Content Editor

Aug 25
China's Financial Reset

​This is an excellent summary by our good friend David Malpass a noted Wall Street Analyst formerly with Bear Stearns, and now with his own firm - Encima Global.

After its Tuesday market close, China announced  a joint cut in interest rates and reserve requirement rates (RRR).  That buoyed U.S. markets in the morning, but they weren't able to hold gains.  The S&P 500 fell from 1928 at 3pm to 1868 at the close, a 3% drop in the final hour.

  • For an analogy, the current equity market slump reminds us of the summer correction in July-October of 2011 (S&P 500 down 20.8%.) The decline was driven by a concrete set of negative fundamentals (severe euro crisis and a U.S. debt ceiling stalemate that disrupted the short-term Treasury market) compounded by August vacations.  The fundamentals were ultimately resolved, involving four major steps by the ECB that allowed the growth outlook to stabilize.  For context, the July-October 1998 equity correction was also 21%, limited by the Fed's bailout of LTCM, but we think the fundamentals were worse. The 2008 bear market was 57% due to a much broader range of irreversible factors.
  • We think the latest equity selloff and the negative year-to-date sag (Dow -12%, S&P -9%) has priced in a big slowdown in world GDP and corporate earnings.  That's probably enough based on the fundamentals, but the market is having major trouble with liquidity concerns, bond market uncertainty and fears of cascading margin calls.  The Fed's September 17 rate decision (either outcome) will reduce the uncertainty, but that's still a long time off.  It's conceivable that the Fed or ECB will take activist steps before September to renew the Bernanke/Yellen/Draghi put.  However, China's rate cuts underwhelmed the market.  That sets a higher bar for the other central banks.   

China's Targeted Cut Was Too Little

  • On Tuesday, China reduced the reserve requirement rate (RRR) by 0.5% to 18% (see graph) and made larger RRR cuts for certain institutions. There was a 3% RRR reduction for finance companies such as auto financing.  China's M2 money supply growth has been accelerating due to the previous cuts in the reserve requirement, and we expect the latest cut to also add to the M2 growth rate. China also cut its one-year lending rate to 4.6% from 4.85%, its deposit rate to 1.75% from 2% and its effective ceiling for the deposit rate to 2.63% from 3%. See graphs in the attachment and details regarding the RRR targeting process and the contrast with Fed tools.
  • As growth slows below 7%, we expect China to increase its stimulus, but it's moving too slowly for the market's taste.  It has major monetary, fiscal and exchange rate policy tools and a large pile of international reserves that can be used if global growth slows further. 
  • China auto sales fell 3.4% on a year over year basis through June. Electricity production fell 2.0%, merchandise exports 8.3% and retail sales 10.5% year-over-year through July.  China's bank lending was up 15.5% year-over-year through July after hitting a low of 13.2% in October 2014.  These indicators are often used to create models showing much slower China GDP growth, but we note major shifts in the composition of GDP toward services and away from these measures.  China is clearly slowing below 7% real as the global slowdown takes hold, but China's growth is still fast compared to other emerging markets and very fast compared to developed countries.  After bottoming at 6.2% year-over-year in the first quarter of 2009, real growth surged to 11.9% yoy in the first quarter of 2010. Since then it has slowed to 7.0% in the first and second quarter of 2015.  The Bloomberg consensus for China's third quarter growth is 6.9% and 6.7% for 2016.

Devaluation Going OK

We think China is better prepared than most of the rest of the world for a strong dollar if the U.S. hikes or a prolonged disinflationary slowdown if the U.S. stays trapped in ZIRP (now likely).  China will slow as long as global growth is sinking into the "new norm" established by Fed policy or below it, but China will probably be able to come out ahead once global growth resumes. 

  • The yuan has weakened 3.2% against the dollar over the last 11 days (from 6.21 to 6.41 yuan per dollar) without causing major disruptions.  There has been substantial criticism of China's debt and the risk of capital flight as the yuan weakens, but the currency transition has been relatively smooth. China explains the yuan devaluation based on the real trade-weighted yuan, which has been appreciating sharply in recent years (see graphs); and on market forces, where China's international reserves have been declining. We expect daily selling pressure on the yuan that invites a slow, crawling devaluation until the government and exporters decide that further devaluation would be inflationary or destabilizing.
  • We think the yuan liberalization will be good for China in the long run, but the immediate issue for markets is the global slowdown, the deep uncertainty surrounding the Fed, and market illiquidity.  Assuming current Fed policy continues, we expect weak growth in private sector credit along with weak GDP growth in the U.S. and most of the world – the "new norm".  China's latest policy flop (too small an RRR cut) lowers the odds of Fed hike and keeps China at the center of world concerns, explaining the late-day U.S. equity sell-off.  As in 2011, we think fundamentals could still come back together, but the liquidity problems are preeminent.  The graph in the attachment shows the dramatic losses in dollar-based ETFs for China (FXI), Japan (EWJ) and emerging markets (EEM).

David Malpass

Encima Global

645 Madison Ave, 5th Floor

New York, NY 10022

(212) 876 4400


Aug 18
The Great Chinese Exodus

Many Chinese are leaving for cleaner air, better schools and more opportunity. But Beijing is keeping its eye on them.

Even when the emperors did their utmost to keep them at home, the Chinese ventured overseas in search of knowledge, fortune and adventure. Manchu Qing rulers thought those who left must be criminals or conspirators and once forced the entire coastal population of southern China to move at least 10 miles inland.

But even that didn't put an end to wanderlust. Sailing junks ferried merchants to Manila on monsoon winds to trade silk and porcelain for silver. And in the 19th century, steamships carried armies of "coolies" (as they were then called) to the mines and plantations of the European empires.

Today, China's borders are wide open. Almost anybody who wants a passport can get one. And Chinese nationals are leaving in vast waves: Last year, more than 100 million outbound travelers crossed the frontiers.

Most are tourists who come home. But rapidly growing numbers are college students and the wealthy, and many of them stay away for good. A survey by the Shanghai research firm Hurun Report shows that 64% of China's rich—defined as those with assets of more than $1.6 million—are either emigrating or planning to.

