SBR Volume 13, Issue 5: September - October 2016

September/October 2016 Volume 13, Issue 5 www.sbrchina.com

Country Report Switzerland Croatian Regenerative Medicine Meets TCM Tourism Industry Review

American Capital Markets Dream Nasdaq's Dream Maker Robert McCooey ISSN: 1813-310X

September/October 2016

September/October 2016

CONTENTS

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COVER STORY

American Capital Markets Dream

Chinese stocks have taken the US stock markets by storm.

EDITOR'S LETTER

6

China's Globetrotters Mainlanders look abroad for business opportunity and to enjoy what the world has to offer.

8

NEWS IN BRIEF

SBR summarizes all the news in brief you need to know this month in the areas of finance, manufacturing, transport, hospitality, technology, media, trade, property, retail and much more.

Learning from Experience

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Author Anne Lee explains the differences between Chinese and US culture.

TOURISM INDUSTRY REVIEW

Ready to See the World

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Rising MICE Tide

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A Roaring Success

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The world has noticed that China travellers are an important force to attract when it comes to securing tourism success.

Nasdaq’s China Vision

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A Perfect World

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Structured to Excel

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Nasdaq is the stock market of choice for China’s high-flying growth enterprises eager to seek US capital.

CMB has what it takes to make the Wall Street grade.

The ADR is the instrument of choice to trade Chinese stocks in America.

Mr. Crystal Ball

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China's business relationship with America must be built over generations.

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The MICE industry remains resilient in the face of changing market conditions and cutbacks in government spending.

Chengdu and its surroundings are the undisputed economic powerhouse of Sichuan Province and the Western region. www.sbrchina.com

September/October 2016

MEDICAL REPORT

COUNTRY REPORT

Croatian Regenerative Medicine meets TCM

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The Swiss Connection

ChemChina’s bid to acquire agribusiness giant Syngenta cements Switzerland’s position as a major destination for Chinese investments.

Led by the team of Sandra and Kresimir Pavelic, the Croatian regenerative medical world has its sights set on combining personalized treatment with traditional Chinese medicine techniques.

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REGULATORY UPDATE

Regulatory Update is a comprehensive overview of the latest legal and tax developments affecting foreign enterprises in Shanghai and across China.

A Visionary Partnership

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Free Trade Swiss Style

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Swiss Consul General Alexander Hoffet discusses the reasons behind the success of Sino-Swiss relations.

MARKET INSIGHTS

58

Infrastructure Dilemma

One of the world’s leading global think tanks raises an important warning on infrastructure rapidly rising deficits.

The Free Trade Agreement between Switzerland and China provides a clear roadmap for the rest of Europe.

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LAKE’S LAMENT

A Trip Down Memory Lane

The faces have changed since the early days of China’s capital markets experiment, but the vision remains the same.

VIEW FROM THE TOP

Agriculture Provides Returns

In a world where technology investment is all the rage China agriculture provides an alternative for investors.

September/October 2016

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© Copyright 2016 Middle Kingdom Media Ltd. All rights reserved. Shanghai Business Review (ISSN: 1813-310X) is published by Middle Kingdom Media Ltd. No reproduction of any articles or photographs in this publication may be made in whole or in part without the written permission of the copyright holder and/or the publisher. The publisher is not responsible for product claims and representations.

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EDITOR'S LETTER

China's Globetrotters Mainlanders look abroad for business opportunity and to enjoy what the world has to offer.

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concerns over transparency. The SBR ot since the times when Admicoverage of China on Wall Street focused ral Zheng He and his treasure on the past, present and future of a comfleet travelled the globe on beplex dynamic. With billions of dollars at half of the Yuan dynasty to expand Sinostake and access to the world’s largest Arab trade during the 14th century has commercial and financial market, it is China had such an impact on the world clear that China is not ready to abandon of travel. In the early 1400s, the Ming the US dream. government sponsored seven naval Other stories focused on the growing expeditions to establish a Chinese presimportance of Sino-Swiss relations in ence and impose imperial control over the context of European Union trade, the trade in the Indian Ocean basin and to mix of Croatian regenerative medicine extend the empire’s tributary system. with that of Chinese traditional mediGiven the current thrust to create the cine and a look at trends driving the Silk Road economic corridor, a meteoric Chinese overseas rise in tourism to all and domestic tourcorners of the earth ism market. When and the desire of all these stories are enterprises to spread seen in combinatheir wings in intion, they present a ternational capital clear picture on the markets, one can say emergence of China that China has truly on the global stage. entered the age of It is not yet clear internationalization. where this interAnd, this issue of SBR national phase will US Editor Michael Bucher on the beat in ref lects the many front of Nasdaq in New York's Times Square. lead China. After facets of this globaliall, when Admiral zation perspective.

