How much energy is used to secure a $1 million bitcoin?

I have a new article over at Bitcoin Magazine called, Bitcoin: Made in China.

It’s based off a paper (pdf) I have been working on and is the culmination of numerous exchanges and conversations I have had over the past couple of weeks.

Another interesting article on this subject of capital costs is this recent one by Dario Di Pardo, $46K Spent on Mining Hardware: What Happened Next?

There are several people to keep your eye on for analysis in this space (such as those in the acknowledgements portion of the piece).  Dave Babbitt is working on his master’s thesis on this specific issue (hence his up-to-date numbers), Jonathan Levin is about to defend his thesis (which goes into several mining models), Robert Sams is brilliant with both econometrics and with understanding incentives and Cal Abel speaks in a whole new different league.  I also had some illuminating exchanges with John Ratcliff (he posted some subsequent comments over here).  Andrew Poelstra has a very critical eye and sharp mind for any logical errors and Bryan Vu is both articulate and provided some good counter-points to the hypothetical trend lines.  Dan Forster and Karl Holmqvist helped spark the initial barage of questions, Joseph Chow helped tweak the responses and Petri Kajander made sure my writing was coherent.  Also, thanks to Ruben Alexander, editor at Bitcoin Magazine for his encouraging words.

Lastly, my sources in China including Weiwu are without a doubt, resourceful and survivors.  That region of the world is a very tough market and unfortunately doesn’t receive the respect it deserves.

For instance, below is a Figure 4 from the new U.S.-China Economic and Security Review Commission (pdf) by Lauren Gloudeman.

chinacongress

Thus the next time you hear someone on reddit complain about China in relation to Bitcoin or tell you how Chinese demand did not impact prices, show them this diagram.  Who will replace the Chinese whale?  Maybe Wall Street.

Also send them here: Fairweather fans in bitcoinland disowning China

Presentation covering Smart Contracts, Smart Property and Trustless Asset Management

Earlier tonight I gave a presentation at Hacker Dojo with the Ethereum project.  I would like to thank Chris Peel and Joel Dietz for organizing it.  Below is a video and accompanying slide deck.  In addition to the footnotes in the PPT, I recommend looking at the wiki on smart contracts and Nick Szabo’s writings (1 2 3).

Also, some quotes regarding synthetic assets in Szabos’ work:

Citation 1:  “Another area that might be considered in smart contract terms is synthetic assets[5]. These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways.”

Citation 2: “Creating synthetic assets or combinations that mimic the financial functionality of some other contract while avoiding its legal limitations”

Citation 3: “Reference to Perry H. Beaumont, Fixed Income Synthetic Assets”

Chapter 2 – Selling books and content

[Note: below is Chapter 2 from Great Wall of Numbers]

In the Spring of 2009, a young freshman named Cena asked me a question (as in WWE John Cena – many men in China enjoy the drama of World Wresting Entertainment).

Cena said, “Mr. Swanson, what do American college students do with their textbooks after the semester is over?”

I replied, “If the class is offered again, we can usually sell them back to bookstores near campus or to online buyers, though sometimes students simply throw them in the recycling bin too.”

Cena thought for a moment and then said, “Why don’t you sell them to China?  Our books are sometimes of lower quality and outdated.”

He raises a good point, what are the logistical and legal challenges of gathering and exporting used American textbooks to mainland China?  Is there any profitable business model that we can use to compare the potential market opportunity?

Founded in 1972, Half-Price book store is a Dallas-based company that buys and sells used books.  Yet despite this seemingly simple business model – buying used books and selling them – the company has grown to operate more than 100 stores in 15 states.

Could you sell used books like Cena suggested?  While establishing a brick-and-mortar store front in an increasingly digital age probably may not be financially justified, there are also regulatory hurdles worth considering (e.g., obtaining permission from the former General Administration of Press and Publication now called State Administration of News, Broadcasting, Film and Television).

In fact, there has been an ongoing trade dispute between the US and China regarding China’s barriers that limit the importation of books and other media.  In addition to regulating the distribution of foreign material, Chinese policies require that foreign media and books must be channeled through state-owned enterprises (like Xinhua and China Film Group).  In 2009 the WTO ruled that China had “violated international rules” by these limitations.1 After appealing, five months later the WTO appeals board once again ruled that China was “unjustified” in such limitations.23 While this dispute continues to simmer, despite these challenges the domestic book market has grown.  For example, “just 7-8 years ago,” Jo Lusby of Penguin China says that “there wouldn’t have been the market to sustain what we’re doing. Today it’s a challenging business, but it’s commercially as well as literarily worthwhile for us.”45

And while there could be a case either way – depending on future import regulations and oil prices for transportation – perhaps you could find a Chinese partner to create the equivalent of Half-Price on mainland China.  Perhaps one relatively sanguine route would be to source the used books in areas that are non-political like the STEM subjects: science, technology, engineering and math text books in the US to sell through your joint-venture (JV) partnership.  Or while this trade dispute remains ongoing, perhaps foreign content creators could attempt to ‘go digital’ in the interim.  I discuss some other relevant challenges in Chapter’s 10 and 14.