To be sure, the departure of China's brightest and best for study and work isn't a fresh phenomenon. China's communist revolution was led, after all, by intellectuals schooled in Europe. What's new is that they are planning to leave the country in its ascendancy. More and more talented Chinese are looking at the upward trajectory of this emerging superpower and deciding, nevertheless, that they're better off elsewhere.

The decision to go is often a mix of push and pull. The elite are discovering that they can buy a comfortable lifestyle at surprisingly affordable prices in places such as California and the Australian Gold Coast, while no amount of money can purchase an escape in China from the immense problems afflicting its urban society: pollution, food safety, a broken education system. The new political era of President Xi Jinping, meanwhile, has created as much anxiety as hope.

Another aspect of this massive population outflow hasn't yet drawn much attention. Whatever their motives and wherever they go, those who depart will be shadowed by the organs of the Leninist state they've left behind. A sprawling bureaucracy—the Overseas Chinese Affairs Office of the State Council—exists to ensure that distance from the motherland doesn't dull their patriotism. Its goal is to safeguard loyalty to the Communist Party.

This often sets up an awkward dynamic between Chinese arrivals and the societies that take them in. While the newcomers try to fit in, Beijing makes every effort to use them in its campaign to project its political values, enhance its global image, harass its opponents and promote the use of standard Mandarin Chinese over the dialects spoken in Taiwan and Hong Kong.

Politics, though, isn't the most important issue on the mind of Ms. Sun, a 34-year-old Beijing resident who's bailing out. (She requested anonymity because she doesn't want publicity to spoil her plans.) The main reason she's planning to pack up: Her 6-year-old daughter is asthmatic, and Beijing's chronic pollution irritates the girl's lungs. "Breathing freely is a basic requirement," she says. The girl also has a talent for music, art and storytelling that Ms. Sun fears China's test-driven schools won't nurture.

Recently, Ms. Sun flew to San Francisco to shop for a school for her daughter, browse for property and handle the paperwork for permanent U.S. residency. She insists that she's not leaving China forever—a sentiment expressed by many on their way out who see a foreign passport as an insurance policy in case things go badly wrong in China.

"I'm just giving my family another option," she says.

A college professor, who insisted on anonymity altogether ("Just call me an intellectual," he says), takes a darker view of China's prospects as he prepares to emigrate to the U.S., joining his two children, who both have postgraduate degrees from U.S. colleges.

Like many Chinese academics, the professor has a business or two on the side, although he hardly looks the part of an executive, unshaven and with crumpled pants riding 6 inches above his open sandals. In China, he pronounces, "Once you get rich, they arrest you."

That is an exaggeration, of course, but there is a propensity for entrepreneurs who appear on lists of the richest Chinese to end up in jail.

His real concern is that to get ahead, he's had to make compromises with his principles (he doesn't say bribes, but that is what he means). "I've been forced to prostitute myself," he says, and now he worries that it could all be snatched away. In China, a weak, corrupt legal system may sometimes work in favor of entrepreneurs while they're clawing their way up, cutting corners along the way, but it is almost always a liability once they've made it.

First-generation businessmen—the ones who powered China's economic rise—now dream of a secure retirement. That means legal safety in places like the U.S. and Canada.

The professor is also a fan of U.S. technology. One of his companies sells environmental equipment, and he's hoping that by living in America, he'll find ways to enhance his products and develop new ones—which he hopes to continue to sell in China, the biggest market. He holds up his Apple iPhone. "How many shirts do you think we Chinese have to export to buy one of these phones?" he asks.

China, he concludes, is still "a very backward country."

The flight of the rich recalls similar outflows from Hong Kong before the 1997 handover of the then-British colony to China and from Taiwan in an earlier period when its own future seemed imperiled. In those cases, businesspeople parked their families in places like Vancouver and Seattle and shuttled back and forth to Asia for business.

That is often the strategy in today's China, which has entered an uncertain transition. The economy is off the boil; property prices are sliding. Mr. Xi has amassed more power than any Chinese leader since Deng Xiaoping and is using it to crack down on corrupt officials while going after human rights lawyers, bloggers and civil society activists. That is ridding China of the kind of individual its government doesn't want but is also scaring away the creative types it needs.

Last year, the U.S. issued 6,895 visas to Chinese nationals under the EB-5 program, which allows foreigners to live in America if they invest a minimum of $500,000. South Koreans, the next largest group, got only 364 such visas. Canada this year closed down a similar program that had been swamped by Chinese demand.

Some of the wealth sluicing out of China is undoubtedly ill-gotten gains. The Chinese central bank estimates that corrupt officials may have siphoned off as much as $123 billion since the mid-1990s.

In his book "Restless Empire: China and the World Since 1750," the historian Odd Arne Westad writes that overseas Chinese "were, and are, the glue that holds China's relations with the world together, in good times and bad."

That explains why Beijing takes an intense pastoral interest in the Chinese diaspora. It has some 48 million members—about double the number of Indians living outside their country—and wherever they alight, they tend to rise to the top, be it Silicon Valley or the high-tech corridors of Southeast Asia.

Beijing makes a crucial distinction between ethnic Chinese who have acquired foreign nationality and those who remain Chinese citizens. The latter category is officially called huaqiao—sojourners. Together, they are viewed as an immensely valuable asset: the students as ambassadors for China, the scientists, engineers, researchers and others as conduits for technology and industrial know-how from the West to propel China's economic modernization.

In 1989, when the Tiananmen Square massacre triggered an outflow of traumatized students and shattered the Party's image among overseas Chinese communities, the Overseas Chinese Affairs Office kicked into high gear with a propaganda campaign to repair the damage. It proved highly successful.

The political scientist James Jiann Hua To, the author of "Qiaowu: Extra-Territorial Policies for the Overseas Chinese," says that the campaign "turned around the way most overseas Chinese look at China." (Read a Q&A with James Jiann Hua To.)

The effort continues. It is subtle—a hearts-and-minds campaign that works through overseas Chinese newspapers, websites (digital "New Chinatowns," in propaganda-speak), schools, youth groups and church organizations.

