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Chairman, Founder and Chief Executive Officer at China First Capital ( , China-based international investment bank and advisory firm for private capital markets and M&A transactions. China First Capital has a disciplined focus on -- and strives for a leadership... More
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  • Analysis- Forced Lending To China SMEs May Risk More Harm Than Good -- Reuters Article


    SHANGHAI/WENZHOU, China Tue Nov 19, 2013 9:12am GMT

    A worker wearing a mask pulls a cart loaded with limestone at a mill in Quzhou, Zhejiang province October 22, 2013. REUTERS-William Hong

    Portraits of German philosophers Karl Marx and Friedrich Engels, and Russian leaders Nikolai Lenin and Joseph Stalin (L-R) are seen hung up inside a company office of a bedding factory in Cangnan county, Zhejiang province, October 24, 2013. REUTERS-Wildau Gabriel

    1 OF 2. A worker wearing a mask pulls a cart loaded with limestone at a mill in Quzhou, Zhejiang province October 22, 2013.


    (Reuters) - Beijing's strategy to reroute money away from state-owned giants towards smaller firms to help fuel the economic transformation behind its reform plans is less of a success than it may seem on the surface.

    Lending has increased in line with Beijing's orders. But banks have found loopholes allowing them to lend to state-owned firms and some borrowers are local-government-owned, operating in saturated sectors Beijing is trying to consolidate, aggravating the risks facing the financial sector rather than alleviating them.

    Some lending is even being routed to real estate, a market Beijing is trying to cool as prices soar, one researcher said.

    These factors highlight the struggle China faces in trying to reform its financial markets while preserving a dominant role for the state, a combination underlined by a 60-point reform plan to redraw China's economy and social fabric announced last week.

    "Despite efforts for many years by every level of government to alleviate financing difficulties for small and medium enterprises, there hasn't been a substantive improvement," said Ye Xixi, director of the finance department at Wenzhou University City College, whose research focuses on small-and-medium enterprise (SME) financing.

    "In fact, in recent years there are signs it's getting worse."

    Regulators classify SMEs differently. China's bank regulator, for example, says they are companies with assets of less than 10 million yuan ($1.6 million) or annual sales of less than 30 million yuan.

    Regardless, economists estimate they account for 70 percent of China's output and create 80 percent of its jobs, so many reformers say it is these companies, not China's stable of massive but inefficient state champions, that should lead China's economy in the future.

    Beijing wants nimble, innovative firms focused on selling services to domestic consumers to steer the economy away from its current credit-intensive, state-driven model.


    In entrepreneurial Wenzhou, a coastal city of 9 million people south of Shanghai, a centre designed to meet the needs of small business is struggling to meet loan demand becausebanks are wary of lending.

    "Demand for loans is heavy, but for a large portion of borrowers, lenders aren't willing to lend," said Xu Zhiqian, general manager of the Wenzhou Private Lending Service Centre, located in a zone testing financial reform. "They think the risk is too large."

    Xu said only about half of the pool of funds made available by would-be lenders has been used for loans. Wenzhou made headlines in 2011 when a wave of local firms defaulted on informal loans, prompting local officials to warn that businesses would be decimated if the city was not thrown a credit lifeline by Beijing.

    Nationwide, official data shows that lending to SMEs has increased as ordered, but still accounts for just about a fifth of all loans, small compared with the sector's economic output.


    To be fair, lending to small businesses is a banker's nightmare: they are hard to appraise, light on assets and quick to capsize when economic winds change.

    Beijing has ordered state-owned banks to lend to smaller companies but bankers say there are loopholes that allow them to meet the quotas through lending to state-backed entities.

    "We're government-owned. The company is state-owned; really our relationship is like that of brothers," said a loan officer at Bank of Communications, who declined to be identified.

    "This is why small and medium-sized enterprises don't get financing from state-owned banks. It's not like they're good or not good. We discriminate against them because they're not one of my brothers."

    Another state banker, a loan officer, said banks have depended on requiring collateral for loans rather than assessing risk. A lack of ability to assess risk prevented many banks from lending to smaller companies, he said.

    The solution is to use a variety of accounting tricks to disguise loans to state-owned enterprises (SOEs) as SME loans, such as making loans to small subsidiaries or paying small suppliers on behalf of SOEs, he said.