A large demand for content

With 370,000 titles, in 2011 the Chinese domestic book market was valued at $10 billion, displacing Germany and making it the second largest book publishing market in the world (after the US).67 All told, according to the Chinese Academy of Press and Publication “the revenue from publishing, printing and distribution reached 1.46 trillion yuan (US$228.62 billion), up nearly 18 percent from the year before.”8

Furthermore, Chinese readers are becoming as voracious as their Western counterparts.  For instance, the academy also found “the average books read by Chinese in the year of 2011 to be 4.35.”910

How are they reading these books?  According to a 2011 Publishers Weekly report, the “preferred platform” for Chinese readers is now the digital ebook, such as those found on smartphones.11 And despite relatively tight government regulations on all forms of communication and publication, the book publishing industry and in particular the ebook industry continues to grow.

For example, Baidu, China Mobile, Hanvon and Cloudary operate the top ebook platforms and distributors; platforms whose usage rates have grown at double digits each of the past several years.  And because Amazon’s Kindle is currently not being sold in China, many other domestic e-readers have gathered large marketshare.  Hanvon has roughly 50% of the e-reader marketshare and Shanda’s Bambook has captured 28%.12 In fact, Shanda-owned ebook platform Cloudary alone has published 5.2 million titles by mid-2011 whereupon it was spun off into a successful $200 million February 2012 IPO.13 Shanda is now China’s 5th largest tech company by revenue.14

Do you or your company have books or content currently published in the US?  Do you create and provide content for science, technology, engineering or math books or periodicals?  If so, then mainland companies like CLS Communication (the largest in China), Sinophone, Yuyi and Berlo may be able to provide translations of your material so that you can upload and sell the content on platforms like Cloudary.15

Translating your content

If you would prefer to use US-based translation services, there are a number of providers. According to a 2012 report from Common Sense Advisory, in terms of revenue, the largest language service providers in the US are: Mission Essential Personnel, Lionbridge Technologies, TransPerfect and ManpowerGroup.16 Together they generated more than $1.5 billion in revenue last year.

Dean Stamatis, author of over fifty books on statistics, quantitative finance and Six Sigma, has been in the process of locating an English-to-Chinese translation service in China for translating his latest 900 page technical book. 17 In November 2012 he explained to me that on the one hand “you have excellent, yet expensive translation service providers in the US and on the other you have relatively cheaper (though still expensive) translators in China who may be a little more difficult to communicate with across the time zone differences.”  Furthermore locating the Chinese providers can be a laborious task at times as well and as a consequence he personally has traveled to China to discuss the services face-to-face.  This is something that all businesses should take into consideration.

A content plan of action

In Chapter 12 I discuss the social media industry in China and how foreign firms can build and maintain a brand through the numerous social media sites.  Again, while it is important in the long-run to understand the culture and language of your potential customers in China, with a few minutes of Google searches you can start rolling out both your brand and your content to the Chinese public right now, without even knowing any Mandarin.

Just as there was a virtual land rush with the opening of Facebook Pages and other unique domain names in the 1990s, so too is there a land rush for social media positioning in China.  And irrespective of whether or not your local competition in the US acquires brand names before you do in these new Chinese platforms, you have another competitor you do not even know about: hundreds of start-up companies in China that are discussed later in Chapter 12.

Thus without needing to hire a strategic consulting firm, you and your company can and should already establish a beachhead in China by registering and creating a QQ and Sina Weibo account (look at Chapter 12 for more details) and by assessing e-tailers like Cloudary for your digital content.

One last word of warning, if you are looking to get involved with an ebook platform, be sure to study the guidelines and regulations permitted by the former General Administration of Press and Publication (中华人民共和国新闻出版总署).18 Amazon China is currently under investigation for possible violations related to obtaining the proper approvals and licenses for its new Kindle Store on the mainland.19 In fact, as an aside, despite its 8-year endeavors Amazon China has only captured 1% of the $196 billion e-commerce market.20 While the case is ongoing be sure to consult with an attorney (see Chapter 10) before making any substantial investments first.