The results show up in "patriotic" street activities. In 2008, for instance, well-organized Chinese students guarded the Olympic torch as it went around the world ahead of the Beijing Games, attracting raucous protests from Tibetan independence activists and other hostile groups. The following year, Chinese students disrupted the Melbourne Film Festival when it screened a movie about the life of exiled Uighur leader Rebiya Kadeer, whom Beijing accuses of stirring up separatist agitation in its Xinjiang region. Similar protesters dog the footsteps around the world of the Dalai Lama, Tibet's exiled spiritual leader, whom Beijing also accuses of "splittist" activities.

Foreigners sometimes have a hard time understanding why Beijing expends so much effort countering threats, real or imagined, from Chinese opponents overseas, including the banned Falun Gong spiritual movement. But China's leaders are haunted by history. To an extraordinary degree, the destiny of modern China has been shaped by the Chinese who left. The overseas Chinese of Southeast Asia provided critical support for Sun Yat-sen's 1911 revolution, which toppled the Qing.

The dynamic works the other way too. When Deng needed money and expertise to unlock the entrepreneurial energies of China in the early 1980s, he first tapped the mega-rich Chinese tycoons in Hong Kong, Thailand and Malaysia, whose factories populated his Special Economic Zones.

But China's cross-border political activities are creating unease. Consider Australia—one of the most popular destinations for Chinese students, emigrants and tourists, and a country where Mandarin Chinese is now the second-most widely spoken language after English.

"Chinese Australians are being lectured, monitored, organized and policed in Australia on instruction from Beijing as never before," wrote John Fitzgerald of Swinburne University of Technology, one of the country's foremost China experts, in an article published by the Asan Forum, a South Korean think tank.

In the U.S., a vigorous debate has broken out in academic circles about the role on American campuses of Confucius Institutes, which are sponsored by the Chinese government and offer Mandarin-language classes, along with rosy cultural views of China. Critics say these institutes threaten academic independence; supporters say they offer valuable language training that would not otherwise be available. In June, the American Association of University Professors stepped into the controversy and recommended that universities "cease their involvement" with the institutes unless they can gain "unilateral control" over them.

China must be exceedingly careful not to leave too many fingerprints on its political activities offshore. For a start, it has an official policy of noninterference in the internal affairs of other countries. But it also puts established overseas Chinese communities at risk by raising the issue of their national loyalties. That is particularly true in Southeast Asia, where the Chinese of a previous era were often viewed with suspicion as a communist fifth column.

Still, the sheer volume of China's outbound travel these days, and its massive economic impact, gives it new leverage. In the global market for high-end real estate, Chinese buying has become a key driver of prices. According to the U.S. National Association of Realtors, Chinese buyers snapped up homes worth $22 billion in the year ending in March.

Australia called a parliamentary inquiry to find out whether local households were being priced out of the market by Chinese money. (The conclusion: not yet.)

Without fee-paying Chinese students, many colleges in the postrecession Western world simply wouldn't be able to pay the bills. Chinese students are by far the largest group of foreign students on U.S. campuses, and their numbers jumped 21% last year from the year before—to 235,597, according to the Institute of International Education. Their numbers are increasing at a similar pace in Australia. In England, there are now almost as many Chinese students as British ones studying full-time for postgraduate master's degrees.

Tourism is booming again thanks to China. The Chinese have overtaken Americans to become the world's biggest tourist spenders—and they're rapidly moving upmarket. Mei Zhang, the founder of Beijing's high-end travel operator WildChina, offers family holidays to destinations such as Kenya, Patagonia and Alaska at $10,000 per head. Chinese are now the third-largest group of nationals landing in Antarctica, where tourists zip around the ice floes in Zodiac inflatables to watch penguins.

The international hotel industry is increasingly tailoring its service to Chinese tastes. Among the required extras these days: teapots and toothbrushes. Russell Brice, the founder of the expedition firm Himalayan Experience, says that he packs duck and chicken feet—Chinese delicacies—along with the climbing gear for his Chinese clients. "A few little things like that make it special," he says.

And the outflow has only just begun. The Hong Kong-based brokerage firm CLSA forecasts that departures from China will double to 200 million by 2020.

In education, the next big wave coming from China is high schoolers. Rich parents are opting out of an education system that prepares children to take high-stakes tests for college entrance but neglects the creative side. Besides, once they've been through the mill, the students have a tendency to kick back when they get to college.

Xie Li, a manager at a Beijing telecommunications company, says that she tried to push her 16-year-old son to go to high school overseas, but he couldn't bear to leave home so early. He's a star pupil at the middle school attached to Beijing Normal University, which First Lady Michelle Obama visited recently.

Still, the boy is being groomed for college overseas and an international life. At 13, his parents packed him off to spend six weeks with an American family in Virginia. They've taken family breaks in exotic places like Tanzania. And now, to his mother's delight, he's set a goal for himself to study chemistry at the Massachusetts Institute of Technology.

Ms. Xie recognizes that he might never come back but says, "His heart will always be with his family."

The Chinese government has no desire to slow the flow of students. Its attitude is simple: Why not have the Americans or Europeans train our brightest minds if they want to? President Xi's own daughter went to Harvard.

As always with China, the numbers awe. In his memoirs, Zbigniew Brzezinski, the former national security adviser, recalls a meeting between President Jimmy Carter and Deng. Human rights were on Mr. Carter's agenda, and he started needling the Chinese leader about Beijing's tight emigration policies. "Fine. We'll let them go," Deng snapped. "Are you prepared to accept 10 million?"

Not even Deng could have imagined the human torrent his "open door" reforms would eventually unleash. Try 100 million—and counting.

Andrew Browne
Jul 01
China Passes U.S. as Tech IPO Dynamo in Best Quarter
July 1 (Bloomberg) -- Daniel Martin, Asia economist at Capital Economics, discusses the prospects for economic growth in China with Rishaad Salamat on "On The Move Asia." (Source: Bloomberg) Inc. (JD) decided to push ahead with its initial public offering last quarter even as Internet stocks tumbled, volatility climbed and other technology companies delayed their share sales.