    Unlike more market-orientated economies, in China "SME" is not synonymous with either private ownership, efficiency, or innovation; many small Chinese companies are owned or controlled by local governments, operating in sectors swamped with overcapacity - like solar power, shipping and steel.

    So even if these companies are knee-deep in debt and facing dismal business prospects, banks will issue loans to them because they know ultimately the taxpayer is on the hook. Even local government financing vehicles are defined as SMEs, said Anne Stevenson-Yang, managing principal at J Capital Research.

    She was referring to a type of financing vehicle associated with an explosion in local government borrowing that accompanied China's response to the global financial crisis.

    She said many smaller Chinese banks, locked out of lending to premium SOEs, had moved downmarket to lend to LGFVs and SME associations that aggregate loans. But this funding rarely ends up with genuinely innovative small firms, she said.

    "Generally, the associations don't pass these loans to small firms but instead lend at higher interest rates to real estate developers or other attractive targets, with the participation of member SMEs."


    Alternative funding channels have also provided little success.

    A "junk" bond market designed for SME corporate debt is virtually dormant. Outstanding volumes are less than 0.5 percent of all corporate bonds issued in China.

    "Third board" over-the-counter equity markets launched around China have mostly flopped due to a lack of interest from firms wanting to list or from investors, many of whom are suspicious of such markets.

    "The valuations are very low, there's no liquidity, and it gives you forever the stain of being traded on that market," said Peter Fuhrman, chairman of investment bank China First Capital. "You are clearly better off trying to do a private deal."

    Furhman said investors in junk bonds and OTC markets were only interested if a state-owned firm would guarantee the issuer. Beijing stamped out a practice of SOEs selling guarantees for a fee after it became clear that the third-party guarantee system, which had been harnessed to help SMEs get bank loans, had devolved into an opaque market where guarantors frequently pledged the same collateral multiple times, while dabbling in shadow banking on the side.


    For viable Chinese small businesses, access to capital is not the major challenge. Entrepreneurs told Reuters that getting loans was less of a problem than the policy hoops necessary to stay in business.

    Wenzhou-based Kingapple Home Textile Co Ltd, which has 100 employees and makes bed sheets, blankets and pillows, has few problems getting bank loans, General Manager Su Zhonghai said. His major problem, he said, was onerous labour laws and rising costs.

    Small companies also face a wider regulatory environment in which government approval, even symbolic, plays an outsized role. Kingapple, for example, is seeking to renew its certification as a "Civilized Work Unit", which requires companies to "diligently study and implement Deng Xiaoping Theory, the 'Three Represents' Important Thought, and Scientific Outlook on Development,(and) resolutely carry out the Party line."

    There are no explicit benefits attached to the certification, a county propaganda official said. But certified firms would be treated favourably when seeking land or administrative permits.

    Nov 19 6:52 PM | Link | Comment!
  • Private Equity Secondaries In China -- PEI Magazine Whitepaper

    Great expectations

    Private equity dealflow continues to stall in China - but so far it hasn't yet prompted the hoped-for explosion in secondary market activity

    Secondaries specialists have been busy in Asia lately. While firms such as LGT Capital Partners and Paul Capital have been doing secondaries deals from Hong Kong since

    2007, in the last 18 months other firms such as Greenpark Capital, AlpInvest Partners and Lexington Partners have all been enhancing their Asia presence.

    So far, secondary market activity in Asia has been more of a gradual flow than a wave of deals. But the changing macroeconomic conditions are increasing pressure on GPs -and that could result in more opportunities, particularly in China. Asia's largest and most attractive market is losing some of its shine, thanks to a sustained slowdown in annual GDP growth and a frozen IPO market that has left GPs holding assets that they need to exit.

    "If you could do [secondaries] at this moment - wow," says Peter Fuhrman, chairman and chief executive of China First Capital. "In this market, some LPs could sell out for 10 cents on the dollar." "For LP secondary buyers, it is nirvana: a distressed exit market, portfolios with solid growing businesses inside of them, and a group of somewhat distressed LPs. A lot of these LPs, even bigger ones who have their money in China, have lost faith."




    Nov 14 9:20 PM | Link | Comment!
  • Chinese I.P.O.'s Try To Make A Comeback In U.S.-- New York Times Article



    (click to enlarge)

    HONG KONG - Chinese companies are trying to leap back into the United States stock markets.

