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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 assets.

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.

"All these 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 investment returns.

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.

Outside 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 consortium.

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 million.

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 14   WALL 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 Christianson.

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 for Maytag.

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 Construction Bank.

"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 say.

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 investment bank.

Having lived through the Cultural Revolution, many of these bankers say they are well suited to dealing with Chinese government and corporate leaders.

"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 over.

"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 makers.

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 also-ran.

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 experienced banker.

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 crimes''.

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 

Who's Hu?

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 Americans.

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 Americans.

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 relationship.

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 party.'

This is the pessimistic school of thought, she noted.

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 bloody.

Tibet is always a vibrant cause for American activists. On his US trip, Mr Hu will face protests from Tibetan exiles and their supporters.

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 Party.

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 succinctly.

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.  - Singapore Straits Times


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