Takeaway: Looking around at your existing content, you and your company may find China as a new market for revenue generation.  This includes both older and new content ranging from science and technology books to reports your company published in periodicals.  China is the 2nd largest book market and has a number of well-funded, well-developed ebook platforms that your company may be able to sell into.  There are also a number of well-established industry leaders on both sides of the Pacific capable of translating your English content into Chinese and vice-versa.  This move towards online selling also presents an opportunity to establish a brand through Chinese social media sites such as QQ and Sina Weibo that are discussed at length in Chapter 12.  Failure to quickly move into the Chinese market not only presents an opportunity for your domestic US competition but also for your competitors in China with whom you probably are unfamiliar.

 


Endnotes:

  1. W.T.O. Rules Against China’s Limits on Imports from The New York Times []
  2. China Appeals WTO Ruling on Book, Film, Music Imports from Bloomberg []
  3. China loses WTO media imports appeal from BBC []
  4. Chinese Fiction Is Hot from BusinessWeek []
  5. Other genres that are currently maturing on the mainland include fantasy and science fiction which was recently a focus of special issue the Science Fiction Studies at DePauw University.  See “Great Wall Planet”: Introducing Chinese Science Fiction by Yan Wu []
  6. IPA’s Global Ranking of Publishing Markets—US, China on Top from Publishing Perspectives []
  7. Slightly older data (2006) lists the largest book markets as: the US, Germany, China, Japan and the UK.  See The Global 2011 eBook Market: Current Conditions & Future Projections by Rüdiger Wischenbart and Sabine Kaldonek []
  8. What Chinese want to read from People’s Daily []
  9. Ibid []
  10. Mo Yan won the 2012 Nobel Prize in Literature and in doing so brought modern Chinese literature into the spotlight.  Sales of his English-translated works rose to best-seller status on Amazon.com.  Similarly, sales of Yan Lianke works also increased following the announcement of being a finalist for the Man Booker Prize in 2013.  See Man Booker International Prize 2013 Finalists Announced from The Man Booker Prizes, The world has yet to see the best of Chinese literature from The Spectator and Stealing Books for the Poor from The New York Times []
  11. The Global 2011 eBook Market: Current Conditions & Future Projections by Rüdiger Wischenbart and Sabine Kaldonek []
  12. Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg []
  13. Shanda Cloudary US IPO is Finally Taking Off from Tech In Asia []
  14. China’s Top 10 Tech Companies by Revenue from Tech In Asia []
  15. Some of the top China-based translation firms are CLS Communication, Sinophone, Yuyi and Berlo []
  16. The Top 100 Language Service Providers from Common Sense Advisory []
  17. Dean Stamatis is the President of Contemporary Consultants in Michigan. []
  18. Stealing Books for the Poor from The New York Times []
  19. GAPP: Amazon China’s Kindle Store Violates Regulations from Marbridge Consulting []
  20. Bezos’ Kindle-Less Amazon Mashed in China by Ma’s Alibaba from Bloomberg []

Chapter 5 – Financial services

[Note: below is Chapter 5 from Great Wall of Numbers]

Since Deng Xiaoping’s “Southern tour” in 1992, China has consistently been one of the top recipients of foreign direct investment (FDI), totaling $85 billion in 2010 and $574 billion overall.  In contrast, up until recently the US still led in both annually received FDI ($194 billion in 2010) and $2.58 trillion overall.  Even though its full year FDI received fell from the year before – a decline that continued through February 2013 – in the first half of 2012 China actually overtook the US for received FDI ($59.1 billion versus $57.4 billion).1

And while US firms and institutions currently invest more FDI within China than Chinese firms invest in the US (in 2011, Chinese companies invested $6.3 billion in the US representing 0.15% of total foreign investment in the US) this will probably change – despite a closed capital account (discussed in Chapter 10).234 For example, among other deals, a Chinese firm was recently granted approval in December 2012 to purchase bankrupt Massachusetts-based battery maker A123 Systems for $256.6 million.5 As a consequence Chinese outbound investment in 2012 such as mergers and acquisitions reached $8 billion for the first time in the US, globally increased to $93.09 billion (compared to $13.58 billion in 2007) and its outbound direct investment (ODI) is expected to reach $150 billion by 2015 due to deals such as A123 Systems.678 One example of continued investment is from ENN Group, one of the largest private companies in China.  Through a joint venture with CH4, a Utah-based energy company, ENN plans to open a network of 50 natural gas stations across the US this year.  Each station costs about $1 million to build and the joint venture has a goal of building 500 stations altogether.9 For comparison, the EU collectively receives twice as much FDI from China than the US currently does (due in part to political trepidation).10

Where are the potential investments that Chinese firms have looked at in the US?  For example, during the build-out of the enormous Haynesville natural gas fields in the Texarkana region, one of the investors courted by local energy companies was CNOOC (the 3rd largest oil company in China), which at the time reportedly wanted to invest $750 billion into the North American energy business.11 It is unclear as to how much they did end up investing (or if they returned a profit) but several Chinese energy companies have now moved up to Canada and invested $3 billion in a new pipeline project in the tar sands as well as put together a “$15.1 billion deal to acquire Nexen.”1213 In February 2013 the deal closed marking the completion of the largest overseas acquisition by a Chinese company.  And depending on regulatory conditions North American energy firms may or may not continue to do business with Chinese firms, yet there is one area that foreign experts can provide inside of China right now.

