Speaker: Anla Cheng of Sino-Century Private Equity and member of Committee of 100
Date: November 16 2011
Interviewer: Hello I’m Fred Tang with China-US Focus and today we have Ms. Anla Cheng, partner at Sino-Century China Private Equity. Ms. Cheng has also worked at Goldman Sachs, Citigroup as well as Robert Flemming, which eventually became a part of J.P Morgan. Ms. Cheng is an active member of the Committee of 100. She is a board member of the Museum of Chinese in America and with the China Institute in America. Welcome Anla.
The Senate recently passed a bill directed at China’s currency valuation. Although the House has not taken up the bill, how do you see the currency situation resolving itself? Will China’s currency revaluation help shrink the trade deficit between the US and China?
Cheng: Historically when you look back, every four years when an election becomes imminent within the US, the US has a tendency to blame others for any mistakes that are going on internally. We’ve seen in the past decades ‘Japan-bashing’ which has been very, very severe. I’ve personally have been thrown stones in Ohio near some of the automobile worker areas because they thought I was Japanese. So I know what its like when an election becomes imminent. This time it’s no different. We are seeing the word ‘currency manipulator’ much more frequently than in the last five years or so. But in fact, one has to recognize that since 2004 the RMB has actually appreciated 30%. And the fact of the reality is that when this happens, not only are there misallocations in terms of the labor force and terms of the manufacturing plants for Chinese companies, but also many of the American companies. Once you study how many American companies have actual manufacturing plants and businesses in China it is staggering we’re talking in the thousands.
So when the US says that China is a currency manipulator its not only hurting China’s perspective but it is also hurting American companies. I think that reality in fact, should be brought up and disseminated much more frequently. If you recall in Japan when the Yen went from 360 yen to where it is currently 70-80 yen or so, three things have happened over the last 40 years. One is that they put manufacturing plants overseas in Southeast Asia whether it be Thailand, Malaysia, Vietnam and actually in China as well. Second is that they automated their plants to make production much more effective and efficient. And thirdly, eventually they started manufacturing in the location of where they manufactured. So for instance cars you have Honda plants here and they actually manufacture more Honda cars than in Japan.
I think the same thing will happen in China you are already seeing outsourcing and they are outsourcing in Vietnam and Southeast Asia, etc. and you are seeing that they are now placing a great emphasis on automation. I see it in my business where Chinese manufacturers are seeking high technology to automate their plants at a very fast speed. Eventually they will start setting up plants overseas. And in fact, you’re seeing that some manufacturers in China are already saying that it is cost effective to create plants produced right here in the US. In fact, Obama and the administration has done a study through the Boston Consulting Group that states that for every $1 billion export that the US has would create 6,250 jobs and that their goal within five years is to create 2 million jobs.
So I think these three things will happen over time however, because in China their number one goal now is to create the next 300-400 million middle-class having successfully done so in the last 25 years, they want to make sure that there are no sudden disruptions within the economy and sudden appreciation of the RMB, not the 2 or 3% that they’ve been seeing gradually, but a 10% or 15% which is what the US Senators would like to see. It’s probably not advisable not only for the Chinese but also for American companies which are placed in a large way in China.
Finally what I want to say, I want to quote Byron Wien, who used to be the head strategist at Morgan Stanley and is currently a senior partner at the Blackstone Group. He said recently that it is not prudent to call those who lend you and are helping you finance the economy within the US, to call the China a currency manipulator. It’s not prudent because it creates bad will and in fact, it also hurts many US companies as well. So he says be nice to China, we really need to appreciate that China is lending a hand to the US. So I think in the long run, the senators are using this as a political maneuvering to pass a veto if Obama passes it, which I personally am not so sure that would happen. But if it does happen it would mean detrimental issues in terms of trade disputes, trade wars, etc. and we really want to avoid, at any cost, that type of scenario.
Interviewer: You’re always concerned for the small and medium sized enterprises. We might be facing slow growth. We might be facing inflation. How do you see China in terms of taking some measures to provide support for those businesses?
Cheng: Well in China SME’s, the small and medium enterprises employ 90% of the population. They produce 60% of GDP and pay 50% of the taxes. This is a huge chunk of China that the government and the banks have, I wouldn’t say ignored, but have not placed priority on. From the bank’s perspective, they have preferred to lend to the SOE’s, the state owned enterprises because basically these are effectively government entities and therefore, have government backing. Therefore from the banks’ standpoint they can reduce their risk exposure by lending to SOE’s. They really haven’t been encouraged to lend to SME’s.
However this recent incident in Wenzhou that you probably want to touch again later was sort of a pivotal tipping point and that is there are over 400,000 enterprises in Wenzhou but about 90 CEO’s abandoned their companies because they just couldn’t get enough funding. There were a handful of suicides, that made sensational news and in fact, the head of the largest spectacle company, that make probably your glasses as well, he fled and came to New York for about 20 days in the middle of October. And that prompted Wen Jiabao the prime minister to fly to Wenzhou and actually make a plea to the entrepreneurs, the 90 entrepreneurs that abandoned their companies, and said we recognize you SME’s are in trouble and we recognize that the banks have not lent to you and we recognize that even your ‘shadow banking’ and your ‘gray loans’ are not working out and we will try to make an effort to do something. And that has been a turning point. So in the last few weeks Wen Jiabao has said that he wants to fine tune the economic policies and allow a number of things.