He finally completed his voyages and We start off with a story that is close returned his f lotilla to China the first to my heart, the evolution of the Chinese action of the Emperor was to burn the enterprises on Wall Street. Working fleet. In his view, the world offered litclosely with US Editor Michael Bucher, tle of interest to China, and provided no we delved into the love-hate relationship added value to what the imperial houseof Chinese stock listings in America. hold already possessed. It is unlikely this Whether the pendulum swings more to latest round of globalization will follow love than hate is hard to determine, but a similar course, but, then again, you one thing is certain: the US and China never know. are not that far apart when it comes to the entrepreneurial culture.

As the statistics point out, Chinese stocks are still the darling of American David Lake investors, despite a spate of delisting and Editor-in-Chief 6

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SEPTEMBER/ OCTOBER 2016 VOLUME 13, ISSUE 5

Publishing Group Chairman

Publisher

Public Relations Administration

Tommy Jiang Ryan Cai Shirley Gui Rong Cissy Gao

Editorial Team Editor-in-Chief Medical Editor European Editor Turkey Editor Associate Editor

Contributors

Douglas Betts Aykut Baştürk Patrick Musgrave Catherine Musgrave

Webmaster Design Printing

John Denvers R&R Publishing Ltd. RR Donnelly

David Lake Leon Qiu Yuanliang Geni Raitisoja Esra Tekil Michael Bucher

Cover Photo Robert McCooey

Senior Vice President of

Nasdaq Listings Services Published by Middle Kingdom Media Ltd. Shanghai 4th Floor, 130 Minli Road, Zhabei District, Shanghai 200070 China Tel: + 86 21 6209 3937 Contact: Mr. Ryan Cai Hong Kong c/o Unit 1801-02, 18/F. Jubilee Center 46 Gloucester Road Wanchai, Hong Kong Tel.: +852 925 8189 Beijing #1008 Tower A, Xian Dai Cheng, Soho No.88 Jian Guo Lu, Chaoyang District Tel.: +86 10 6522 5919 Contact: Shirley Gui Rong Australia Level 3, 10 James Street, Waterloo NSW, Australia 2017 Tel: + 61 410 918 966 Contact: Maple Ye Europe Via della Mostra 14 39100 Bolzano (BZ), Italy Tel: +39 0471 982265 Contact: Paolo Brillo Jordan Sobhi Omari Street, Building No.12 Sewifiah District, Amman, Jordan Tel: +962 77777 7802 Contact: Mr. Sari Traih Philippines Unit 1802, OMM Citra Building ADB Ave, Ortigas, Pasig City Manila, Philippines Tel: +63 917 887 9663 Contact: Mr. Ray Apita Istanbul Balmumcu Mah. Dellalzade Sok. No: 28 Kat: 2 Besiktas Tel: +90 532 600 57 54 Contact: Yasin Basturk

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NEWS BRIEFS

News in Brief SBR’s Catherine Musgrave summarizes all the news in brief that you need to know this month in the areas of finance, manufacturing, transport, hospitality, technology, media, trade, property, retail and much more Manufacturing & Auto Tesla First Autopilot Crash Tesla’s first autopilot crash took place in Beijing after a driver claimed sales staff gave him a false impression of the vehicle’s capabilities. Following the accident, Tesla reviewed data and confirmed the car was in autopilot mode, a system that takes control of steering and braking in certain conditions. Tesla states the driver should have been more careful regardless, and that it was his responsibility to ensure the vehicle was in control. In this case, the driver’s hands were not even detected on the steering wheel.

BMW Develops Self-Driving Car With the help of Intel and Mobileye, BMW has plans to release its first self-driving vehicle in China by 2021. Mobileye, an Israeli company that develops cameras and software so cars can “see” the road, first assisted Tesla in developing its self-driving vehicle, but has since ended this partnership. Future BMWs will be able to self-drive on highways with the simple push of a button. By 2021, BMW has exciting plans to introduce a ridesharing program for driverless vehicles. This should be no trouble for the car company, whose fleet of 12 vehicles have already driven some 1.3 million miles in autonomous mode.

to sit at a conference room table in China to explaining how emojis are used in Chinese apps. These resources are increasingly valuable as companies learn how to navigate China’s overwhelming and volatile market.

