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12/06/2011

The State of China’s Economy and US-Listed Chinese Companies


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Ten years ago, when you read The Wall Street Journal, you barely noticed articles about Chinese public companies. Today, when you click your iPad app, WSJ.Com, China-related news generates daily headlines. On Oct 24 2011, the New York Society of Security Analysts (NYSSA) joined with China Council for International Investment Promotion (CCIIP) to host “2011 Chinese Companies Listed on US Market Development Forum”, which provided an opportunity for US investors to have an open dialogue with several Chinese companies. Not surprisingly, this forum drew a lot of attention from an audience that including both private and institutional investors. When analyzing the complex interdependent relationship between the fast-growing Chinese economy and the globally dominant US economy, one must understand three key points.

  • The US and Chinese economies are closely tied together.
  • China’s growth provides enormous opportunities for US industry and businesses.
  • An understanding of the Chinese culture is important for US investors conducting business in China, as is an understanding of US business practices for Chinese companies that seek to do business in the US.

The world’s two largest economies have become deeply interrelated. According to the Montreal Gazette, the US is China's largest trading partner, with $385 billion in two-way trade in 2010, an almost 30% jump in a single year. From 1998 to 2009, China’s exports to the US accounted for 20% of the Chinese total export amount. Besides holding a sizable trade surplus, as of May 2011 China also held 36% of all foreign-held US Treasury securities, which make it the biggest creditor of the US. Qin Jiao, a Market Analyst from Dragon Gate Investment Partners showed that since 2009 the Dow Jones Index has become more correlated with the China Shanghai Composite Index. From an investment perspective, US companies have stepped into the Chinese market and enhanced the nuclear, green technology, and energy industries, all areas with high growth potential.

Figure 1: Dow Jones and the SSE

ChinaSSECompositeIndex

Modified from Yahoo Finance, accessed November 2011

China’s growth has already provided tremendous investment opportunities for US investors and should continue to have great potential. In 2008, China pledged 4 trillion Yuan, about $580 billion USD, to stimulate its economy to avoid recession. The funds represented 20% of China's annual economic output. According to J.P. Morgan’s analysis of the 12th Five-Year Plan, industries such as basic materials, retail products, and alternative energy will get a dramatic boost. Both industrial conglomerates and top tier financial service companies are seeking decent returns upon Chinese future market growth. Recently, Boston-Power, a Massachusetts-based battery and green technology company, shifted its whole business plan, cutting 35% of its US operation and expanding in China. American companies from Apple to Ford Motor, from Starbucks to H.J. Heinz, from Gap to American Apparel are all expanding aggressively in mainland China.

Figure 2: J.P. Morgan's Analysis for China's 12th Five Year Plan
 
ChinaTable2

An understanding of the local business and government practices is important for US corporations and investors. The Roman philosopher, Lucius Annaeus Seneca said, “As the soil, however rich it may be, cannot be productive without cultivation, so the mind without culture can never produce good fruit”. The Chinese and Americans approach conflicts and agreements differently and knowing the difference can facilitate business relationships. For instance, if you have conflicts with your Chinese business partner, how do you deal with it? Speak truth out aloud or show respect to your business partner first? In China, the manner with which you speak can be more important than what you actually say.

The dispute between Yahoo and Alibaba is a good example. The relationship between Carol Bartz, Yahoo’s previous CEO, and Jack Ma, the chairman and CEO of Alibaba Group became intense owing to divergence of opinions. Culture difference is one of the factors deteriorating Ma and Bartz’s relationship. News that Bartz had been fired generated hundreds of comments; there is one very interesting saying that her tense relationship with Ma fed investor dissatisfaction about her leadership. Therefore, culture understanding is very important during communicating with Chinese partners.

At the “2011 Chinese Companies Listed on US Market Development Forum,” Mr. Miao Gengshu, the president of CCIIP, gave an insightful speech on the current situation regarding the Chinese companies listed on the US markets. He pointed out that he counsels Chinese entrepreneurs to learn from and adapt foreign ideas in building their business.

Jeff Sine, the co-founder and a partner of The Raine Group—a merchant bank in the global entertainment, sports, and digital media industry—also discussed his expectations for the Chinese companies and suggested actions they should consider. Sine, who has focused his career in the global media and technology industry noted, “Chinese companies in my sector have returned approximately 103% for investors over the past five years, much higher than the total return of 12% for the NASDAQ and loss of 10% for the S&P 500 over the same period.” The Raine Group has risen over $14 billion for Chinese companies in the TMT sector. “We believe the rapid secular growth in Greater China will continue for the foreseeable future, and will be particularly pronounced in the entertainment, media, sports, consumer, and lifestyle sectors. We also believe demand for international content in China will increase and China-based companies will expand globally, seeking strategic capital and partners,” Sine said.

Sine also explained, “Chinese companies are attracted to US exchanges mostly for the prestige and brand recognition of the NYSE and the NASDAQ names. However, Chinese companies have been rocked by a wave of events and fraud allegations that have led to dozens of suspensions and de-listings from US exchanges. To borrow an old Chinese saying, ‘one mouse dropping has ruined the whole pot of rice porridge’. There are a lot of good Chinese companies with strong underlying performance—these companies will ultimately always do well.”

During and after the presentations, both the Chinese companies and the US investors actively discussed the current situation and reached a consensus on reviving the market. Some of the advice to Chinese companies included:

  • Select your advisors carefully—for their experience, their reputation, and how they will support you in the aftermarket.
  • Appoint board members with significant industry experience and risk management expertise who can act as credible, independent voices in the board room.
  • Place an emphasis on investor relations.
  • The key to sustained superior valuation is to under promise and over deliver.
  • Take care of the minority shareholders.

China-Trip


We would like to invite you to explore Chinese culture for yourself, learn first hand about the Chinese economy, markets, and business climate. NYSSA is delighted to invite you to attend Investment Program in China: What Is Really Going on with US-Listed Chinese Companies". Learn what is really going on the US listed Chinese companies. Meet the people who have expressed interest in doing business with the US Learn which sectors are most favorable for US investing and make invaluable personal contacts in China that would be difficult to make from your desk in the US

–Zhouman Liao & Lijie Zhu

Lijie Zhu is the managing director of Dragon Gate Investment Partners and the vice chair for the China Council of International Trading Promotion. Zhu has a decade of experience in the financial and media industry in America, Europe, and Asia. She was the chief financial officer for a solar manufacture company listed in the US market. She also has experience as a credit analyst for Rogge Global Partners in London, and a financial analyst for Aufhauser Securities in New York. Before moving to the United States, She worked as a business reporter for several Chinese media including China Center Television (CCTV) and China News Agency. Currently, she leads a career development program for the New York Society of Securities Analysts (NYSSA) and is a Board member of the Asian Financial Society. She graduated with a MBA and a MS degree from the University of Alaska Fairbanks, and a BA degree in Journalism and a Law Degree from Lanzhou University in China. 

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