Summary
- The United Kingdom and Singapore are leading the way in establishing a foothold in China’s rapidly expanding economy.
- With all of the frenzy about Internet and high tech companies, it is nice to see that many investors are wisely choosing to invest in good ol’ industrials and consumer staples…not sexy investments, but strong and stable performers.
- Of course, financials are pulling in most of the investment capital by value. I predict that these investors will face a very bumpy ride over the next few years as the many “dead bodies” in these Chinese banks float to the surface.
- “Complex regulatory regime and its multifaceted tax system”??? Come on…it’s not that difficult! It requires some knowledge and experience and a willingness to do things in a slightly different way, but it’s not rocket science!
Analysis
I was surprised to see how much of a lead the US is taking in investments/acquisitions in China. Living in Shanghai, it feels like I am surrounded by Europeans at all of my favorite North American-style restaurants (Malone’s, Blue Frog, Moon River).
Also, it was encouraging to see the statistics about the number of deals finalized in various sectors. [”the high-technology sector accounted for the highest number of cross-border deal activity (16 percent). This sector was closely followed by the materials (14 percent), industrials (13 percent), financial services and consumer staples sector (both with a 12 percent market share)"]. There have already been so many highly publicized deals in the Internet sector, so I would have expected a larger number of high tech sector deals. Funny how these Internet investments get lots of free PR and then they seem to disappear quickly, or implode as in the case of eBay (OK, C-Trip worked out very well for early investors).
Investments in banks: Ahhh…one of my favorite dogs to kick. I hereby officially predict that every investor that put money into the recent public offering of ICBC is going to be feeling great pain over the next five years. Why do I think so lowly of ICBC? First of all, similar to all other major Chinese banks, it is managed like the very worst of the old state-owned enterprises. No structure, no discipline, and no clue on what to do next. Second, I guarantee you that there are loads and loads of “dead bodies” that will be floating up to the surface over the next few years, e.g. much more bad debt than expected, and massive internal corruption. Third, service…ICBC has never heard of the word.
“Complex regulatory regime and its multifaceted tax system”??? Come on…it’s not that difficult! Most of the problems that you often read about in the news (for example, Carlyle’s big trouble in buying out XuGong) could have been easily avoided with some early-stage communication with government officials. My strategy is to get them involved early, make sure they are ok with the deal, and get them committed to the success of the business investment. On the other hand, you could follow Carlyle’s approach and just assume they are going to support you because you are bringing money into China. Mr. T would say “I pity the fool that makes that mistake!”.
As for taxes, they’re fairly straightforward and surprisingly logical. Admittedly, I still get a bit confused by VAT, but that’s what the accounting department is for, right?
Takeaways: Don’t get China Internet fever, don’t invest in Chinese banks, and be smart about getting early government support (i.e. unofficial pre-approval) for your industrial or consumer sector investments/acquisitions.