One, is that they are loosening on the quotas for SME’s to lend and in fact, last month alone the banks, the lending has gone up by like nearly 34% or so, I’m sorry maybe 25%, but it’s a sizeable, recognizable amount. The second is that they are possibly cutting reserve requirements, which as you know has been going up for the last year and a half or so. That could be very imminent, it could happen this month or at least before the end of this year. And thirdly, what they are allowing is creating bonds for the first time. Shanghai in fact announced today that they are allowing issuance of bonds and a pilot program to lend to state owned enterprises and to the provincial governments, to help these, some of them are property developers some of them are SME’s. And the same thing for the province of Guangzhou, this Friday they will issue a $1 billion equivalent of bonds to help the SME’s and property developers.
So I think it’s happening, I think the worse is a little bit behind us now, and I think the government is saying now so let’s focus on inflation which has been a real concern. You’ve seen that in the last month inflation has come down from 6.2 to about 5.5% and I think the trend is trending down. So the government says lets fine-tune. Rather than focus on inflation control, we are now going to focus on growth. So I think SME’s are going to be helped, but they aren’t helped enough.
In China I mentioned that it was 90% of the employment. And yet in the US, you got a group called the SMB, Small Business Bureau and Administration. I think an organization equivalent to that in China could be very helpful to help Chinese SME’s. Also most of their funding in the US come from commercial banks and some of it comes from credit cards. I personally do not recommend credit card borrowing for SME’s but I think the commercial banks need to be much more active in helping SME’s within China and I believe that China is on its way to recognizing that and will implement those policies in the long-run.
At Sino-Century, our main focus is investing in small and medium enterprises so we’re very fully aware when there’s a shortage of funding and when there’s restrictive that hurt the SME’s.
Interviewer: There’s also been a lot of talking about a housing bubble. Is this real? In what form? If it happens what impact would it have to China?
Cheng: I think one has to ask how do you define a bubble. If you look at the definition it is defined as excessive assets that is beyond or reaching absurd values. You’ve seen that in the Internet bubble, you’ve seen that in Japanese real estate stock prices and real estate prices overall in Japan. And you’ve also seen it in the housing in the US. I for one at one point recall so vividly that in Japan the stock prices reached 300 times P/E. And you’re really not seeing the type of levels in China yet and also, at the time, when these various bubbles happened, there is always a crash that follows, there is a huge destruction of wealth, that could be followed by a depression or long periods of recession. I don’t think we’re seeing that yet in China.
There are also various metrics that you can measure in terms of housing and that is housing prices over income. For that in China, the average is about 10 times, in Shanghai its about 12 times, and Beijing its 16 times. In the US, its about 3 times. So it’s a fact that the housing prices in China are really way too high for the average individual to be able to purchase. And so for that reason, the Chinese government has decided to take a more restrictive stance in lending policies by restricting individuals to buy second and third and fourth homes by increasing the amount for down payment. And it’s working because in the last month and a half or so, you’re seeing nationwide prices not only in land transactions and real estate prices in terms of developer starts, you’re seeing a decrease of anywhere between 5 to 30%.
And I think we are avoiding a hard landing at this point and I just want to emphasize that this exercise has been all deliberate by the government, and it’s not market force but it’s really from the top down from the government to make sure that A)a they control inflation and B) that they control the runaway property prices. So to answer your question, personally, I do not see a bubble, we don’t think we’re going to have major four closures, you’re not going to see a huge loss of employment. We want to make sure that the prices decline, not 40, 50 or 60 percent but I think around these levels, the government is comfortable to start loosening up a little bit and I think that Wen Jiabao made that statement and I think that you’ll probably see loosing not so much for real-estate lending, but I think you’ll see that the prices not falling that much more from this point onwards.
Interviewer: So China is dealing with a lot of internal problems. Internationally, such as Europe, also in financial trouble, and they’re asking China to help, should China help finance the multibillion dollar plan to resolve some of Europe’s debt crisis? And if so, is it reasonable for them to attach certain terms along with that financing?
Cheng: This is a very sensitive question, and I’m not a politician, so I hope I don’t say the wrong thing, but it is a fact that Europe is the largest trading partner to China now. Most of it has been in high tech so it’s helping China automate, to advance it’s manufacturing process, and I think for that China is very grateful. So to that extent I think it’s prudent for China to come up with a creative solution to help Europe to the extent that it can. On the other hand, as you know micro blogging in China is a very big way for individuals to let out their grievances and it is clear that the micro blog, the decimal level has really exponentially increased and the populous is basically saying why should we Chinese help Europeans who are much richer than we are, who work less hard than we are. Why should we help them when we need help first?
So it is a legitimate concern that the government to take care of. I think it’s that kind of pressure that made Wen Jiabao and Hu Jintao make some blatant remarks about how the conditions that China put on Europe would be rather stringent which made the European politicians respond that we don’t want to beg for China’s help. And either way it’s a good thing because if China does help in whatever creative form, it’s helping Europe. If it does not help, at least it’s shaping up Europe to get its act together. And it’s very important that Europe really band together to come up with solutions.