China Graces Australian Shores Tourism in Australia is booming – especially from China.

According to the Australian Bureau of Statistics, 693,200 short-term visitors arrived in June, the largest monthly total on record and a 12.9% YoY increase. There are a number of factors justifying the increase, including the lower Australian dollar. The majority of tourists this year have undoubtedly been from China. 125,100 Chinese arrived in June, up nearly 22% YoY. Although this figure may not seem overwhelmingly impressive, put into perspective, this number is up 112% from June 2011, 211% from June 2001 and 590% from June 1991.

Transport & Logistics Silicon Valley Advice When Uber CEO Travis Kalanick sought advice regarding his China operations, he reached out to Carmen Chang, a lawyer and Investor in Silicon Valley. Likewise, when Lyft, one of Uber’s rivals, was looking to break into China, it spoke to none other than Silicon Valley insider Connie Chan, a partner at venture capital firm Andreessen Horowitz. Behind the scenes of the numerous business exchanges between China and the US is an elite network of brokers. Not only do these individuals provide dealmaking advice, they are cultural translators – from teaching startups about the culturally appropriate place 8

Ola Scared by Uber-Didi Merger Hailing a cab in India is more interesting than ever, as the Uber-Didi Chuxing drama begins to extend beyond China. Not only has the acquisition left Uber shaking, it leaves India’s Ola more vulnerable than ever. Four months ago, Ola executives met with Didi to ask whether the Chinese firm might consider investing. Didi claimed it first wanted to deal with its own

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September/October 2016

challenges in China, where it was burning through cash to fight off Uber. Ola is now waiting for the fight to begin as the new, powerful Didi-Uber company comes together to take over India.

WiFi Introduced on Flights Millions of Chinese travelers may soon see their dreams come true as authorities are considering lifting the ban against the use of phones during air travel. A legislation to amend these regulations is in the works, and will be finalized by early 2017. If approved, travellers will be allowed to surf the web and use apps such as WeChat while in the air. “From a business perspective, we definitely hope there will be a breakthrough in the policy review”, notes Zhang Chi, Deputy Director at China Eastern, who hopes his company will have the opportunity to generate advertising revenue.

profit and a 59% jump in sales. For investors across the world, Alibaba is seen as a safe haven when investing in China. Alibaba continues to outperform China’s overall retail market by focusing on logistics and rural areas where fewer people are online. Doing so promotes growth and shields the company from economic turmoil.

Alibaba is bracing itself for another potential slowdown by moving away from its conventional shopping business, towards cloud computing, entertainment and food delivery.

International Trade China-France Trade Relations Though France has been a late bloomer with regards to increasing trade with Asia, Chinese interest in French aerospace, alcohol, cosmetics and luxury goods is growing. For years, a major focus of the French government has been balancing the gap between French investment in China and vice versa. China is currently a major contributor to France’s trade deficit and Chinese Premier Li Keqiang has expressed interest in boosting trade with the country and promises China is “not purposely pursuing a trade surplus with France.” France’s main trading partners are other European countries, but by 2030, HSBC forecasts China will become France’s third largest export market.

Tough Canola Standards Hurt Canada Canadian officials are currently in Beijing to persuade China to end its plan to toughen standards for Canada’s canola shipments, which has stalled some US$1.5 billion in trade. China’s quarantine authority AQSIQ as well as other Chinese officials met with Canadian Food Inspection Agency in addition to Canada’s agriculture and trade departments until 12 August.

According to Patti Miller, President of Canola Council of Canada, both parties are keen to find a resolution, but “there is a significant difference in opinion.” Both sides hope to find a “reasonable solution” in the coming days.

Retail & FMCG Chinese Demand Australian Goods There are more than 40,000 Chinese “daigou” in Australia using social media and mobile payment apps to purchase goods then send them to China. These individuals have established a network of clients on platforms such as WeChat, where some broadcast shopping trips live to prove the products are from Australia. Health conscious and wealthy Chinese increasingly demand safer Australian products. Australian brands, such as A2 Milk, are now looking for ways to harness the growth of daigou, rather than try to compete.