So what opportunities are there for foreign financial professionals?

While it has become almost cliché to say, finance is one of the industries that is undergoing “reform and opening up.”  This involves building institutions, physical infrastructure and a legal structure – all of which is thoroughly discussed in both Mark DeWeaver’s new book as well as a Brookings Institute report in June 2012.14 Yet reforms in general are always just around the corner.15

For example, because of pent up savings due to relatively few investment vehicle choices on the mainland, once larger liberalizations begin, there will be opportunities that can come from not just asset management and private equity (PE) markets but through the large expertise requirements in the relevant fields that currently do not exist (e.g., debt structuring).  As part of the once-in-a-decade leadership transition that began in November 2012, one expectation was and is that there will be a “big bang” of reforms in the coming months.1617 One immediate, visible reform was the creation of super-ministries referred throughout this book (e.g., Ministry of Health dissolving to become National Health and Family Planning Commission).18 Another case in point, on November 19, 2012 the State Administration of Foreign Exchange (SAFE) announced that it “ended 35 foreign-exchange approval rules and simplified others.”19 By reducing paperwork and shortening approval processes, such liberalizations are done with the intention of attracting FDI.  On December 12, 2012 the Shanghai stock index surged to its highest daily gains since October 2009 due to policy changes in the Qualified Foreign Institutional Investor program (QFII合格境外機構投资者).20 As a consequence sovereign wealth funds such as Qatar Holdings and central banks are now allowed to raise more than the $1 billion previously permitted for investing in the securities market.21

Another instance is on December 17, 2012, where a number of new liberalizations were implemented such as reducing regulatory approval and remittance of profits for foreign-owned companies.  Continuing this trend, on February 28, 2013, the government expanded its short-selling program which will now enable select brokerages to borrow shares from preapproved publicly traded companies.22 And on March 15, the China Securities Regulator Commission announced that effective immediately, brokerages could convert loans and other assets into securities, paving the way for securitized business.23 On a provincial level, financier Harry Ding (see below) explained to me, that pilot regions throughout China are also enacting reforms to make it easier for entrepreneurs to begin operating.  Shenzhen and Zhuhai in Guangdong announced that effective March 1st they have streamlined 18 different business licenses, created a new version of business licenses which no longer requires lengthy documentation procedures and removed some of the registered capital restrictions.24

Another specific area you and your firm may be able to literally capitalize on shortly is building a local bond market in structured debt.  Over the past several years there have been attempts to roll out local government bond markets on the mainland.  In November 2011, Shanghai issued China’s first local bond issuance yet eight months later, all of the programs were scrapped.25  Yet a year later, in November 2012, the China Securities Regulatory Commission (CSRC) approved a plan from ICBC (the largest commercial bank in China and in the world) to start a pilot program of selling bonds known as asset-backed securities (ASB) beginning in 6 months.26 The local market of this local debt, based on several estimates of over 10,000 local-government financing vehicles (entities that were set up to bypass these kinds of bans) is between $1.7 trillion and perhaps up to $5.4 trillion, which I discuss later in Chapter 17.27

Foreign firms specializing in managing distressed loans have already capitalized on opportunities on the mainland (with mixed results), including Shoreline Capital Management who raised $300 million for a new fund last year specifically to invest in distressed Chinese debt.28 DAC Capital is also in the process of raising $300 million for a new Chinese-focused fund.  The gamble is while investors in such debt may receive returns if and when a borrower repays portions of the loan, local government policies and a nebulous court system can make returns lower than they would have otherwise would have been (e.g., transaction costs and opportunity costs).