It went ahead because has one thing that many closely held candidates don’t: China. The Beijing-based online marketplace raised $2 billion in its May IPO, making it the biggest example of a trend where mainland-based technology companies attracted buyers in U.S. offerings.

For those investors, a surging Internet consumer base coupled with the higher returns of U.S.-listed Chinese companies encouraged them to scoop up shares. In the second quarter, companies based in China raised $3.5 billion through IPOs in the U.S., the most since the last three months of 2007, data compiled by Bloomberg show. This quarter is poised to be even bigger, with Alibaba Group Holding Ltd. (BABA)’s IPO slated to raise the most ever in the U.S.

“Even in choppy markets, the best companies in China can get deals done,” said Chet Bozdog, co-head of global technology, media and telecommunications investment banking at Bank of America Corp., which led’s IPO. “There’s extra investor interest right now in investing in Chinese companies, and that’s why the Chinese companies decided to move forward.”

U.S.-based companies that went public this year have increased 21 percent on average since their debuts, data compiled by Bloomberg show. Their China-based counterparts have jumped 33 percent following U.S. offerings.

Volatile Markets

The sharpest decline in technology stocks this year took place before began marketing the IPO to investors. Still, the backdrop to its first week of investor meetings in mid May was a three-day decline in Internet stocks and the biggest retreat in the Standard & Poor’s 500 Index in a month. proceeded with the sale even as U.S.-based technology companies Arista Networks Inc., MobileIron Inc. and Box Inc. delayed their offerings to wait for better conditions, people with knowledge of the matter said early in the month.

Companies based in China accounted for 63 percent of the money raised by technology and Internet firms that went public in the U.S. in the three months through June, according to data compiled by Bloomberg.

Micro-blogging service Weibo Corp. and Web-based cosmetic retailer Jumei International Holding Ltd. were among the 10 Chinese companies that went public during the quarter. The shares of both companies have climbed more than 20 percent since their debuts.

Creating Interest

“Investors always like to buy what’s worked,” said Greg Lesko, a New York-based fund manager at Deltec Asset Management LLC, which oversees $800 million including emerging-market stocks. “China’s growth prospects are strong and their business models are similar to companies here. The fact that these IPOs have done well will create more interest.”

Chinese Internet users have grown to 618 million and could exceed 850 million by 2015, according to government data. McKinsey & Co. predicts online retailing in the world’s second-largest economy will reach $395 billion next year, triple its 2011 level.

U.S. investment in Chinese Internet companies slowed in late 2011 and 2012 as profit warnings, auditor disputes and delistings fueled investor distrust. As those issues waned, U.S. investors returned. When China’s securities regulator froze approval for domestic IPOs amid a crackdown on fraud and misconduct, more companies sought the U.S. public market.

“The problem with the U.S. investment world is that they have an arm’s length philosophy when it comes to China,” said Jeff Sica, president of Morristown, New Jersey-based Sica Wealth Management LLC, which oversees $1 billion in assets. “They would rather take the ’ignorance is bliss attitude’ and just look at the growth.”

Shareholder Risk

One issue that remains is the way Chinese companies structure themselves when they go public in the U.S. -- as variable interest entities, or VIEs -- designed to circumvent the Chinese government’s restriction on foreign ownership of key industries.

VIEs, which create holding companies to link foreign investors to Chinese firms via a set of complex legal contracts, are a shareholder risk, according to a U.S. congressional commission report last month.

There’s a “high probability” Chinese courts won’t uphold the contracts behind the structure, according to the report. The U.S. should engage China on remedying VIE risks by eliminating Internet restrictions, liberalizing financial markets and clarifying the legal status of VIEs, the report shows.

That isn’t dissuading Alibaba, which could go public as soon as August, people familiar with the matter have said.

Company Control

Analysts surveyed by Bloomberg estimate Alibaba’s valuation to be $168 billion. The Hangzhou-based company is looking to sell a 12 percent stake, people familiar with the matter have said, which could mean an IPO of around $20 billion, which could make the IPO the largest ever.

Alibaba decided to list its shares in the U.S. after it was unable to persuade Hong Kong regulators to change rules to give founder Jack Ma and other executives a unique way to control the company that the U.S. allows.

“Investor confidence in Chinese companies has been restored,” said Steve Wang, chief China economist at Reorient Financial Markets Ltd. in Hong Kong. And given that Hong Kong forbids shareholding structures preferred by companies such as Facebook Inc. and Alibaba, “their choice of venues is further limited.”

‘No-Win’ Situation

Still, Alibaba’s IPO may be a double-edged sword -- creating a “no-win” situation for other Chinese companies, Sica said. If the e-commerce giant’s IPO succeeds, it will absorb a lot of the liquidity out there; if the IPO fails, that disappointment will cast a negative shadow onto the whole sector, he said.

If is any indicator, Alibaba’s prospects look good: JD has gained 50 percent since its May 21 IPO, when its shares were priced above the marketed range.

“Over the last quarter, and several other deals have performed very well, and as investors see that, they become even more interested in those types of investments,” said Bank of America’s Bozdog. “We expect to see continued growth in the number of IPOs coming out of China.”

To contact the reporters on this story: Leslie Picker in New York at; Fox Hu in Hong Kong at

To contact the editors responsible for this story: Mohammed Hadi at Elizabeth Wollman

Jun 23
Top Chinese Auto Maker Looks to Silicon Valley for a Boost

Laborers work at the Qingdao branch of SAIC-GM-Wuling Automobile.
Agence France-Presse/Getty Images

China’s No.1 car maker by sales said it would establish a venture-capital company in Silicon Valley to tap advanced technology in a bid aimed at bolstering its own brands at home, where it faces increasing competition from foreign brands.

SAIC Motor Co. Chairman Chen Hong gave only a broad overview of the plan during a shareholders meeting Thursday. He said the company is in talks with Silicon Valley-based venture capitalists and private-equity investors over potential cooperation, but he didn’t give any specific names.

Chinese car companies, including SAIC, could do with all the help they can get, as the majority of Chinese consumers prefer foreign-branded cars. Chinese domestic brands’ market share in the country’s passenger-vehicle market fell to 36.5% in May from 39.4% in the year-earlier period, the ninth-consecutive month of decline, according to data from a government-backed industry group.

