Tuesday, June 30, 2015

US inspection of listed China firms "little and too late" - Paul Gillis

Paul Gillis
Paul Gills
 Under new US rules the Public Company Accounting Oversight Board (PCAOB), the main U.S. audit regulator will start this year to inspect Chinese firms listed at US stock markets in China, Reuters reports. Accounting professor Paul Gillis is not impressed.

Reuters:
The PCAOB has been seeking access to China for audit inspections for years, following a rash of botched audits that led to massive losses for investors in Chinese shares in the United States. China had balked at granting access for audit inspectors, citing sovereignty concerns. Under U.S. law, auditors that check the books of U.S.-listed companies must be registered with the PCAOB and open to inspections. 
"They've gotten very little here, but they're making progress," said Paul Gillis, an accounting professor at Peking University in Beijing. 
"The whole issue is becoming less relevant as these companies flee the U.S. markets to return to China, and that's really the best for all parties," he said. 
Chinese companies have been pulling out of the United States and returning home, where share prices had surged before a recent pullback. In the media and internet sectors alone, 17 U.S.-listed Chinese companies have said this year they will go private, spurred by a chance to re-list on Chinese exchanges, according to a report on Monday from Mizuho Securities.
More in Reuters.

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Friday, June 26, 2015

Beijing government to move: at last? - Ian Johnson

Ian Johnson
Ian Johnson
The Beijing municipal government now seems serious about leaving the old city center and move to the suburbs, a very old plan. For the New York Times journalist Ian Johnson dives into the history of the plans. Most reactions are mildly positive.  

Ian Johnson:
For decades, moving government offices outside Beijing has been a taboo subject. In the 1950s, a prominent architect and urban planner, Liang Sicheng, proposed building an administrative center outside the old city. The idea, however, was rejected by Communist China’s first leader, Mao Zedong, and his associates as running against the revolution. Instead, they put national ministries and the urban administration of their capital in the old city, purposefully using palaces and parks to symbolize the Communists’ overturning of the old order. 
Over the years, however, this has meant the destruction of the old city, as alleys, temples, city walls and old buildings were torn down for an ever-expanding bureaucracy.
“The move is ironic given that earlier planners advocated something similar in the 1950s,” said Thomas Hahn, a geographer and historian of urban China affiliated with the University of California, Berkeley. “They were outmaneuvered, which eventually led to the wholesale gutting of the traditional urban core.” 
The exact details have not been released, but some published reports say the city’s Communist Party headquarters, as well as several other political committees, could move to Lucheng, a part of Tongzhou where a subway connection to the inner city recently opened. 
Local government websites have publicized new orders not to construct buildings on the land. Those also state that local residents would be reclassified from rural residents to urban ones, which would end farming on the land and allow for more intensive construction. 
Officials at several Beijing offices refused to confirm or deny the plans. Speaking anonymously, however, numerous officials said the move was definite and could be announced on the National Day holiday on Oct. 1. A senior official with the city’s Bureau of Industry and Commerce said that his office received a notice from his superiors last month to prepare for the move, but that it would take years to complete.
According to Zhang Wuming, a researcher at the Fangtang Think Tank in Beijing, which specializes in urban and cultural issues, the plan would leave the core part of the city home only to central government ministries. 
“The idea is to strengthen the function of Beijing as the capital, which means that Beijing should serve the central organs more efficiently,” Mr. Zhang said. “If the Beijing government can move to Tongzhou, it actually can better manage the city from there.”
More in the New York Times.

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New US internet companies succeed by complying with the government - Ben Cavender

Ben Cavender
Ben Cavender
China has seen a wave of new internet companies, actually succeeding. A surprise after Google, Facebook, Twitter saw them locked out. Business analyst Ben Cavender tells in Quartz what the trick is: complying with the Chinese government. Names? Evernote. LinkedIn. Uber.