In October 2012 I spoke with Shawn Mesaros, CEO of Pamria an asset management firm located in the financial district in downtown Shanghai.29 Despite these setbacks above, in his view SOE banks will “eventually become facilitators, that they will offload debt which can then be restructured.  As a consequence there will then be a bigger market for sovereign debt.”  In addition, even though public capital (through SOEs) is currently cheaper than private capital Mesaros thinks that private equity (PE) is still a relatively good business, “it is not as easy as you think because domestic companies typically would rather not share equity in exchange for your capital.”  For perspective, according to the consultancy Bain, “the total value of mainland private equity investments jumped from US$3.7 billion in 2005 to US$15.2 billion in 2011.”30 And nearly $230 billion worth of deals were collectively completed between 2001 and 2012.31

Yet to give you an idea of the soft PE market today in China, according to a recent report from the Wall Street Journal, both foreign and domestic PE firms have been struggling over the past two years.32 The value of PE deals in 2012 declined 27% to $21.9 billion in part because of the domestic stock market performance.33 Between 2010 and 2012 the Shanghai Stock market declined roughly 37%.  Fortunes however, may continue to fluctuate in the future as the main benchmark index regained about 9% in the first six weeks of 2013 then lost 7% over the following month through mid-March.34 However because many investors cash-out of their positions through the securities exchange, fewer firms have wanted to go public.

Subsequently, private-equity firms which provide this junction have been affected as well.  In fact, in 2012 there was a 70% drop in initial public offerings (IPOs) – in the first half of 2012 alone there was a 37% drop in IPOs, from 218 during the same time last year to 138.35 PE deals as a whole “fell an unprecedented” 43% last year.36 Furthermore, of the 10,000 PE deals conducted between 2001 and 2012, 7,500 remain “unexited” as the firms cannot go public on Chinese exchanges.  And whereas PE firms in China raised 75 yuan-denominated funds in 2011 and raised another 52 yuan-denominated funds last year, only 2 new funds have been raised in 2013 (both focused on real-estate investment).37 This is in part because there has been an across the board red light from Chinese regulators since last summer (as of January 31, 2013, a record 873 companies have filed for IPOs in China yet have to wait) and Chinese firms trying to list on American credit markets are essentially persona non grata due to regulatory oversight from the SEC and disagreements with Chinese auditing regulators.383940

However despite these drops, there is still an active set of foreign and domestic PE activity, including Jiuding (the top domestic PE firm) who has averaged an internal rate of return of 30% since 2010 (an IRR is one gauge of how profitable investments are).41 Furthermore, this “softness” in the PE market may have a silver lining as well.  For example, according to Peter Plakidis of Deutsche Bank, “[a] softer equities capital market has meant that private equity is not competing as much with public money, and depressed public valuations have improved the returns for private-equity firms.  Hence, private-equity firms now have more companies on their radars as attractive investment opportunities.”42

In addition to PE, according to Mesaros, one large SOE bank on the mainland is already filling an office floor just for fixed-equity investments.  And if they are doing it, then perhaps other SOEs are close behind.  What this means to Mesaros is that eventually the big spreads “that can roll over price takers will become smaller.”  This also means that there is potential for foreign experts in this field to also train and get involved at a variety of levels within the periphery of this investment field.

Human capital

And in both the long and short-term, irrespective of growth trends on the macro side (which I discuss in later chapters), expertise in these two areas is in short supply.  At the same time, as noted above one challenge in this type of training is retention.  I was told by an another American source that a very large US bank (top 3) has trained numerous local financial experts in some of these sub fields (like forfaiting and futures) yet was unable to retain them due to an insatiable demand for such experts at mainland institutions.  Or in short, since talented human capital in certain areas is scarce, training may be a risky endeavor.43

Natalia Shuman, the new COO of Kelly Services’ in China recently explained the labor supply issues of financial experts in this region,

[…] the lack of supply and high demand is reflected in compensation.  If you look at Shanghai’s market today it’s not only financial analysts.  There are multiple positions and multiple functions where salaries are very competitive compared with global.  People are getting the same salary, maybe even higher, particularly in Shanghai and Beijing, compared to New York or London nowadays.44

And recruiting local talent for financial positions is also a seller’s market in Shuman’s view “Chinese with Western experience who are coming back here; they could easily get more money here than they would get in New York or London.”45 Further human resource constraints including retention issues are discussed later in Chapter 15.

For perspective in December 2012 I spoke with a Chinese financial manager at Fosun International (复星国际有限公司) in its Hong Kong corporate subsidiary.  Fosun is the largest privately held company in China, generating 25.73 billion RMB ($4.12 billion) in the first half of 2012.46 According to him, “I have colleagues who have a lot of career experience in the financial industry on the mainland but they currently do not have a competitive edge over their international counterparts when applying for finance positions in Hong Kong or elsewhere.  Yet simultaneously, if they want to further their career they would prefer working outside the mainland because both the experience gained and the compensation in the international marketplace is significantly higher than anywhere on the mainland.  And since the financial infrastructure and investment instruments in Shanghai still have not reached ‘critical mass’ it is basically more of a regional financial center compared with Hong Kong, which itself is filled with experienced staff in dozens of specialties that do not exist yet on the mainland.  Concurrently, because there are more and more banks in China and more and more people that have financial backgrounds and overseas educations they also want to pursue careers in this industry making it very competitive in certain specialties compared with previous years.”47