    The return, still in its early days and involving just a handful of companies, comes after several years of accounting scandals that pummeled their share prices and prompted scores of companies to delist from markets in the United States.

    But the spate of recent activity suggests investors may be warming once more to Chinese companies that seek initial public offerings in the United States.

    Qunar Cayman Islands, a popular travel website owned by Baidu, China's leading search engine company, began trading on Nasdaq on Friday and nearly doubled in price. On Thursday, shares in, a Chinese classified ad website operator that is often compared to Craigslist, surged 42 percent on the first trading day in New York after its $187 million public offering.

    The question now - for both American investors and the companies from China waiting in the wings to raise money from them - is whether these recent debuts are an anomaly or have truly managed to unfreeze a market that was once a top destination for Chinese companies seeking to list overseas.


    Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm based in Shenzhen, China, said that for both sides, the recent signs of a détente between American investors and Chinese companies is "a matter of selectively hoping history repeats itself."

    "Not the recent history of Chinese companies dogged by allegations, and some evidence, of accounting fraud and other suspect practices," he added. "Instead, the current group is looking back farther in history, to a time when some Chinese Internet companies with business models derived, borrowed or pilfered from successful U.S. companies were able to go public in the U.S. to great acclaim."

    That initial wave of Chinese technology listings began in 2000 with the I.P.O. of and later featured companies like Baidu, which has been described as China's answer to Google. In total, more than 200 companies from China achieved listings on American markets, raising billions of dollars through traditional public offerings or reverse takeovers.

    But beginning about 2010, short-sellers and regulators started exposing what grew into a flurry of accounting scandals at Chinese companies with overseas listings. In some cases, such accusations have led to the filing of fraud charges by regulators or to the dissolution of the companies. Prominent examples include the Toronto-listed Sino-Forest Corporation, which filed for bankruptcy last year after Muddy Waters Research placed a bet against the company's shares in 2011 and accused it of being a "multibillion-dollar Ponzi scheme."

    Concerns about companies based in China were reinforced in December when the United States Securities and Exchange Commission accused the Chinese affiliates of five big accounting firms of violating securities laws, contending that they had failed to produce documents from their audits of several China-based companies under investigation for fraud.

    In response, American demand for new share offerings by Chinese companies evaporated, and investors dumped shares in Chinese companies across the board. It became so bad that the tide of listings reversed direction: Delistings by Chinese companies from American markets have outnumbered public offerings for the last two years.

    Despite the renewed activity, it is too early to say whether Chinese stocks are back in favor. The listing by was only the fourth Chinese public offering in the United States this year, according to Thomson Reuters data. LightInTheBox, an online retailer, raised $90.7 million in a June listing but is trading slightly below its offering price. China Commercial Credit, a microlender, has risen 50 percent since it raised $8.9 million in August. And shares in the Montage Technology Group, based in Shanghai, have risen 41 percent since it raised $80.2 million in late September.

    Still, this year's activity is already an improvement from 2012, when only two such deals took place, according to figures from Thomson Reuters. Last month, two more Chinese companies -, an online lottery agent, and Sungy Mobile, an app developer - submitted initial filings for American share sales.

    But the broader concerns related to Chinese companies have not gone away. In May, financial regulators in the United States and China signed a memorandum of understanding that could pave the way to increased American oversight of accounting practices at Chinese companies. But the S.E.C.'s case against the Chinese affiliates of the five big accounting firms remains in court.

    The corporate structure of many Chinese companies is another unresolved area of concern. Because foreign companies and shareholders cannot own Internet companies in China, both and Qunar rely on a complex series of management and profit control agreements called variable interest entities. Whether such arrangements will stand up in court has been a cause for concern among foreign investors in Chinese companies.

    And short-sellers continue to single out companies from China, often with great success.

    In a report last month, Muddy Waters took aim at NQ Mobile, an online security company based in Beijing and listed in New York, accusing it of being "a massive fraud" and contending that 72 percent of its revenue from the security business in China last year was "fictitious."

    NQ Mobile has rejected the accusations, saying that the report contained "numerous errors of facts, misleading speculations and malicious interpretations of events." The company's shares have fallen 37 percent since the report was published.

    Nov 02 11:02 PM | Link | Comment!
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