Quartz:
After Google’s exit, those three firms have yet to come back. But in recent years, other American internet companies have found a degree of success in China—or at least a bit more stability than their predecessors. 
The solution involves sacrifice—hand over data and control, and the Chinese government will hand you the keys to the market. 
“If you want to develop an internet business in Chinese now, you have to be willing to work with the Chinese government, even if that means censoring content or sharing access to your data,” Ben Cavender, principal at the China Market Research Group, told Quartz... 
By now, some may say that question sounds downright passé. Google and Facebook, the posterboys for internet companies shut out of China, are now knocking on its door. 
Facebook has reportedly opened an office in Beijingand aspires to develop a consumer-facing product. Mark Zuckerberg’s China infatuation seems carefully staged. Google, meanwhile, is rumored to be working on an app store for China, as a way to reach consumers without relying on its search engine. 
“Google decided to take a stand, and they effectively locked themselves out of the market,” Cavender said. Businesses must ask, “How important is China to our growth and what is our long-term perspective on what to do there?” he adds.
More in Quartz.

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Thursday, June 25, 2015

Sequoia: getting US-listed firms back to China - Paul Gillis

Paul Gillis
Paul Gillis
A rising number of Chinese companies, listed in the US, are returning home encouraged by rising stock prices. Bloomberg looks at Sequoia Capital China, one of the firm organizing the shift, and accounting professor Paul Gillis gives his take on the trend.

Bloomberg:
Alternative asset managers are focusing on companies they already hold and on which they also have board positions as they race to complete their due diligence, line up management and arrange buyout groups. Companies from online retailer Jumei International Holding Ltd., in which Sequoia owns a more than 15 percent stake, to online bookmaker 500.com may be the next takeover targets, according to China International Capital Corp
“Sequoia is a big player in entrepreneurial Chinese companies,” Paul Gillis, a professor at the Guanghua School of Management at China’s Peking University, said by e-mail. “There is a real opportunity right now for U.S. listed Chinese companies to seek higher values on the Chinese exchanges. PE firms are providing the brainpower for these privatization and relisting deals.”.. 
“I expect the majority of U.S. listed Chinese companies will do privatizations with the intent to relist in China in the next year,” Gillis said. “It’s a classic private equity opportunity.”
More in Bloomberg.

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Can China offer its graduates enough jobs? - Sara Hsu

Sara Hsu
Sara Hsu
China is trying to employ this year 7.5 million graduates, and while getting a job is not as hard as a few years ago, high-profile politicians have encouraged them to start their own companies. Financial analyst Sara Hsu wonders in the Diplomat whether that will work, even with help from the government.

Sara Hsu:
Education Minister Yuan Guiren encouraged graduates to find jobs in the services and commercial agriculture sectors, especially in second and third tier cities. Xu Hongcai, assistant to the financial minister, promised tax breaks to college graduates who start their own businesses. Vice Minister of Science and Technology, Cao Jianlin, stated that Guangdong province will provide 2.5 billion RMB ($403 million) to science and technology start-ups, and that Zhejiang province will allocation 100 million RMB for these types of startups. Human Resources and Social Security Minister Yin Weimin said the government will provide business start-up subsidies to individuals on student loans. 
Many college students were able to find a job in 2014, a considerable improvement from 2011, but the job market for new graduates has now become far more competitive in first and second tier cities. Age limits for hiring of graduates have made competition for jobs even more heated in some first-tier cities. About 3 percent of college graduates chose to start their own businesses in 2014, which was more than in previous years, but is still a low number. 
Still, the lure of starting a new business is enticing, especially in the internet industry. E-commerce start-ups are hot right now, with electronic payment platforms quite of the moment. The success of internet giants Alibaba and JD.com, coupled with the stock market boom, has attracted new Internet start-ups to the industry. Premier Li Keqiang’s concept of “Internet plus,” linking online ventures to offline businesses in the manufacturing industry, has underscored the leadership’s interest in moving up the value chain. College graduates, particularly those with one or more years of experience, are encouraged to enter this industry. 
No matter what specific jobs graduates choose, creating jobs in high-skilled sectors is essential to ensuring employment for China’s graduating students. Educated young people are loath to work in manufacturing jobs, but mismatches often exist between students’ skills and existing jobs. Academic universities do not necessarily produce graduates with technical skills. This is why some traditional universities are being converted into polytechnic schools... 
Although college graduates may choose to start their own businesses, it is probably wiser to generate more high-skilled jobs in which graduates can first gain experience. The pressing need for economic restructuring will not be staved off by policies encouraging youth entrepreneurship. More substantive policies should transform the manufacturing and services sectors to bring new graduates into higher value-added positions.
More in the Diplomat.