On the other hand, he still sees opportunities as “the mainland industry needs experts to train local people how to work in all areas in this growing market because there are relatively few providers doing it today.  Not just in debt markets, M&A, private equity or IPOs, but also in all forms of international trade such as letter of credit, trade finance, arbitrage and export finance.  Since there is a lot of overseas businesses that want to do business in China these banks will continually need to hire people capable of not just fulfilling relatively basic financial services today, but also the more advanced investment instruments and complex transactions in the future.  And since nearly all of corporate finance on the mainland still depends on bank loans for credit, banks typically provide most finance and capital for nearly all companies.  Thus foreign service providers can potentially bring their knowledge to our young industry for a mutually beneficial exchange.”

What are these salaries like?  A recent Bloomberg report similarly noted the demand for qualified financial professionals and experts for China, yet also found that managing directors now earn less than they would in the US and roughly “on par with those in Europe and the U.K.”48 For example, managing directors in Beijing and Hong Kong earned between $900,000 and $1.3 million in salary, bonus and stock options last year – while their counterparts in the US earned $1.2 – 2.01 million and their peers in the UK and Europe earned $850,000 – $1.77 million.

Wealth management

In November 2012 I spoke with Richard Johnsson who was the President & CEO of Soderberg & Partners in Beijing.  Soderberg & Partners is an independent financial advisory targeting high-net worth Chinese citizens since 2007.  According to Johnsson, “one of the challenges early-on was to establish a business in a field that didn’t exist in China, and few could see the benefits of independent advice.  The competition was all about returns, as opposed to for example tax planning; and the commissions were very low.  But lately, the industry has expanded very fast.  And one of the opportunities is of course that it is highly likely that the tax system and regulatory setup will look more and more like in the West.  This will mean complicated tax systems and tax deductions will make planning hard for people, thus driving sales.  On the other hand, other parts of government will try to control the industry, driving extensive compliance.49 But the former will likely come before the latter.”  All of the Big Four auditing firms and Big Three management consulting firms have long ago established mainland offices; can your firm provide similar services?

In January 2013 I also spoke with Harry Ding, a native of Guangdong who has worked as a manager in the finance industry on the mainland for the past five years.  According to him, “one of the opportunities for activities like day-trading and forex trading is that you do not need to have a PhD in finance to understand and be successful or even profitable in these segments.  As a consequence, the companies I have worked with over the past several years usually involves training new college graduates with finance backgrounds how to use econometric models and computing technology to conduct their trades.  While there are licensing and training fees as well as a learning curve, in the long-run their relatively lower labor costs usually acts as a profitable form of arbitrage.  That is to say, that because they can effectively trade on exchanges like the Toronto Stock Exchange, they are usually several times cheaper to hire and manage than local talent in Canada.”  Forex means ‘foreign exchange’ and typically involves the buying, selling and trading of foreign currencies (e.g., JPY, USD, GBP).

Ding also sees a few challenges in that, “because of the numerous restrictions on the financial industry and because of its overall developmental status, there are not as many investment tools and instruments available and those that exist can be difficult to trade profitably at large volumes.  As a result, many individuals and institutions have turned to overseas investment.  And by virtue of the fact that much of a firm’s activities are conducted overseas, it normally requires investors to transfer money out of China which oftentimes makes domestic clients feel uncertain as their assets are not physically close by, creating a psychological insecure feeling (e.g., uncertainty) especially in recent years as Western countries have had numerous financial scandals that have shaken investor trust and confidence.  In addition, China has a capital transfer restriction that strictly prevents citizens from transferring assets to a broker or investment firm outside the mainland over an annual limit of $50,000 USD.  Thus any amount beyond that requires other legal ways to process and transact it.”  These capital restrictions are discussed in Chapter 11.  Furthermore, can you or your company utilize local talent like Ding’s firms have?

Ding’s point regarding a dearth of investment instruments was recently echoed by Nick Yim head of Goldman Sachs China Market.  According to Boston Consulting Group, the total value of private investible assets in China reached $12 trillion in 2012 (a 14% increase year over year).50 Where are these assets?  According to Yim, most of his high-network clients only have “have 20% to 30% of the funds parked offshore, the rest remains onshore.”51 And because of the global financial crisis and relatively slower domestic growth, these clients “have become more conservative and now behave more like U.S. clients.”  This means they are looking for safe, conservative lower yield products.  While there are a limited number of investment products and a scarcity for seasoned bankers, which he considers to be the two biggest challenges, Yim sees a lot of growth potential due to improving legal and regulatory frameworks.  And ultimately, because China also has a single culture, currency, language and regulator, he thinks that there are a lot of opportunities for Western private banks to provide diversification, risk management and retirement planning services in what may become the world’s largest economy in the next decade.