I was very encouraged when I read today’s op-ed page in the FT by Bill Rose who is the chairman, one of the chairmen of Citigroup, saying that the IMF which had a pivotal role in the past to help situations like this, this is their chance to be able to stand up again, and help, be sort of the agent between Europe and Asia to help this type of crisis. And I think one of the suggestions that was suggested in another article I think makes perfect sense, and that is for China not to help directly to Europe, but perhaps with the help of IMF as an agent, get together, gather forces from Asia, whether it’s India, Singapore and any other countries who want to help, create a basket to come up with an European bail out fund and to help Europe in some way. I think it could be a win-win situation. It would win goodwill and it would also be an investment that China will be able to benefit from in the long run. We all want China to become a stakeholder, as it gains, rises in power. This does not mean we want China to become a policing entity, but clearly to help out your brethren countries in the time of need is something we want China to step up into.
Interviewer: This also deals with some recent changes in the top financial regulatory posts in China. And leadership is important and do you think there will be any immediate changes in terms of the financial and business policies as a result of these changes?
Cheng: Right, as you know next year, 2012 is the year that we will have a change in the leadership in both prime minister and president roles in China. And along with it will be a lot of shuffling. The recent shuffling basically accomplished 2 things.
First it allowed retiring members, particularly from the CBRC, the China Banking Regulatory Commission and the CIRC, the China Insurance Regulatory Commission, Mr. Liu and Mr. Wu to retire, so that’s done. The second is to allow those other rising stars to move into these three very important regulatory jobs. And Mr. Xiang, who used to be the head of the CSRC is now the head of CBRC and he has done quite a bit at his tenure at CSRC. The ChiNext, which is the Nasdaq equivalent. He has also started the futures trading, margin trading. Just remember that the stock market only started in the 1990. It is a huge change that we’ve seen.
China now has the largest number of IPOs at 380, larger than United States and Europe put together — that's the number of companies that have been IPO-ed. It’s tremendous. The size of the assets of the stock markets has grown exponentially and this created a tremendous amount of wealth so the job that Mr. Xiang has accomplished while at CSRC is really to be commended. His job as CBRC though is also a very big job, and that only five, six, seven years ago, banks were a pretty simple entity, receiving cash, and then writing sort of a receipt for giving loans. Now the banks, with the help of American entities such as Goldman Sachs and Morgan Stanley, have gone on a huge IPO spree over the last five, six, seven years. And they are some of the largest banks, largest entities that’s in the world. I think that a lot of the American entities ought to be thanked for having to helped China to create such wonderful institutions. They’ve gone on to engage themselves in merchant banking and investment management and investment banking and they’ve learnt their ways to become a real global entity.
I think the challenge that Mr. Xiang has at this point is to develop the bond market, which is still nascent in China. The new bond issuing in Shanghai and in Guangzhou would be an interesting entree into this area. I think the other thing that he apparently has a big challenge is in is to make sure that the bonds will not be associated with the bank, therefore ensuring he can separate the risks in the bond market from the banking sector. So I wish him luck for that. Secondly, for the CSRC job, there is a Mr. Guo Fuqing I believe, who will be taking over this job. Mr. Guo speaks perfect English, he was educated in Oxford, and his job as the head of CSRC, is to continue this wonderful growth that we’ve seen.
Recently there was a TCFA conference I don’t know if you’re familiar with it, but it’s The Chinese Finance Association. My business partner is the president of this organization. We had somebody from the CIC speak, he’s the head of the asset allocation, and he made it very clear that the market and the financial reform has started, has been going on for 20 years but they still have another 20 years, 20, 30 years to go to complete this total reform. And it’s objectives are very impressive. At the end of that conference he turned to the association (there are alltogether 2000 members, but at the conference itself there are about 400 members) and said: ‘each of you is responsible to make sure that we complete this market reform.’ Meaning that there will be many jobs that will be created from this financial reform. Through the CSRC, through the IPOs, through help in making sure that these companies grow and are institutionalized enough to audit it properly and corporate governance plays in such a way that they deserve to be IPOed. So I think it’s a very exciting job. I think for him the job ahead is to make sure as a I mentioned, corporate governance is applied, that auditing methodology that the reporting mechanisms are transparent, and that these Chinese companies become international entities that create brand names that are recognizable.
Lastly, Mr. Xiang Junbo who used to be the head of agricultural bank, whom I personally know, has been selected to become the head of CIRC of the insurance company. I personally don’t know enough about the insurance company to make an intelligent remark, but I understand that the challenges that he has are multifold. One is to help the China life payment insurance to develop into a mature entity. And secondly I think the agriculture insurance business is apparently quite nascent and needs to be developed, having been the head of the Agricultural Bank, he’s in a position to be able to help that. So many things, much more to be done in these areas and I’m looking forward to seeing the financial development of all these industries.
Interviewer: With that, Anla, thank you very much for sharing your perspective with us, and thank you for watching ChinaUSFocus.