times, and its About.com3 division.

GigaOM has learned that About.com is seriously eying China for future expansion. About.com’s CEO Scott Meyer confirmed that the company is in the process of planning a move into China, looking to build a team there and is headhunting for a general manager. Meyer said the plans are still in the early phase. Thirty percent of About’s unique visitors are from outside of the U.S., Meyer said.

Meyer wouldn’t disclose how the Chinese operations would be financially structured, or if the company would use a new Chinese brand or an About China brand. The timing of the launch remains fuzzy.

Like most non-Chinese Internet companies, About will have to figure out how to navigate the Chinese markets, and adapt to the local government regulations, the business models, and the consumer tastes of the Chinese market. Murdoch has said that he has struggled over the control of content with Chinese regulators1 in his attempts to move MySpace to China.

About’s content will likely face similar issues. When we asked Meyer what he thought of Murdoch’s troubles thus far in China, he said “We are spending a lot of time staying up to speed on the Internet market in China, and MySpace is just one of those examples.” He didn’t seem too concerned. We will call him in a few months and see if he’s still so relaxed.

China’s Capital Markets Set for Growth

By Angela Pasceri, Financial Correspondent

HONG KONG (HedgeWorld.com) – The Shanghai and Shenzhen stock markets will once again draw attention, as China’s financial reforms of the past two years are expected to provide the catalyst for a rapid expansion in market capitalization.

The value of China’s stock market is expected to quadruple by 2010, according to a recent Credit Suisse report authored by Vincent Chan, with the dual listing of major Chinese H shares and red chips being the major driver.

If China’s market capitalization-to-GDP ratio reaches 50% by 2010, the report noted that People’s Republic of China capital markets would reach a value of $1.88 trillion, compared with $402 billion at the end of 2005. If China’s more successful offshore- listed companies sought a dual-listing on the A-share market, and share prices were valued at 10 times 2005 earnings, the capitalization of the mainland stock market would rise to $2.6 trillion in 2010.

The regulatory reforms, which were taken up at a pace far quicker than the market predicted, and the recovery of mainland share prices, will give Hong Kong a run for its money in attracting mainland listings. Hong Kong found its niche as the key destination for China listings over a period stretching from 2001 to 2005. That was when China restricted fundraising activities on the mainland as it launched its reform of listed companies. During this time, mainland companies raised $149 billion in Hong Kong versus $48 billion in China.

Along with the China Securities Regulatory Commission’s push in 2005 to push through non-tradable share reform, where listed companies converted non-tradable shares into tradable stock, other regulations were implemented to create market supports. This bodes well for Chinese companies, which are increasingly considering dual listings.

There are 53 Chinese companies with a total market capitalization over $3 billion listed in domestic and overseas markets. The top three companies by market capitalization are PetroChina, China Mobile and Bank of China. Within the broader group, 29 stocks are listed only overseas, and not accessible to domestic Chinese investors under the current capital account control framework in China. “There is a good chance that almost all of these 29 companies would seek a dual listing in the domestic China market within the next five years,” according to the report.

The total market capitalization of these 29 companies, based on current valuations, is $731 billion, which is greater than the current aggregate market cap of the Shanghai and Shenzhen stock exchanges.

What would drive activity on the Chinese stock market even more, said to Aaron Boesky, chief executive of Hong Kong’s Marco Polo Investments Ltd., are the Olympics.

China fulfills commitment to WTO to open securities market

SHANGHAI — China has fulfilled its commitment to the World Trade Organization to open its securities market, China Securities Regulatory Commission chairman Shang Fulin has told the Sino-French Financial Forum in Shanghai.

Since beginning of this year, the government had taken a series of measures to further open its capital market, he said.

In February, the regulations on foreign strategic investment in Chinese-listed companies started to take effect, allowing overseas investors to put long-term investment into listed companies, Shang said.

Regulators had also relaxed QFII (qualified foreign institutional investors) rules to attract more overseas investment to the securities market, he said.

Slashing the QFII threshold, the new regulations made it possible for more overseas foreign institutional investors to qualify as investors in the Chinese A-share (Renminbi-dominated) markets, he said.

The rules, which came into effect on September 1, stipulate the minimum securities assets managed by QFII applicants — such as fund management institutions, insurance companies and other institutions that stress long-term investment — as five billion US dollars for the current fiscal year, half the earlier QFII provisions.

Insurance companies must exist for at least five years to become a QFII, a much shorter period than the 30 years in the previous rules.

QFIIs will be allowed to open three securities investment accounts with each of the country’s two stock exchanges. Under the old rules, they could only hold one account with each stock exchange in cooperation with their trustees and local partners.

By the end of August, seven joint-venture securities companies and 23 joint-venture fund management companies had been established in China.

Foreign investors hold at least 40 percent of equity in nine fund management firms, and overseas securities agencies had been allowed to deal directly in China’s B-share (overseas currency dominated) market, he said.