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Tuesday, June 23, 2015

Why O2O is working in China - William Bao Bean

William Bao Bean
William Bao Bean
Unlike most group buying ventures, O2O (Online to Offline) is working in China, says managing director William Bao Bean of the ChinaAccelerator in TechinAsia. "Group buying just did not make sense economically for most companies."

TechinAsia:
Even so, though, the O2O sector is far more diverse than the group buying sector ever was. 
Moreover, some investors see a fundamental difference between group buying and on-demand services when it comes to economic viability in China. Chinaccelerator director and SOS Ventures partner William Bao Bean explains that group buying “didn’t make economic sense for the vast majority of businesses using it.” In order to partner with group buying sites and attract customers, they had to offer steep discounts. Many ultimately couldn’t afford to, and without local partners, group buying sites went under fast. But O2O services, in contrast, don’t demand businesses offer discounts, they just bring them customers. In essence, William Bao Bean says, O2O is “a trendy new name for the age old practice of brick-and-mortar businesses marketing themselves […] in the end most of it is just advertising.”
More in TechinAsia.

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Japan tourism catching up among Chinese - Shaun Rein

Shaun Rein
Shaun Rein
The Fukushima disaster and a flare of nationalism made a dent in Japan´s position as favorite tourist destination for Chinese. But, helped by a slumping currency, Japan is back on the agenda for Chinese tourists, tells business analyst Shaun Rein in Japan Times.

Japan Times:

Visits by Chinese slowed after the 2011 nuclear disaster and a 2012 revival of tensions between Tokyo and Beijing. After exploring South Korea, Taiwan, Thailand and Bali, Indonesia, many affluent Chinese travelers are making up for lost time, said Shaun Rein, Shanghai-based managing director of market intelligence firm CMR.  
 “There’s massive pent-up demand,” Rein said.
To lure more big spenders, Japan has slashed sales taxes on a wider range of items favored by foreign tourists and is setting up duty-free counters at hundreds of shops in Tokyo and elsewhere, even in drug stores — medicines and supplements are big sellers among Chinese and Russian tourists. 
The Laox duty-free shop in Ginza was crammed with Chinese buying watches, cosmetics, robotic vacuum cleaners and space-age rice cookers. 
Ultra high-tech, detachable toilet seats with automatic lighting and lid opening and closing, that warm, wash and dry are another big must-haves among Chinese, even though the products are made-in-China for export to Japan. 
“The new status symbol in China is buying things and having experiences,” said Rein. “It’s not just buying a Louis Vuitton bag but how you bought it and how you did something cool.”
More in Japan Times.

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Monday, June 22, 2015

Sky high stocks do not boost consumption - Wei Gu

Wei Gu
Wei Gu
Despite a short correction, Shanghai´s share are still on record heights, writes WSJ wealth editor Wei Gu in Marketplace. But those records in wealth have not boosted consumption, as investors tend to wait and see what the market is doing.