Alibaba Outperforms Retail Market Although China’s economy is slowing, the online market place is performing well. Alibaba released Q1 2016 growth figures, which revealed strong revenue, a 71% increase in operating September/October 2016

Trump Ignores China Importance As part of a desperate attempt to save his falling poll numbers, Republican Presidential Candidate Donald Trump is once again pointing fingers at China. Trump has accused China of breaking trade rules “in every way imaginable”, but has yet to present a feasible idea to fix the two nations’ differences. Trump continues to accuse China of illegally subsidizing exports, manipulating its currency and stealing intellectual property. In addition to this blame game, Trump has failed to mention China’s importance in relation to his business. Trump has undergone major deals with Chinese clients, but has given few specifics.

Finance & Investment China Faces Acquisition Roadblock China’s foreign shopping spree may be coming to an abrupt end. All in all, Chinese companies have pumped US$111.6 billion into overseas acquisitions this year, already surpassing the 2015 full year US$111.5 billion. Overseas countries are increas-

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NEWS BRIEFS ingly wary of Chinese investment, as much of it originates from state owned companies who are facing scrutiny over concerns of the Chinese government’s influence on local firms operating in foreign markets. Australia recently blocked the sale of Ausgrid to government owned State Grid Corp. of China and Hong Kong’s Cheung Kong Infrastructure Holdings. In addition, Britain’s government has conducted a review of the Hinkley Point project due to concerns surrounding China General Nuclear Power, one of the deal’s partners.

Hopeful Obama Visits China The US-China Business Council is hopeful US President Barack Obama will push China to improve its offer on an investment treaty during his upcoming visit to China. Council President John Frisbie believes that although there have been advancements “more needs to be done”. Obama will visit both China and Laos from 2 September to 9 September and will attend the G-20 summit in Hangzhou and meet with Chinese President Xi Jinping. Last year, Obama and Xi agreed they would discuss a bilateral investment treaty at a later date, and many hope these talks will progress and result in a deal before Obama leaves the White House later this year.

Tips for Business in China For businesses wanting to expand overseas, China offers great potential. Business.com, a digital media company, put together a list of helpful tips to ensure the journey runs smoothly for

businesspeople planning their first China trip. First, visitors should expect f light delays. China’s airlines are among the worst rated in the world in terms of punctuality, especially Spring Airlines, Lucky Air, Shanghai Airlines, China Express Airlines and Chongqing Airlines. Second, those looking to break into China’s market should remember friendship comes before trust when signing a deal. In other words, to develop strong business relations in China, personal bonding must first be checked off the list. Finally, though China’s culture is fascinating, it is unfamiliar to many foreigners. These individuals must remember to be respectful and understanding when doing business with Chinese. Many things that are considered positive traits in Western business culture, such as assertiveness, might be considered rude in China.

Hospitality & Leisure Marriott-Starwood Merger Put on Hold At the request of China’s Ministry of Commerce, Marriott International has agreed to extend the amount of time the Ministry has to finalize its review of the Marriott-Starwood Hotel and Resorts merger. Regulatory agencies in the US, EU, India, Mexico and Canada have all approved the merger, and this extension, expected to last about 60 days, may be the last hiccup. If approved, the new company will be worth US$36 billion, and will be the largest hotel operator in the world with more than 1.1 million hotel rooms.

China’s Leading English Business Magazine SBR provides the latest news and in-depth reports on the industries that shape the Chinese business world.

Our readers include top decision makers and leading business professionals across the globe.

We are the leading English language source for people who drive business in China.

Visit www.sbrchina.com to learn more about our subscription packages and advertisement opportunities.

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Vanke Struggles Vanke, a large residential real estate developer in China, has revealed its business operations suffered during H1 2016. Though net profit increased 10% in the first six months of the year, the company’s partners and customers are raising concerns. In June, Vanke began noticing changes within the business. Particularly, the filing of a proposal for removal of directors and supervision reduced confidence among partners and customers. This interrupted plans to expand and caused confusion among staff members. Also in June, Vanke agreed to a US$6.9 billion deal with Shenzhen Metro Group, which the public was not keen on, as they feared this might impact the sustainability of the group’s product and service quality.

in both Hollywood and China. “If you compare the number of visits that Chinese people make to the movies compared with other parts of the world, it’s still a fairly embryonic market.

There’s a lot of organic growth to get,” Gelfond added.

