China is quietly
cultivating a home-grown private-equity industry.
That could soon mean fresh
competition for high-powered foreign investors like TPG, Carlyle Group and
Kohlberg Kravis Roberts & Co., which are going after the country's prime
This week, China's
securities regulator cleared two of the country's strongest domestic
investment banks, China International Capital Corp. and Citic Securities
Co., to make direct-equity investments. That approval lifts a ban on
private-equity-style investing by securities firms that had been in place
since April 2001.
They now join Bohai
Industrial Investment Fund Management Co., which at the end of last year
became the first yuan-denominated private-equity fund in China to adopt the
same model as Western rivals.
international funds are pouring into China," says Au Ngai, the
39-year-old chief executive of Bohai Fund. "It's only reasonable to
think that somebody will make the connection and say: 'Why couldn't we?' "
Private-equity firms raise
money from large investors to buy up companies -- aiming to fix them up and
eventually sell them again at a profit.
China "isn't short of
capital, and it isn't short of deal-flows," notes Mr. Au, in an
interview at the fund's office in the northeast port city of Tianjin.
Until recently, unfavorable
tax laws hampered the development of a domestic, yuan-denominated
private-equity industry. Yuan funds had to pay income taxes, and their
shareholders also paid income tax on their returns. That changed June 1,
when China established a law allowing for a private-equity structure that
eliminates the double taxation. The management company earns its gains
tax-free, but individuals are still responsible for income taxes.
China's financial system
remains flush with liquidity, despite the global credit crunch brought on by
problems in the U.S. housing market. Some Chinese officials have grown wary
of turning over control of state assets to foreigners. Domestic
private-equity funds may represent a key tool for the government to
counterbalance an influx of foreign capital.
But turning to local
institutions to restructure Chinese companies could be hazardous. When
Chinese securities firms made unregulated investments in the late 1990s,
including private-equity-type deals, Beijing dipped into its
foreign-exchange reserves to bail out many of them and closed others.
In the past, Chinese banks
and state-run investment funds have come under pressure from local
government officials to bankroll pet projects that fail to produce healthy
Investors such as Gao
Xiqing are well aware of the risk. A Duke University-trained lawyer, Mr. Gao
manages investments for the country's $37.4 billion national social security
fund, which is an investor in Bohai.
"We were concerned
that this was very much government-controlled," Mr. Gao says. "At
least for the near-term I feel positive, very positive, about it," Mr.
Gao told an investor conference earlier this year.
For Bohai, which is
53%-owned by Bank of China Ltd. and its investment-banking arm, an industry
veteran like Mr. Au could make a difference. In 2004, he worked on TPG's
landmark purchase of a controlling stake in Shenzhen Development Bank Co.,
which remains the only Chinese bank controlled by foreigners. He remains a
director at the Chinese bank. About a year ago, Bank of China's
investment-banking arm asked Mr. Au to lead the Bohai Fund project and he
jumped from TPG (the former Texas Pacific Group) to take the helm.
Problems in global credit
markets aren't likely to affect Bohai Fund's ambitions, which are modest by
international standards. The fund is sitting on a war chest of 6.1 billion
yuan (about $810 million) raised last year from investors, including a
number of big players with state ties, such as China Life Insurance Co., the
country's biggest life insurer, and China Development Bank.
of China, some private-equity deals have unraveled as banks have demanded
higher interest rates to finance leveraged buyouts. But within China,
private equity is usually an all-cash affair.
Mr. Au, who says China's
economy is "sealed off from the shock" reverberating through
global credit markets, adds that rising interest rates in China could make
direct financing like private equity more attractive than bank borrowing.
Mr. Au says the fund, which
will shoot for investments worth more than 500 million yuan, is
"cranking on deals" and hopes to close its first in the near
future. The Bohai fund, founded in part to stimulate economic growth in
China's northeast, is required to invest at least half of its current
capital, or around $400 million, in a Tianjin special economic zone.