Takeaway: With more than 57 million inbound tourists that spent $48 billion last year, the domestic Chinese tourism industries is one of the largest in the world.  Training staff and putting together a brand positioning campaign are just two areas of many that foreign expertise can bring to the growing industry (which may grow from 2 million hotels today, to 5 million in the next four years).  In addition, financial service companies may be able to find opportunities to not only to train local financial firms on bond technicalities but also provide ancillary services to fixed-equity investment programs.  And in addition to conducting your due diligence it is also recommended that you read through Chapter 10 regarding legal and regulatory risks and uncertainties.


Endnotes:

  1. See China’s Foreign Direct Investment Declines for Eighth Month from Bloomberg, China 2012 FDI suffers first annual fall in three years from Reuters and China Overtook US as main Destination for FDI in First-half 2012 –UNCTAD from The Wall Street Journal []
  2. Investment from China in US reaches record high from China Daily []
  3. According to the World Bank total overseas investment by Chinese firms reached $21.4 billion in Q1 2012.  This is substantially higher than $17.8 billion in all of 2009.  See China Buys Overseas Assets from The Wall Street Journal and China’s overseas direct investment strategy from finfacts []
  4. The Shift from East to West: Chinese Investment in North America from Firmex []
  5. See Chinese company buys battery maker that got recovery funds from The Washington Post and Investment from China rises amid concern from The Washington Post []
  6. See Chinese Investment to the U.S. Speeds Up from Caijing from Caijing, Chinese outbound investment accelerates from China Daily, Investment from China rises amid concern from The Washington Post and Make It for China to Buy U.S. Businesses from Bloomberg []
  7. Another area Chinese individuals and firms are now investing in is the US real estate and property market.  According to a recent report, “[b]uyers from China also invested almost $2 billion in commercial property in 2011, or quadruple what they spent several years ago.”  One of the recent deals was led by China’s Vanke (the largest real estate developer on the mainland) who agreed to a $620 million project in San Fransico in December 2012.  See Chinese buyers lead foreign investment in US housing market from Fox News, China Vanke Arrives in U.S. from The Wall Street Journal and Lennar Said to Get $1.7 Billion San Francisco Loan from Bloomberg []
  8. See A Gateway to the U.S. by Daniel Rosen and Thilo Hanemann, China’s outward FDI to reach US$150bn by 2015 from Want China Times and FDI with Chinese characteristics from The Economist []
  9. Chinese firm puts millions into U.S. natural gas stations from Reuters []
  10. Chinese Investment: Europe vs. the United States from Rhodium Group []
  11. After the Boom in Natural Gas from The New York Times []
  12. Another segment Chinese firms are expanding into in the US and Europe is construction equipment.  Sany is China’s largest heavy machinery manufacturer (e.g., excavators) and aims to become the largest globally in the world.  As a consequence it is looking abroad for mergers, acquisitions and joint-ventures.  Perhaps your firm could find a new partnership with them.  See Sany Tries to Gain Traction in the U.S. from The Wall Street Journal []
  13. China takes new step in oil sands from The Globe And Mail []
  14. See Animal Spirits with Chinese Characteristics by Mark DeWeaver and Achieving 2020 from the Brookings Institute []
  15. See Foreign capital rules eased from China Daily and China Capital Account Restrictions Loosened for Foreign Investors by Stan Abrams []
  16. China Big Bang Seen Like London in New Regime: Cutting Research from Bloomberg and Reins on Shanghai set to be loosened from South China Morning Post []
  17. In addition to QFII, a recent report suggests that citizens of Taiwan, Hong Kong and Macau could invest directly into mainland stock exchanges.  See Mainland to allow overseas citizens in stock market from Xinhua []
  18. Graphics: Super Ministry from Caixin []
  19. SAFE Issues New Rules to Further Relax the Foreign Exchange Controls over Direct Investment from King & Wood Mallesons []
  20. See China Scraps QFII Limit on Sovereign Funds, Central Banks from Bloomberg, China’s Stocks Drop Below 2,000 from Bloomberg and China stocks fall below 2000 to 4-year low from South China Morning Post []
  21. See Qatar granted $1b QFII quota from Reuters, China’s Qualified Success In Attracting Qualified Foreign Investors from China Bystander, China pledges to expand QFII, RQFII programs from China Daily and 64 More Institutions Enter China via QFII, CSRC Official Says from Caixin []