As foreign companies produce more affordable cars, they’re entering into what used to be the Chinese players’ realm, said Mr. Chen.

“Building a brand is an arduous job,” he said. “Chinese car makers must go upscale, otherwise the situation will be worse.

“In terms of sales, SAIC is a big car company. But when it comes to core technologies, we are far from strong enough,” said Mr. Chen, who became chairman in May. “Silicon Valley houses a number of emerging-technology companies. Having a footprint there will help improve our innovation ability.”

In addition to keeping an eye on opportunities in the U.S., SAIC is building a research center in Shanghai that will focus on emerging auto technologies. It’s set to be completed in June 2015, he said.

New technologies are desperately needed to alleviate problems plaguing China, such as traffic congestion and air pollution. “We must have a sense of urgency,” he said.

Citing recent remarks from Chinese President Xi Jinping, who visited an SAIC facility last month, Mr. Chen also said developing new-energy vehicles is a priority for SAIC. “We already have a lineup of electric car models. The next step is to reduce costs to make them affordable,” he said.

–Rose Yu

Jun 20
Sunstone to Issue 18M Shares in Public Offering
Jane Yu Friday, June 20, 2014

Sunstone Hotel Investors Inc. announced plans to issue 18 million shares of its common stock in a public offering, in part to help pay for its latest resort acquisition.

The Aliso Viejo-based real estate investment trust has stakes in 29 hotel properties throughout the U.S., including a couple in Orange County.

Pricing of the public offering could vary, according to Sunstone, which said the “underwriter may offer shares of common stock” in transactions on the New York Stock Exchange, where its stock currently trades, or in the over-the-counter market. The company said the transaction also could be made at market prices or at negotiated prices.

Sunstone’s stock closed Thursday at $14.61. A rough calculation of the public offering using the recent market price would put the total amount raised at about $263 million.

Sunstone said it expects to use the net proceeds from the offering to help finance its acquisition of the Wailea Beach Marriott Resort & Spa in Maui from a Blackstone affiliate.

The deal, which is Sunstone’s first buy in Hawaii, was signed today at a price of $325.7 million. Part of the payment—about $60 million worth—is expected to be made in common stock directly to the seller, Sunstone said.

Jun 18
Chinese investors buying up U.S. golf courses

An influx of Chinese investors is restoring the fortunes of some unprofitable U.S. golf clubs
To Chinese investors, U.S. golf courses can look like screaming bargains

Eight years ago, Du Sha cashed out his chain of home-improvement centers — the first superstores of their kind in China — with a sale to Home Depot for $100 million.

Today, with a net worth of more than $600 million, the former economics professor has taken up the conventional pastime for those with money and time: golf.

Du has bigger plans than reducing his handicap. Teaming with a Canadian golf executive, he has bankrolled Pacific Links International, which now owns 10 high-end U.S. courses, including the $20-million Dove Canyon Golf Club, in a private community abutting the Cleveland National Forest in south Orange County.

Du and other wealthy Chinese investors are quickly adding golf courses to their growing portfolios of U.S. holdings. In the last year, Chinese investors have bought prime properties including the 2,000-acre Sea Trail Golf Resort, built around three Sunset Beach, N.C., courses, along with smaller ones, such as Rancho Duarte Golf Club, a nine-hole, par-31 course built on a former dump in the San Gabriel Valley.

"We're seeing a lot of tires getting kicked by the Chinese," said broker Jeffrey Woolson in Carlsbad, managing director for golf and resorts at real estate services giant CBRE Group Inc. "They only recently came forward and started buying. They do love golf, so it makes sense."

The influx is restoring the fortunes of some unprofitable clubs such as Dove Canyon, where Pacific Links has committed $6.2 million to refurbishments after buying the property last year.

The investments also mark the third wave of golf course purchases by Asian investors. Unlike the Japanese and the South Koreans before them, the Chinese are buying at the bottom of the market. But they are entering an overbuilt industry that has suffered from declining American interest in golf since well before the Great Recession drove many courses into bankruptcy.

The purchases of U.S. golf courses follow a long series of investments by wealthy Chinese in other areas — such as Gov. Jerry Brown's pet housing project in Oakland and the AMC Theatres chain. Chinese investors also have purchased Sheraton hotels in Universal City and at Los Angeles International Airport and helped ignite such red-hot California housing markets as Arcadia and Irvine.

Major Chinese investments in U.S. businesses doubled to $14 billion last year — and added $8 billion more in the first three months this year, according to Rhodium Group, a New York economic consulting firm.

Thilo Hanemann, Rhodium's research director, said wealthy Chinese individuals and companies are rushing to get money out of China, where the government is trying to gently deflate a property bubble, and into U.S. real estate and entertainment.

"Most Chinese have 90% of their assets in China, and most of that is in real estate," Hanemann said. "It was a great place to be over the last 10 years. They made a lot of money. But the domestic Chinese market is now very fragile. And from an investment perspective, it's not good to put all your assets in one basket."

One of the more curious aspects about their U.S. golf ventures is the stark contrast with the sport's rise in China.

Banned as bourgeois excess under communist dictator Mao Zedong, golf started gaining appeal in China in the 1980s as courses began springing up. They often were designed by American firms as enticements for buyers of expensive adjacent housing.

Comparatively few in number and extremely expensive to play, the courses still became popular venues for the financial elite, who cut deals during all-day sessions of playing, eating and drinking, much as their U.S. counterparts once did.

Pacific Links has dropped membership fees in China to $20,000 — compared with the $160,000 or so that courses there typically charge. But the company is also looking to offer its Chinese members access to U.S. golf destinations, capitalizing on a surge in Chinese tourism here.

The company has clustered most of its courses in prime destinations for Chinese tourists, including five public courses on Oahu and three private clubs in Las Vegas. It also owns the Bridgeport, W.Va., golf club named for legendary course designer Pete Dye, and it is overhauling its 11th property, a golf resort in Du's hometown of Tianjin, into a luxury playground.