Last year, private-equity
deals outside of the financial industry reached $817.9 million, continuing a
steady uptrend. The march of China's state bank toward listings in 2005 and
2006 provided a boost to private-equity deals in the financial sphere that
is unlikely to be repeated. For instance, Goldman Sachs Group Inc.'s
private-equity arm took a stake in Industrial & Commercial Bank of China
Ltd., the country's biggest bank by assets, as part of a $3.78 billion
China signaled its growing
interest in private equity this past May, when it agreed to purchase a $3
billion stake in Blackstone Group LP through a new state investment agency.
This week, Blackstone reached an agreement to buy a 20% stake in China
National BlueStar (Group) Corp., a state-owned chemicals maker, for $600
But in the past year, China
has slowed sales to foreigners amid concerns that the country previously had
let go of some state-owned assets too cheaply. Carlyle, one of the largest
private-equity investors in China, has encountered difficulty getting some
deals approved, including the acquisition of a 45% stake in a big
construction-equipment manufacturer, although it is getting smaller deals
done. - 2007 September
ST. JOURNAL By
RICK CAREW in Tianjin, China, and LAURA SANTINI in Hong Kong
The New Power Brokers
They grew up during China's Cultural Revolution, when Mao Zedong's brutal
political campaigns in the 1960's and 1970's tore apart families, pitting
children against their parents and husbands against their wives.
Today, they are some of the most powerful deal makers in China, a group
of rich and politically astute investment bankers who are helping transform
China's economy and restructuring some of its biggest corporations.
Every major investment bank now has a Chinese-born star banker: Goldman
Sachs has Fang Fenglei; Merrill Lynch has Erhfei Liu; Morgan Stanley has
Jonathan Zhu; J. P. Morgan has Charles Li; and Citigroup has Wei
They are so powerful and so sought after by Wall Street's biggest firms,
their pay packages can reach $10 million a year after bonuses.
The major Wall Street investment banks generally decline to talk about
how their top-level bankers operate; few of the banks would agree to comment
publicly for this article.
But a great deal is known about this crop of fairly secretive bankers,
most of them having traveled west in the 1980's to study in the United
States. They have since returned home to play pivotal roles in a growing
number of cross-border megadeals. Erhfei Liu of Merrill for example, was
behind the scenes when Lenovo, China's biggest computer maker, purchased
I.B.M.'s personal computer business. A few weeks ago, Charles Li and Fang
Fenglei, two Chinese-born bankers, were at the center of things when the
China National Offshore Oil Corporation, known as Cnooc, one of the huge
state-owned oil companies, made a $18.5 billion bid for Unocal.
That deal alone could earn lawyers and investment bankers up to $300
million in fees.
It has been a long, sometimes tough, road for these bankers. For years,
Westerners called the shots at investment banks operating in China, and they
still do to some extent. Even now, some argue that the relationships and
navigational skills of these new bankers are more valuable than their
hard-core banking skills.
"These are the new deal makers," said Jack Huang, head of the
Greater China practice at the law firm of Jones Day. "Morgan Stanley,
Merrill Lynch, Goldman Sachs. Look at their organizational chart and you'll
see a lot of Chinese-born bankers at the junior and senior level now."
Of course, the rise of Chinese born star bankers does pose some risks to
the banks. There are worries that these bankers could disrupt their
companies' corporate cultures if they are perceived as stars. There are also
concerns that currying favor in China's often corrupt political and
financial system could end in scandal.
And there are expensive bidding wars that periodically break out here
even though China still accounts for only a fraction of the global revenues
of the major investment banks.
Still, the new power brokers are on the rise. They are mostly in their
40's, born in China and educated in the United States. They were raised as
Communists, but were schooled in capitalism.
The large banks, though, like to insist they are not operating under a
star system. And it is clear that these bankers are backed and supported by
the power, prestige and resources of the world's richest investment banks.
Mr. Liu at Merrill was a lead banker on the stock offering of the China
Shenhua Energy Company, Hong Kong's largest - though not its most successful
- listing so far this year. His star power also helps Merrill's influence,
as it advises Haier, China's biggest appliance maker, in a bidding battle
These bankers are paid handsomely, the firms say, because they can get
access to powerful officials and then navigate the complex byways of
East-West deal making.