  22. China to Expand Short-Selling Program as Part of Reform from Bloomberg []
  23. China Allows Brokerages to Conduct Securitization Business from Bloomberg []
  24. 深圳、珠海商事登记改革3月1日起正式实施国家工商总局支持两地启用新版营业执照from Guandong Province Administration for Industry & Commerce []
  25. See Shanghai makes China’s first direct local-bond issue from Reuters and China Scraps Trial of Local Government Bonds, Studies Risks from Bloomberg []
  26. Regulator Allows Bank Subsidiary to Sell Special Bonds from Caixin []
  27. According to Shang Fulin, chairman of the China Banking Regulatory Commission, as of September 2012 the local government debt collectively amounted to $1.48 trillion.  See High local debt levels coming under control from China Daily and China averts local government defaults from Financial Times.  Other higher estimates can be found in China tells banks to roll over local govt loans: report from Reuters and Are Chinese Banks Hiding “The Mother of All Debt Bombs”? from The Diplomat []
  28. Back in Fashion: China’s Bad Debt from The Wall Street Journal []
  29. Pamria Asset Management []
  30. No exit from China Economic Review []
  31. Private Equity in China: Which Way Out? from The New York Times []
  32. Chinese Headwinds Beset Private-Equity Highfliers from The Wall Street Journal []
  33. China Private Equity Chilled by ’Old Days’ Asking Prices from Bloomberg []
  34. See China’s Stocks Slump to Two-Month Low on Property Curbs from Bloomberg, Finding Investment Opportunities in a Tough Market from The Wall Street Journal and China IPO Hiatus May Prompt Smaller Firms to Seek HK Listing from The Wall Street Journal []
  35. This decline in IPOs is not a new phenomenon; even Hong Kong has had difficulties this past year.  See Bankers See Fees Fade as China Era of Jumbo IPOs Draws to Close from Bloomberg and Hong Kong Has Tough IPO Road Ahead from The Wall Street Journal []
  36. China Private Equity Chilled by ’Old Days’ Asking Prices from Bloomberg []
  37. Doubts Over Returns Hit Fundraising in China from The Wall Street Journal []
  38. See China IPO Hiatus May Prompt Smaller Firms to Seek HK Listing from The Wall Street Journal, Private Equity in China: Which Way Out? from The New York Times, Auditing Spat Dividing U.S. and China Turns Ugly from Caixin and MNCs in China and PCAOB deregistration from China Accounting Blog []
  39. Foreign auditing firms such as the Big Four are stuck between the proverbial rock and hard place.  On the one hand the SEC requires that these firms hand over audit documents to be verified and audited by the government, yet due to Chinese laws, the same auditing firms sometimes cannot hand over some of the documents as the audit documents are considered “state secrets.”  See Deloitte sued over audits of ChinaCast Education from Reuters and MNCs in China and PCAOB deregistration from China Accounting Blog []
  40. The IPO process has been frozen for six months in China because the security regulators are currently reorganizing both the process and the personnel involved in the approval process.  See Finding IPO Alley from Caixin []
  41. The private equity (PE) market has also been directly affected by other policies recently discussed in With Great Power Comes Great Responsibility from Peterson Institute for International Economics.  On the other side of the Pacific, PE and Chinese firms were recently discussed in Chinese Firms Take Lonely Buyout from The Wall Street Journal []
  42. In China IPOs, the Upside of Scarcity for Private Equity from The Wall Street Journal []
  43. Another short term area for opportunities may be as an auditor due to the large dispute between the US and China over potential delistings of Chinese firms from US credit markets.  See What U.S.-China Auditing Dispute Means for Chinese Business Culture from The Wall Street Journal, U.S. audit watchdog chief hopeful on China dispute from Reuters, Auditing Spat Dividing U.S. and China Turns Ugly from Caixin and MNCs in China and PCAOB deregistration from China Accounting Blog []
  44. Developing a Competitive Edge from Insight []
  45. Ibid []
  46. Fosun International Announces 2012 Interim Results Revenue and Net Portfolio Value Continue to Grow from PRNewswire []
  47. For a detailed explanation of criteria and challenges regarding Shanghai’s push to become an international financial center see Achieving 2020 from the Brookings Institute. []
  48. China Bankers Earn Less Than New York Peers as Pay Dives from Bloomberg []
  49. See Starting a business in China from the World Bank and New Path for Trade: Selling in China from The New York Times []
  50. Private Banks Enter ‘Golden Period’ in China from The Wall Street Journal []
  51. Ibid []