Chinese members can also play at a discount in scores of affiliated high-end courses in North America, Asia and Australia. Du said the membership card gives Chinese golfers "the experience they've been looking for: a single membership that provides access to over 160 high-end courses around the world."

The company charges U.S. customers differently. Golfers join courses individually, with memberships ranging from $10,000 at the SouthShore Golf Club in Las Vegas to $50,000 at the Southern Highlands Golf Club, also in Las Vegas. Members get access to other Pacific Links courses but not preferred tee times.

Dove Canyon member Mary George Gilman of Laguna Niguel said she and other frequent players at the club are "thrilled" by the opportunity to play other courses in the company's network.

"We're out in Las Vegas all the time, playing courses as good as Dove," Gilman said. One of the clubs there, Southern Highlands, "is a five-star, beautiful course — really, really nice for avid golfers like us."

Pacific Links, which has about 4,000 members worldwide, plans to buy two or three more Southern California courses, said Harry Turner, the company's vice president for mainland U.S. operations.

Du and other Chinese investors in U.S. golf courses are working to make sure this third round of Asian acquisitions won't go the way of the previous two, which occurred during real estate bubbles that burst.

Japanese buyers in the 1980s and early 1990s often were left underwater after a spree of trophy purchases — including the $1-billion acquisition of Pebble Beach resort in 1990. The new owners of Pebble Beach, under financial stress, sold the resort two years later at a loss of $300 million.

Many Koreans and Korean Americans who bought courses a decade ago in Southern California found themselves upside down during the Great Recession. A Korean group that bought the Rancho Duarte club in 2004 ended up in foreclosure, and the property was sold last year for $3.3 million to Americasia Investment, a company owned by Chinese investors.

The latest wave of Asian golf investment may be different, said Terry Vanek, a specialist in golf properties for the Marcus & Millichap real estate brokerage in Tampa, Fla.

A Marcus & Millichap analysis called 2013 "a pivotal year of improvement" for the industry, with the median prices of courses up slightly for the first time since 2006. More than half the company's golf course listings generate Asian interest, Vanek said.

Letsgo, a new e-commerce arm of Tianjin Sun Investment Group in China, hopes to capitalize on that interest by matching Chinese buyers with brokers selling North American golf courses.

"A golf course is a kind of symbol of status — a thing you can be proud of and show off," said Letsgo manager Judy Gao.

Temple City real estate broker Peter Lam, a Chinese investment specialist who represented the Rancho Duarte buyers, warned that potential investors should enter the market "only if they have money to burn."

Overbuilding in the 1990s and a sharp downturn in usage, he said, have resulted in too many courses and not enough players.

It's hard, though, to overcome the fact that, from a Chinese perspective, the U.S. courses can look like screaming bargains.

"You're seeing courses sell for less than $2 million that back in 2004 or 2005 would have cost more than $5 million," said Chris Charnas of Links Capital Advisors, a brokerage in the Chicago suburb of Evanston.

In December he arranged the sale of Chalet Hills Golf Club, a foreclosed course in Oakwood Hills, Ill., for $1.5 million. Charnas said the buyer was a Chinese investor, who commented: "This is like a $15-million deal in China."

In Rancho Santa Margarita, Du Sha's group took over a club that had never made a profit and had been losing nearly $1 million a year as membership stagnated. Pacific Links acquired Dove Canyon from the U.S. arm of Japanese noodle maker Sanyo Foods, which had owned it since 1992 and still owns three other Southern California courses.

Dove Canyon raised the initial membership fee to $13,500 from $8,000 and still picked up nearly 75 new members in the last year, said Russell Sylte, the club's director of operations. It now has 401 golfing members and 245 who pay $2,500 for non-golfing social privileges or $1,500 to be able to use the dining room.

"The club will turn a profit this year for the first time," Sylte said.
Twitter: @ScottReckard

Copyright © 2014, Los Angeles Times
Jun 18
China's Wanda Group Says It Will Spend Tens of Billions on Entertainment
Wang Jianlin, president of Wanda Group
Wang Jianlin, president of Wanda Group

UPDATED: With $500 million in store for AMC renovations, chairman says company has earmarked $30 billion for acquisitions and investment in entertainment.

The Dalian Wanda Group has come to Los Angeles with an open wallet.

Wang Jianlin, the chairman of the group -- which announced the close of its $2.6 billion purchase of the AMC Theater Group -- said Tuesday at a news conference at the AMC complex in Century City that it plans to spend an additional $500 million renovating the chain, one of the largest in the United States.

But that's not all, said Wang, who flew from Beijing for the occasion.

Wanda plans to spend $30 billion to invest and make acquisitions around cinema, hotels and department stores outside China. Wang said that while he's in Los Angeles, he will meet with five "major movie companies" to discuss possible joint ventures for film production or discuss starting a fund for film production.

The move comes after a line of investments Wanda has made in the entertainment sector since 2005.

"We are very pleased to have completed the acquisition of AMC and begin this new chapter in Wanda’s international development," Wang said in a news release announcing the closing of the purchase. "We now look forward to working with AMC’s CEO [and chairman] Gerry Lopez and his team to invest in and build on the company’s widely recognized brand and the incomparable entertainment experience AMC offers to its millions of customers.”

The Wanda Group already operates the largest theater circuit in China.

At Tuesday's news conference, Imax chairman Rich Gelfond said his company is working closely with Wanda to expand the number of Imax screens in Wanda's theaters in China from 50 to 90 during the next two years.

AMC, headquartered in Kansas City, Mo., employs about 18,500 people and owns 346 theaters. It is not believed the transaction will affect employment levels at the company.   

“All of us at AMC are thrilled about our future with Wanda," Lopez said in the release announcing the deal's closing. "It allows us to continue expanding and innovating in what is the world’s largest movie market. More so, we are enthusiastic about combining AMC’s leadership in the U.S. with Wanda’s leadership in China, the world’s fastest-growing market."

Jun 09
Asia Pacific News

China's hunger for foreign food groups soars

Arash Massoudi

COMMENTSStart the Discussion

China's appetite for buying international food producers has grown at a record pace so far this year, reflecting growing middle-class hunger for a more affluent diet in the world's second-biggest economy.