Media, Advertising & Entertainment

Disney Rides Close Following the opening of Shanghai Disneyland on 16 June, commentators gladly welcomed the park “poised to lure millions”. Disney’s Chinese specific characters were a perfect combination of tradition and innovation. In recent weeks, dissatisfaction about the park, mainly relating to the sudden closure of several key attractions, has been brought forward. Media outlets report there was an “outcry” following the unanticipated closure of five sites. A Disney representative responded claiming the “maintenance and operational requirements” of these rides were unpredictable and unfortunate.

IMAX Opens 150 China Theaters IMAX signed an agreement with Wanda Cinema Line to open up 150 new theaters in China. The construction will take place over the coming six years, and about 50% of theaters will be fitted with IMAX’s latest laser-projection technology. This deal emphasizes Hollywood’s desire to break into China. IMAX has been a major player in China’s film industry for some ten years and is investing huge wads of cash to expand in the region.

IMAX CEO Rich Gelfond believes this expansion is a sound one which will generate huge box office returns for movie studios

Olympic Results Revealed China is mortified over its worst performance in 20 years at the Olympic Games. This year, China ranked third place behind the US and UK, raising concerns regarding the quality of the country’s state sponsored sports system. China topped the list for the first time with 51 gold metals in 2008 and ranked second at the London Olympic Games four years later earning 38 gold. This year in Rio, China only won 26 gold, whereas the US won 43 and the UK 27. This is surprising, especially since China had thought it would place in the top two. Before the Rio

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NEWS BRIEFS Games, China’s State General Administration of Sports had announced, “At the 2016 Rio Olympics we aim to maintain and consolidate already existing advantages in sports events and results positions.” Consequently, the results were a major disappointment back home.

go online on their smartphones, and the number of Internet users in small rural areas remained low – only 191 million. In addition, web users spend an average of 3.8 hours per day on the Internet, an increase of 0.3 hours YoY. As the Internet becomes increasingly popular, it remains a mystery what next year’s report will reveal.

China Tops Dominance Score Each country has its own specialities in the Olympic Games. Russia is known for weightlifting, the US for swimming and South Korea excels at archery. Analysts say China’s sporting supremacy is greatest in table tennis. In the 2008 Beijing Olympics, China won all six table tennis medals. Again in 2012, China won either a gold or silver medal in every table tennis match. This year in Rio, both recipients of the men’s and women’s gold medal are again from China. Each country is given a Dominance Score representing how well it performed in its best sports. China tops the list with table tennis at 63.9, followed by China, again, with diving at 51.5. Trailing behind in third place is South Korea with archery and US softball both standing at 45.8.

Meitu Popular Among Chinese At MeituPic, an image editing software company, the selfie is seen as science. Chinese beauty gurus are using facial recognition and 3D modeling to transform their physical appearance.

From eye widening to skin lightening and chin narrowing apps, this appealing platform has been downloaded more than one billion times by fans who refer to the company as “zipai shenqi,” or “godly tools for selfies.” The business has hundreds of millions of monthly users, a valuation of billions of dollars and big plans for global expansion.

Most Valuable Tech Firm Revealed Tencent has overtaken Alibaba to become China’s most valuable technology firm. Recent data indicates Tencent is worth US$249 billion, compared to Alibaba’s US$246 billion. Tencent saw a massive increase in profit earlier this year, driven by its online gaming business and advertising. “Revenues jumped and platforms are booming,” notes an IG analyst. Following this announcement, Tencent’s shares rose more than 6%. Though Tencent’s China business is thriving, compared to local rivals Alibaba and Baidu, the company is less known in the West.

Mining, Energy & Environment China Prepares Satellite Launch China is prepared to launch the world’s first quantum communication satellite, which includes high quality hackproof security features that prevent wiretapping and intercepts. If all goes as planned, this satellite will pave the way for improved hackproof communication systems. In July 2015, the Chinese Academy of Science and Alibaba jointly established a quantum computing lab in Shanghai. This lab, which is expected to produce a general purpose quantum computer prototype with between 50 and 100 quantum bits by 2030, will be helpful in this initiative.