Wei Gu:
The recent market upturn follows a long spell in the doldrums for Chinese stocks after a sharp correction in 2007. Lots of investors lost money in the downturn, reducing interest in the market. Momentum only began to build again last year, fueled by low interest rates and moves to allow greater foreign investment. 
While the rally has done little to help consumption, it could hurt spending in the event of a market collapse. That is because much of the recent buying has been with borrowed money. Margin debt as a percentage of China's stock-market capitalization is now higher than on the New York Stock Exchange. If the market's downturn continues, investors may have to rein in spending to repay loans. 
Agents at luxury-car showrooms in Shanghai say wealthy customers are delaying purchases to invest more in the stock market. Auto sales fell by 0.5% from a year earlier in April, the first decrease in almost three years. Fewer than a quarter of respondents to a recent survey by online news portal Netease said they would consider using gains from the stock market to buy a car. 
Instead of buying a new vehicle, "some people have decided to lease a car for the first time so they can keep investing," said Shaun Rein, managing director for China Market Research, a consumer-intelligence firm.
More at Marketplace.

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Britain gains most jobs from Chinese investments - Rupert Hoogewerf

Rupert Hoogewerf
Rupert Hoogewerf
First rich Chinese send their children. Then they invest in real estate. And then other investments and jobs for the locals follow. China Rich List founder Rupert Hoogewerf was the first to discover that trend, and his latest Hurun report shows the UK has been in 2015 a key winner of job creation, led by Huawei, he tells Xinhua.

Xinhua:
In its report named "the UK Engaging the Chinese Private Sector 2015," the institute highlights eight key findings, including Masters courses and boarding schools have been the most important drivers of personal connections with Chinese entrepreneurs; led by Huawei, Britain has seen notable rise in job-creating investments from China's private sector. 
Rupert Hoogewerf, Chairman and Chief Researcher of Hurun Report, said that the private sector of Chinese mainland is the most dynamic and the one with the brightest future. According to a report released by UK Trade & Investment on Tuesday, China made 112 foreign direct investment (FDI) projects in Britain, becoming the fourth biggest FDI countries for UK in fiscal year 2014/15, which ended March 2015. 
"There has been a clear evolution of Chinese wanting to send their children to the UK and US, whereas a decade ago it was Canada and Australia," said Hoogewerf. 
The education destination choice also bolsters the residential purchases for Chinese high net worth families in Britain. London was the only European city to make the Top 10 preferred cities for Chinese to buy residential property, according to Hurun's report in June 2014.
More in Xinhua.

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How the Renminbi goes global - Sara Hsu

Sara Hsu
Sara Hsu
Step by step, China takes its currency global. The latest move, the launch of the China International Payment System (CIPS) this fall, marks another step forward, writes financial analyst Sara Hsu in the Diplomat.

Sara Hsu:
The system will be located in Shanghai and will facilitate cross-border trade settlement, direct investment, and other RMB-denominated deals. This will reduce transactional costs for RMB clearing and make such transactions easier. The international payment system is expected to expand internationalization of the RMB as China continues down the long path of market-oriented reforms. 
China currently uses the China National Payment System (CNAPS), with a 2014 settlement amount of 6.55 trillion RMB, according to the People’s Bank of China. The transition to CIPS will better allow use of both Chinese and English and will run on SWIFT ISO20022 standards, consolidating a system of multiple clearing houses. The system is currently being tested among 20 banks and will be rolled out to other banks in the fall. Cross-border use of RMB is expected to rise as it becomes easier to engage in foreign currency transactions. 
Improving the ability to conduct international RMB transactions is an essential component of China’s capital account and exchange rate liberalization process, as well as of its “Going Out” policy and the One Belt, One Road initiative. Under the Third Plenary Session of the 18th Communist Party Congress, China committed to further opening up its capital account and increasing exchange rate liberalization. This will allow transactions to be further carried out in RMB and to somewhat loosen the rate at which the RMB is internationally traded. The One Belt One Road initiative aims to expand the scope and scale of the bilateral currency swap and settlement.
More in the Diplomat.

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China offers VIE´s a way out - Paul Gillis

Paul Gillis
Paul Gillis
For decades foreign and Chinese companies used tax heavens like the Cayman Islands and Bermuda´s as a way to circumvent restrictions in China´s laws. Now the country is closing that loophole, but last week also offered a way out for those who feared to be in trouble, writes accounting professor Paul Gillis at his weblog, at least for online ventures.