"These people are rainmakers and well-respected inside the
bank," said Marie W. Cheung, a spokeswoman at the Hong Kong office of
J. P. Morgan.
It is not just Chinese-born investment bankers who are gaining influence:
major law firms, venture capital firms and multinational corporations are
also starting to turn to Chinese-born, Western-educated executives.
Weijian Shan of the Newbridge Capital Group was a barefoot doctor during
the Cultural Revolution. Andrew Y. Yan and Jing Huang at the Softbank Asia
Infrastructure Fund returned home to invest $40 million in an online gaming
company in Shanghai called Shanda in 2003. In January, they sold that stake
for over $500 million.
For years, Chinese-born bankers often played second fiddle to Hong Kong,
Taiwan, Singapore or Western businessmen. Now, at the highest levels of deal
making, the pedigrees are unmistakably Chinese.
Charles Li worked in the offshore oil fields of northern China in the
late 1970's for the predecessor company of Cnooc. Now he is the top banker
in China for J. P. Morgan and one of the lead deal makers behind the Cnooc
takeover bid for Unocal.
Jonathan Zhu, who was born in Shanghai, studied Wordsworth at Cornell in
the 1980's. Now he is Morgan Stanley's point man on what is expected to be
one of the world's largest initial public offerings this year, by the China
"Having the right cultural background in China and Wall Street
experience: that is the most sought-after combination of skills," said
Steve Xiang, a lawyer at Weil Gotshal & Manges and one of the few
Chinese-born lawyers who worked on the Lenovo acquisition of I.B.M.'s
personal computer business this year.
Many of these bankers grew up during the Cultural Revolution. Some saw
their parents imprisoned or denounced as "capitalist roaders."
Some roamed the countryside as teenagers or worked as peasant farmers. And
those experiences helped harden them for the boot camp of Wall Street.
"I stayed in Beijing and as a student finished my primary and high
school education (while my parents were persecuted)," Wei Christianson
wrote in a recent e-mail message.
But after the Cultural Revolution ended with Mao's death in 1976, many of
them enrolled in college and then were among the first wave of students to
study in the United States.
Most of these "red capitalists" later rose through the ranks of
America's biggest investment banks, crunching numbers or writing legal
briefs first in New York and then in Hong Kong, where the China operations
of all the major investment banks are still based.
Yet even in the late 1990's, the top Chinese born bankers here were seen
largely as "relationship men," whose primary job was to connect
the firms with high-level Chinese government and corporate officials.
Nearly every Wall Street firm privately acknowledges hiring some bankers
for their connections - in the past, they were the "princelings,"
or the sons, daughters or relatives of high-ranking Communist Party
officials - to help smooth deal making.
The role of relationship bankers came under greater scrutiny last year
when Margaret Ren - the daughter-in-law of the former Chinese leader Zhao
Ziyang and considered one of the most powerful Chinese-born bankers - was
dismissed by Citigroup for misconduct.
While China is still not a significant revenue or profit center for Wall
Street firms, the deals here are getting bigger and more lucrative, analysts
And so the firms are willing to pay millions of dollars to hire bankers
like Fang Fenglei, 53, of Goldman Sachs, and Zhang Liping, 47, of Credit
Suisse First Boston, who are both thought to have remarkable access to
China's power elite.
Mr. Zhang was one of the first Western-trained bankers to operate in
China in the early 1990's, when the markets were just opening up.
Mr. Fang is the only Chinese-born top banker without a Western degree or
English fluency. But that did not prevent Goldman Sachs from hiring him last
year to run its joint venture investment banking operation in Beijing, and
extending a $100 million loan to him to start the venture.
Part of their edge, these bankers say, is that they have gained access
and can meet regularly with high-level government officials and the heads of
major corporations. Success has come, however, from how well these bankers
have anticipated the next moves of these corporations, or how smart their
proposals have been for business deals.
Wall Street bankers need to be led, these Chinese-born bankers say, by
someone who can earn the trust and respect of Chinese officials and
executives but also know how to marshal the resources of a Western
Having lived through the Cultural Revolution, many of these bankers say
they are well suited to dealing with Chinese government and corporate
"When you're engaged in high-level negotiations, it's the nuances
that are important," said Mr. Zhu, who last year was named chief
executive at Morgan Stanley China. "In the M.& A. business, it's
about understanding people."