Outbound mergers and acquisitions in the food and beverage industries accounted for 17 percent of total M&A in China in the year to date, almost on a par with the 20 percent from the energy and power sector - traditionally the biggest deal generator, according to Thomson Reuters.

The targets include Hollick, the Australian winemaker, and Tnuva, the Israeli cheese and consumer foods supplier, as well as the trading arms of companies involved in the pricing and flow of agricultural raw materials around the world.

Read More This country tops China's favorite travel hotspots

STR/Stringer | AFP | Getty Images

The shopping spree comes a year after U.S. pork producer Smithfield Foods was gobbled up by Shuanghui International, now known as WH Group, in a $7 billion deal that remains the largest ever outbound acquisition by a Chinese company, according to Thomson Reuters.

Zhizhong Yang, chairman and chief executive of Nomura China, says: "There is an upward trend in China's overseas investment in the consumer sector which will grow at a much faster rate than its investment in other sectors - including natural resources."

The reason for the wave of dealmaking is China's transition from an export-led economy hungry for energy, natural resources and infrastructure into one driven by a surging consumer class.

In a special report on changing food consumption patterns in China published on Friday, the World Bank said that the country's rapid growth over the past three decades had "vastly improved diets".

Each person is eating on average 40 percent more calories a day than in 1980 with a "shift to a more 'affluent' diet" - away from basic staples to livestock-based products, such as meat and dairy.

"Over the next two decades per capita food consumption will continue to grow rapidly, with somewhat faster growth during the coming decade, driven by income growth," according to the World Bank.

Growing wealth is also leading to demand for better quality and safe, reliably-produced food - which some western brands are perceived as offering - after several scandals involving tainted food, including baby formula.

Wan Long, chairman of WH Group, cited "Smithfield's leading production and safety protocols to provide safe, high-quality products", and its higher-margin pork products - such as ham and sausages, increasingly favored by Chinese consumers - as key attractions of the U.S. company during the takeover.

Read More Small China developer goes on a $3.3 billion buying spree

<p>China's changing buying habits</p> <p>Mykolas Rambus, CEO of Wealth-X, says luxury brands need to offer a diversity of products and adapt to fast-changing consumer tastes in China.</p>

Nomura's Mr Yang says: "As China's middle class becomes richer, their taste for goods and services will become more sophisticated. Local supply is not sufficient, so they have to look outside of China. Food security and safety has been a pivotal issue for China. With abundant capital, China would rather buy than simply import."

Many Chinese acquirers are national state-owned bodies, such as grain trader Cofco, which recently spent $1.5 billion on a stake in a sugar, soyabean and wheat joint venture with Noble Group, the Singapore-based commodity group.

A second group of buyers belong to local governments. These include Bright Food, owned by the Shanghai municipal government, which has already bought Weetabix, the UK breakfast brand, and last month paid just under $1 billion for a controlling stake in Tnuva.

Private sector groups such as WH Group have also become active, but their overseas shopping lists are selective.

"Chinese companies are looking for opportunities which make the most strategic sense," says Camillo Greco, head of M&A advisory for Europe, the Middle East and Africa at JPMorgan. "We see them acquiring businesses for technology and competencies they don't have or for a brand that they can develop in China."

Read More Catering to the Chinese shopper's grand tour

Bright Food has said that one of its target areas is modern agriculture - one reason for its interest in Tnuva. It has also said it is looking for dairy, sugar and sweeteners and spirits and wine.

More from the Financial Times:

KKR buys into China pork producer
Chinese food: slim pickings
China's Bright Food targets majority stake in Israel's Tnuva

Lacking the expertise to manage companies, bankers say that Chinese buyers are also becoming more comfortable with keeping existing management in place.

Florian Fautz, global head of M&A at HSBC, says: "They are also going into situations where they acquire minority positions. They are not necessarily just looking for 100 percent stakes any more."

But for even greater outbound investment to take off more needs to be done at a policy level to integrate China into the global economy.

Mr Fautz says: "Europe continues to drive a lot of interest and there are strong economic ties between China and EU, which is its largest trade partner in the developed world. A bilateral investment treaty would make investment flows much easier."

Jun 04
China's Growing Economic Impact

China’s Growing Economic Impact On Asia: Part 2

In the first part of this post, I discussed the drivers of China's expanding economic impact on Asia. In the following post, I discuss specific business opportunities in several key industry sectors.

Basic Materials and Energy

In basic materials and energy, China continues its push to develop additional energy suppliers closer to home. Central Asia and eastern Russia are becoming very important sources of gas, with China funding much of the infrastructure needed to carry the gas to China. As I wrote earlier, Putin’s visit to Beijing in May was a milestone in China’s pivot to sourcing energy from its neighbors, with the signing of a supply contract of potentially US$400 billion in size.

Alongside Australia, Indonesia is becoming an increasingly important source of coal and minerals for China, with CIC recently committing more than US$1 billion to infrastructure to enable mines to transport their output to China. Many more of these investments are minority stakes. There has been much learning from investments in Africa that controlling ownership is not needed and may often be a disadvantage. Increasingly, China’s state-owned enterprises, who make most of these investments, prefer to invest in Asia over Africa as they find the context more familiar.

In coming years, China is likely to become a much larger exporter of energy technology to the rest of Asia. China’s nuclear power industry is actively seeking opportunities to sell power stations in Asia. Chinese manufacturers have enormous scale in solar panels and are leaders in parts of the wind turbine industry. As Asian countries ramp up their investment in solar and wind generation, they will be buying product produced in China. For example, as India’s new government is committing several billion dollars to expand deployment of solar, Indian companies are turning to China for supply.


Investment in agriculture across Asia to meet growing demand in China is a well-worn investment theme pursued today both by corporations and private equity funds, but it is still only in the first stage of its development. China’s potential demand for imports over the next decade could rise to levels that exceed the total current cross border global trade today in certain products. Demand exists for a very broad range of products from many countries.

New Zealand is seeing its exports to China growing 35% annually on the back of milk sales, India is supplying growing volumes of beef, rice is coming from Thailand, wheat from Russia and Australia, fish from Indonesia and Malaysia. Future growth will be driven by several factors – the growing demand for protein in China, growing demand for quality food, loss of land to farm on, relatively high yields already achieved and many of China’s food imports today come from beyond Asia. Supply from closer by is seen as more secure.