Paul Gillis:
The new MIIT (Ministry of Industry and Information Technology) rule provides an escape valve. It appears limited to companies operating in online data processing and transaction processing (operating e-commerce). It is unclear to me how far that definition will stretch. 
Many foreign multinationals operate in China through the VIE structure. Only a few have disclosed this fact, since disclosure is only required when the VIE operations are material to the company as a whole. Amazon, CBS, and Pearson Education have disclosed the existence of Chinese VIEs. The new rule seems to help Amazon, and it is less clear whether CBS or Pearson Education will be able to take advantage of it. 
The law might also be used by some of the overseas listed Chinese companies that will have difficulty complying with the new foreign investment law. Tencent cannot put in place the control structure required because the Hong Kong Stock Exchange does not allow it. Ctrip does not have a dual class share structure or sufficient Chinese ownership to demonstrate Chinese control, and the new rule might provide an out for them. 
It is also unclear to what extent operations will have to be moved into the Shanghai Free Trade Zone in order to qualify for the new rule. Such is the nature of Chinese regulation; implementation details will take some time, even though the new rule is already effective. Many overseas listed Chinese companies are in the process of going private from the US exchanges with the intent to relist on China’s frothy boards. I believe this trend is less motivated by changes in VIE rules than the high valuations currently available on Chinese exchanges.
More at the ChinaAccountingBlog.

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Thursday, June 18, 2015

Lesson #1 from Alibaba: Be visible - Joel Backaler

Joel Backaler
Joel Backaler
Jack Ma of Alibaba made a recent splash by his visit to the US, and more Chinese companies want to follow in his footsteps. Joel Backaler, author of China Goes West: Everything You Need to Know About Chinese Companies Going Global explains in Forbes the rules to be learned from Alibaba.

Joel Backaler:


Jack Ma, chairman of Chinese e-commerce giant Alibaba, recently returned to the city where his firm made history last year with its record-breaking $25 billion IPO. First in New York and then in Chicago, Ma emphasized the importance of ‘cross-border e-commerce’. This relatively new form of e-commerce enables Chinese consumers to purchase products directly from the US and other international markets via Alibaba’s TMall Global online platform. This booming industry is expected to grow from $40 billion in 2014 to as large as $240 billion by 2020. There’s a huge market up for grabs, and competition is intensifying – NASDAQ-listed JD.com recently launched its similar JD Worldwide, while other ‘pure cross-border’ companies like Shanghai-based Ymatou.com are quickly gaining ground. 
Ma’s high-profile US visit had two goals. First, it enabled him to promote cross-border e-commerce and explain how American businesses can capitalize on the emerging phenomenon to sell their products to Chinese consumers. Second, it provided him a platform to address mounting concerns about counterfeit products being sold on Alibaba’s sites. Ma’s fluent English and ability to navigate complex and sensitive topics are key assets that have enabled him to connect with Western audiences. However, there are three more important lessons that Chinese CEOs who wish to ‘go global’ can learn from Jack Ma and Alibaba. 
Lesson #1: Be Visible 
Chinese companies, especially in traditional business-to-business sectors, have often built success through a relentless focus on short-term sales. Given the size of the Chinese market and rapid pace of economic growth, their firms often grew without extensive focus on activities like marketing, branding and public relations. Yet these three capabilities are critical for Chinese firms expanding overseas in order to proactively build and manage their international reputations. 
Alibaba’s successful example demonstrates how important it is for Chinese CEOs to personally invest in spending time with overseas governments, trade associations and media to shape perceptions, rather than appearing only during times of crisis. During Alibaba’s high-profile IPO roadshow, Jack Ma traveled to 10 different cities around the world serving as the face of Alibaba. He accepted interviews and guest spots with nearly every major international business media outlet. His firm produced high-quality videos, articles, and a wide variety of online and offline content positioning the firm as a global company with a track record that is comparable to other more established multinational firms.
More lessons in Forbes.

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