Foreigners still fly into China to complete big deals, experts say, but
as Chinese cross-border deals get larger, these Chinese-born bankers will
gain experience and take on greater decision-making roles.
John Healy, who worked as the lead lawyer for Clifford Chance when the
firm advised Lenovo on its acquisition of I.B.M.'s personal computer
business, said complex deals still rely on foreign bankers and lawyers with
expertise in cross-border deals.
But, increasingly, he said, Chinese-born bankers and lawyers will take
"They'll come to play an increasingly important role," he said.
"Then people like me will become dinosaurs." - by
David Barbossa NEW
YORK TIMES Shanghai 18 July 2005
The power brokers
They are known as the ``princelings'' or taizidang,
and they are the mainland's rainmakers. Family connections to the very
highest levels of China's government are their stock in trade. Indeed, most
are scions of former senior Communist Party officials or their closest
allies, and are thus in great demand.
Foreign firms, especially investment banks, court
them aggressively, and pay them well, in hopes that their connections will
gain the firms and their clients privileged access to Beijing's top decision
Mainland firms are no less anxious to make use of
their influence, well aware that a princeling on the board of directors can
make all the difference between winning official approval for a lucrative
Hong Kong share sale and languishing in underfunded, provincial obscurity.
Most keep deliberately low profiles, though
sometimes they hit the news in a big way. The latest to do so is Margaret
Ren, recently suspended by Citigroup, the bank said, for ``presentation of
false information to the company and its regulators''. The daughter-in-law
of former Chinese premier Zhao Ziyang, Citigroup poached her from rival Bear
Stearns in 2001 in the hope she could make the bank a major presence in the
rapidly growing mainland market, where Citigroup had been something of an
That was soon to change. Within a couple of years
of her arrival, the New York-based bank won potentially lucrative mandates
to advise China Netcom and Minsheng Bank on planned overseas share sales.
Then came the big one - the US$3.5 billion (HK$27.3 billion) sale of shares
for China Life Insurance in December last year.
Rival banks quietly whispered that Citi's
new-found success had little to do with its investment-banking prowess and a
lot to do with Ren's family ties. What they did not mention was that all
large investment banks have at least one taizidang on the premises, many of
whom have greater access in Beijing than Ren. Her father-in-law, after all,
has been under house arrest for much of the time since he lost power
following the June 4, 1989 Tiananmen killings.
Earlier this month, Swiss bank UBS hired George
Li, the son of Li Ruihuan, former Politburo member and current chairman of
the Chinese People's Political Consultative Conference to help ``boost'' its
mainland banking operations.
At Merrill Lynch there is Janice Hu, granddaughter
of deceased Communist Party chairman Hu Yaobang. The jewel in the crown at
China International Capital Corp (CICC), the country's best-known investment
bank, is undoubtedly Levin Zhu, CICC's top mainland investment banker, who
also happens to be the son of former Premier Zhu Rongji.
Shanghai Alliance Investment (SAI), which has an
insurance joint venture with Citigroup, has long been controlled by Jiang
Mianheng, son of former president and incumbent military chief Jiang Zemin.
Not surprisingly, the princelings and their
families are frequent targets of charges of nepotism, though in truth many
senior officials try hard to rein in their offspring, aware of the
antagonism it can cause in a populace unevenly divided between the poor
masses and the rich few.
Many princelings have also earned their
professional status by dint of hard work as much as by birth. Merrill's Hu
has a degree from Cambridge and is regarded by many in the business as an
Levin Zhu has an accounting degree from Chicago's
DePaul University. Ren herself, a graduate of the Massachusetts Institute of
Technology, is held in high regard by many Hong Kong finance industry
professionals. She is also a trained cardiologist, of all things, with a
master's degree in management from MIT.
Then there are the princelings who seem to revel
in their positions. Perhaps the most interesting current member of the
taizidang is Wilson Feng, who was hired earlier this year to help push
Merrill back up the investment league tables.