Infrastructure and Real Estate

China’s investments in infrastructure are shifting from Africa to Asia. Perhaps the best example is Xi Jinping’s commitment in October 2013 to provide nearly $30 billion of infrastructure to Indonesia over the next 5 years. Investments will range from public transport systems to railways and ports, and will mostly be delivered by state-owned enterprises. Similarly, Pakistan will see a new public transport system built in Lahore and a new airport in Gwadar to go with the existing port and pipeline investments. Sri Lanka has received nearly $4 billion to expand Colombo’s port. Indochina has other examples. Most of these projects have an economic objective, for the receiving country and for China, a shift away from the “vanity projects” sometimes seen in Africa. Chinese banks, especially China Development Bank, play a key role both in funding these public sector projects but also in private sector projects with APP and Reliance.

In contrast, China’s fast growing real estate investments in Asia are largely by private sector. Projects are visible from Sydney to Kuala Lumpur to Hyderabad. In Malaysia, for example, Country Garden, R&F and others have invested over US$3 billion in residential projects that they market to mainland Chinese customers, who recognize the brand and who are very keen to diversify their investments internationally. Individual Chinese buyers have bought tens of billions of dollars of property internationally in the last 5 years as it has become much easier for them to take money out of the country. The impact on Hong Kong, Sydney and Singapore is often discussed, the growing impact in Thailand, Malaysia and Japan less so.


The coming growth of China’s digital industry leaders across Asia could become a highly disruptive factor for local retail industries . We are just at the start of this change with early indicators visible - the majority of small packages going into Russia today are already from Taobao vendors and has led to the introduction of new taxes. Alibaba has launched dedicated sites for Southeast Asia, is investing in the Singaporean Postal Service and is partnering with local banks to simplify payment by local consumers. Tencent has offices in Malaysia and Singapore and has invested in a Thai portal and a Korean social network and gaming company. Baidu has an R&D hub in Singapore for Asian language processing. In ecommerce, the China “giants” have the potential to substantially undercut local retailers, big and small. It is not clear that local businesses and government will let this happen. The financial scale of the “giants” also means they, theoretically, could buy any local players that start to scale.

People moving

This deepening of business and investment connections between China and the rest of Asia requires a corresponding growth in people movement between countries. Outbound travellers from China to Asia are growing 20% annually, with more than 3 million to Thailand and 4 million to South Korea in 2012. However, inbound travellers from South Korea and Japan have been flat for 5 years and there are some obvious gaps in where people are moving to and from – in 2012 more outbound travellers from China visited New Zealand than India. There are more than 85,000 flights a year between China and South Korea. This compares to 8,000 with Indonesia and 4,000 with India.

There are more than 90,000 Chinese students in Australia (25% of all international students in Australia) and, in a quiet development, 80,000 Chinese students in Japan (60% of all international students in Japan and a great source of talent for McKinsey). China hosts 60,000 students from South Korea, 15,000 from Indonesia and even 9,000 from India (mainly in medical areas).

Looking forward

The deepening of business connections between China and the rest of Asia will accelerate. Chinese manufacturers will increasingly have a fuller presence in many Asian markets going beyond sales to include marketing, manufacturing and even R&D. India is in some ways the biggest market opportunity, but Chinese companies are starting so far behind there it is not certain they will catch up. China will continue to support the development of infrastructure across Asia and will create demand for Asian agricultural output that could drive up prices over time across the region. The impact of China’s digital champions across Asia could be enormous but they will need to tread carefully to avoid a local backlash. Growth in people flows is an incredibly important underpinning to these business connections – the emergence of a new generation of Asians with experiences in multiple Asian countries is an essential talent pool for the new generation of multinational Chinese businesses.

You can read more of my views on China on my blog, Gordon’s View. And please follow me on Twitter @gordonorr

Image credit: Miles Willis

Jun 02

Ahlstrom's new Product & Technology Development Center in China inaugurates today

GlobeNewswire Europe

Ahlstrom Corporation PRESS RELEASE May 30, 2014 at 8.00

Ahlstrom`s new Product & Technology Development Center in China inaugurates today

Ahlstrom, a high performance fiber-based materials company, today celebrates the inauguration of its new Product & Technology Development Center in Shanghai, Minhang District, in eastern China.

Ahlstrom`s new Product & Technology Development Center in Shanghai will improve the company`s direct support to its customers in China with local product development. Located in the Caohejing Pujiang Hi Tech Park in Shanghai, the center is conveniently positioned near its customers in China.

"The new Shanghai product development center supports Ahlstrom`s growth strategy and strengthens our presence and local market understanding. We are pleased to start long-term development work in Asia and hereby reinforce our offering for a clean and healthy environment to help our customers to stay ahead," says Jan Lång, Ahlstrom`s President & CEO.

"The development work in the new center will build on our strong know-how on material science, fibers and chemistry. To more quickly address the local market needs, it is crucial to develop new products and technology close to our customers here in China," says Dr Paul H. Stenson, Executive Vice President, Technology and Strategy Development.

The new center in China employs approximately 30 people and will serve all five of our Business Areas in China: Advanced Filtration, Building and Energy, Food, Medical, and Transportation Filtration. In addition to Shanghai, Ahlstrom has four manufacturing plants and 13 sales offices in Asia, providing services throughout the region.

For more information, please contact:
Liisa Nyyssönen
Vice President, Communications
Tel. +358 10 888 4757

Ahlstrom in brief
Ahlstrom is a high performance fiber-based materials company, partnering with leading businesses around the world to help them stay ahead. We aim to grow with a product offering for clean and healthy environment. Our materials are used in everyday applications such as filters, medical fabrics, life science and diagnostics, wallcoverings and food packaging. In 2013, Ahlstrom`s net sales from the continuing operations amounted to EUR 1 billion. Our 3,500 employees serve customers in 24 countries. Ahlstrom`s share is quoted on the NASDAQ OMX Helsinki. More information available at

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