Not a princeling by birth, Feng, like Ren, relies
on a significant other to wield the real clout. In Feng's case his
girlfriend, Zhang Yan, just happens to be the daughter of current National
People's Congress chairman Wu Bangguo, who in the 1990s was a key player in
deciding which of the mainland's 100,000 state-owned enterprises were ripe
for stock sales. Merrill says that its recent successes were the result of a
concerted effort to beef up its mainland staff and plays down any connection
between Feng and Wu.
Something clearly suddenly went right for Merrill.
Last year it was not even among the top 10 banks handling IPOs in Asia
outside Japan. Now it is in the top spot. In the first four months of this
year, it won the right to advise on four of the mainland's hottest stock
sales - Air China, China Power International and Dongfeng Motor, in addition
to Shenhua Group. One thing seems clear: Today's princelings are a more
professional bunch than the preceding generation. Former leader Deng
Xiaoping's son Deng Zhifang, are among the more celebrated examples of the
pioneering crop of the well-connected.
Deng Zhifang established the Grand Real Estate Co
in Shanghai in 1991 and personally assumed the posts of chairman and general
manager; he also teamed up in 1993 with Li Ka-shing - buying a shell company
and listing it as the Shougang-Concord-Grand (Group) in Hong Kong. But after
his business partner Zhou Beifang was arrested in February 1995, much of
Deng Zhifang's assets were confiscated and he disappeared from public view
for several years. BBC reported that he spent time in jail for ``economic
Chen Weili, a daughter of Chen Yun (a member of
China's politburo for over 60 years) founded China Venturetech in the early
1990s after receiving hundreds of millions of yuan in loans from the central
government. She organised a series of high-profile takeovers in Hong Kong
and was later sued in New York for defrauding investors. Then there is the
case of Wang Bing, another son of Wang Zhen, who masterminded the kidnapping
of another princeling, Chen Xianxuan, in 1995 to settle a money dispute
arising from a corruption scandal in the early 1990s involving three
state-owned companies. - by
Elliott Wilson HONGKONG
STANDARD 7 August 2004
WASHINGTON - In
American eyes, Chinese Vice-President Hu Jintao has a reputation for mystery
that arises from his minimal contact with the US and his ambivalence about
China-watchers in the US are abuzz over China's
future leader and want to know: Who's Hu? What does his rapid ascendance
mean for US-China relations?
The little that is known about him stirs unease at
first. At a secret party meeting in 1994, he made his distrust of the
superpower clear when he accused the US of strangling China's development as
a strategic principle.
Mr John Tkacik of the conservative Heritage
Foundation, who has studied Mr Hu's power trajectory closely for a decade,
said in a recent report: 'One gap in Hu's portfolio should concern his
future American counterparts. For a man destined to be China's supreme
leader, he has rarely dealt with US issues.
'In the past, he has complained of Cold War
hegemony and has voiced suspicion of American power.'
Those US issues he did handle would not comfort
He stoked Chinese nationalist sentiments after the
bombing of China's Belgrade Embassy, and he managed the EP-3 spy-plane
standoff, two crises that drove US-China relations to the brink.
Mr Dan Ewing, a research fellow in Chinese studies
at the Nixon Centre, said: 'He delivered China's official and angry response
to the bombing of the Chinese Embassy in Belgrade.
'That performance earned him nationalist
credentials, an important asset for Chinese leaders in an ideologically
vacuous era, but it may also suggest that he harbours serious concerns about
America's geopolitical intentions.'
Indeed, he reportedly fumed to a closed-door
conference after the 1999 bombing that 'hostile forces in the US will never
give up its attempt to subjugate China'.
A less menacing interpretation is that he was
largely performing from a playbook scripted by President Jiang Zemin, who
regards himself as the true arbiter of bilateral relations.
Moreover, his livid words do not fall outside the
pale of official Chinese reaction.
On an even brighter note, some US analysts believe
that in his only televised address on the bombing, he also tried to move the
Chinese beyond the black episode because of the vital importance of the US
The best hope is that he will embrace President
Jiang Zemin's policy of stabilising relations with the US.
The anticipation so far is that Chinese leaders of
Mr Hu's Fourth Generation will continue to be open to the West.
How much this inclination may be undercut by the
excruciating job of enacting economic reforms at home - and the need to
diffuse any ensuing upheaval - remains an edgy question.
It may be expedient for Mr Hu to wave the
nationalist card again under these circumstances.
Ms Maryanne Kivlehan, an Asia security analyst
with the CNA Corporation, said: 'In lieu of difficult or
impossible-to-institute reforms, China would take on a policy of
confrontation with the US in hopes of inspiring unity and support for the
This is the pessimistic school of thought, she
But like other American experts, she juggled both
the glum and optimistic analyses, a necessary exercise given the opaqueness
of Mr Hu's views and the system within which he operates.
On the flip side, she added, the current trend in
relations suggests that on this trip, he is likely to seek collaboration on
a multitude of issues, from terrorism to trade.
Unexciting building blocks these may be, but they
have utility in placing a needed floor under the fragile relationship.
Both Chinese and American experts agreed that Mr
Hu is still an enigma, even inside China.
However, the composite they have drawn is that of
a technocrat-reformist who is a possible plus for the US-China relationship.
There are some fascinating aspects in their
accounts, including in Mr Tkacik's study, released in the past week.
As a young man, Mr Hu was described by his mentor
as 'a walking map of Gansu'.
He was an engineer-official who had toured all
corners of this poor desert province in about 12 years there.
Because of his assignments in Gansu, Guizhou and
in remote Tibet, Mr Hu, the scion of educated tea merchants from central
Anhui province, is reputed to be sensitive to Chinese poverty.
He is better known for his Tibet days, for he had
been skilful in putting out escalating troubles there.
Even before he landed in Lhasa in January 1989 as
Tibet's party chief, the large pro-independence protests had turned violent.
At first, he permitted displays of the independent
Tibetan flag, and showed a moderate face.
As the demonstrations spread, he ordered the armed
police onto the streets in February to discourage unrest. Later, he brought
in the People's Liberation Army to suppress the uprising, which had turned
Tibet is always a vibrant cause for American
activists. On his US trip, Mr Hu will face protests from Tibetan exiles and
However, there are also reports that some Tibetan
groups believe he is the only Chinese leader with a grasp of Tibetan issues,
and he has a genuine interest in addressing their troubles.
Tibet and poverty issues will have a certain
resonance in US circles in the long term.
But there are not yet enough signposts to his true
thinking in these and other issues.
The fact that he has risen so fast - and stayed in
the political stratosphere - also amazes Americans who have studied the
shortened trajectories of would-be successors like Liu Shaoqi and Lin Biao.
Mr Winston Lord, the former Assistant Secretary of
State for the Asia-Pacific, met Mr Hu recently and told CNN that the Chinese
leader is polished and attractive to Americans.
However, he was not particularly exciting in terms
of substance and stuck closely to the script.
Other descriptions are that he is very bright,
articulate, genial, quietly efficient, pragmatic, has a photographic memory,
and can develop a constituency among ordinary Chinese.
Another observation is that, unusually, he can
work with both the conservative and liberal wings of the Chinese Communist
Professor John Fewsmith of Boston University said:
'Hu Jintao can work effectively with others - both those of a higher
position and those of differing points of view.
'Perhaps this points to a certain weakness of
personality, a willingness to compromise too much, but it reflects the more
corporate style of political management that China has been developing.'
US officials hope such facets of his thinking and
personality will be revealed on his US journey.
As Mr James Kelly, the Assistant Secretary of
State for the Asia-Pacific, told foreign journalists: 'The primary objective
will be starting to know Mr Hu.'
But the rising consensus is that he will hold on
to his inscrutability as a strength - while getting his measure of the
Americans ahead of the 16th Party Congress and the changeover of power.
Nothing will happen, as one diplomat said
On balance, the outlook on US-China relations,
under Mr Hu, tilts to the positive, even if he has expressed distrust of the
US and its global role.
There are forces for openness within the younger
generation, including towards the US, and Mr Hu is part of that momentum.
Moreover, if Mr Jiang continues to wield power
even after Mr Hu is installed as the Chinese president, he will press for a
continuation of his policy of engaging the US for stable relations.
In this scenario, there will be more constancy
than change in US policy when Mr Hu takes power, but perhaps in an
atmosphere of heightened tussles between the reformists and hardliners.