IT & Telecoms Internet Population Hits 52% According to a report released by the China Internet Network Information Centre, by June 2016 China’s number of Internet users hit 710 million. With 51.7% of citizens surfing the net, China has passed the global average by 3.1%. China gained a whopping 21.3 million new web users during H1 2016, up 1.3% YoY. Still, the number of Internet users in rural areas remains low. The same report revealed 92.5% of Chinese Internet users 12

China Cracks Down on Illegal Mining Although China is the world’s largest rare earth producer and exporter, the industry is filed with problems, such as illegal mining, smuggling and a lack of competitiveness. As part of the Five Year Plan from 2016 to 2020, Chinese ministries and departments will enhance cooperation, boost inspections and implement stricter approaches towards illegal mining of these metals. A tracking system will be introduced to trace the source of rare earth elements to curb illegal mining. “The next few years are an important period for the overhaul of China’s rare earth industry and promoting its healthy development,” notes Zhou Changyi, Head of the Department of Raw Materials under China’s Ministry of Industry and Information Technology.

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START SPREADING THE NEWS Shanghai’s Times Square Apartments has attracted some of the world’s best business minds, teachers and athletes.

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hen you work for the best and are surrounded by the best, it is only natural that you want the best for yourself and your family. As the winner of three Best Homes for China awards, Shanghai’s Times Square Apartments provides its residents with the highest quality service surrounded by an elite group of motivated neighbors and staff from around the world.

The year 2015 brought yet another round of impressive accolades from the serviced apartment community. Times Square received the Golden Key Properties Alliance Award as well as the Winner of Best Hospitality and Honorable Mention Best Eco-Friendly awards from Luxury Homes of China. For the second year running, Times Square took Talk’s Top Service Apartment Awards for Shanghai.

Awards are important, but more important are the warm words and testimonies of long-time residents. Below are some personal words from residents about the Times Square living experience.

Irene – Hong Kong “Initially I came to Times Square with the intention of staying for a short period of time. After a few months I knew I’d chosen the right place. Now I’ve been here for over a year!

To be honest I feel just as home here as I do at my house in Hong Kong. The thing that I love most about this place, apart from its proximity to my office, is the service. Everyone knows who I am, the cleaners know just how I like things and they’re always willing to do more than they need.

That is only one of the many of the great examples of fantastic customer service!”

Irene Lau is Vice President of China for HK-based retailer Lane Crawford.

Lucy & Carlton – England “We came last year to start our new jobs and looked at a number of different serviced apartments. We decided on Times Square because it is in a great location, well located for our work and it was hands-down the best value for money. We’ve found the staff here are fantastic. They are all really welcoming and go above and beyond to help out.

Lucy Palmer is Head of Lower Prep at Wellington College International Shanghai and Carlton is a former professional England Footballer and current Academy Director at Wellington.

September/October 2016

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13

COVER STORY

C h i n a L e n d i n g C o r p. makes the trip all the way from Urumqi to enjoy the fanfare of ringing the opening bell for their Nasdaq 2014 IPO.

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American Capital Markets Dream Chinese stocks have taken the US stock markets by storm over the last two decades and American investors have jumped on the bandwagon.

by David Lake

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t has not all been a dream scenario for Chinese companies interested to list in the American capital markets, but all in all the stock listings experiment is a success. Despite a 2015 markets crash precipitated by concern over China’s economic performance along with the rapid depreciation of the yuan currency, not to mention a delisting binge that witnessed technology powerhouses like Shanda Interactive Entertainment Ltd., Focus Media Holding and Perfect World Co. Ltd. spend a record breaking US$5.5 billion buying back their shares, China has remained the foreign stock purchase of choice for US investors.

With over US$6.7 trillion of foreign stocks held by America’s institutional and retail investors, corporate finance teams from around the world compete to dip into the deep US capital pool. The battle between the largest and most successful companies to attract American investors extends from Latin America to the shores of Japan and the hinterlands of China. Though the usage of global capital markets is a relatively new experience for China, stateowned enterprises and entrepreneurs have embraced the Wall Street culture, with listed company American Depositary Receipts (ADRs) surpassing US$1.2 trillion in global market cap.

Alibaba Group Holding Ltd. is one company that cannot complain about its US experience. Alibaba’s 2014 New York Stock Exchange (NYSE) initial public offering (IPO) is still the world’s biggest at US$25 billion. Jack Ma’s online retailer was so popular that its stock price surged 38% on debut. This spurred underwriters to satisfy demand with an added 48 million shares sold at the IPO price of US$68. Alibaba surpassed the old US record for a Chinese IPO set by Agricultural Bank of China’s US$22.1 billion NYSE IPO in 2010. Incidentally, today the Alibaba stock rests around the US$90 mark after reaching a high of about US$120.

“Alibaba’s Jack Ma started his business in 1999 with US$60,000 from his apartment in Hangzhou,” recalls Fred Teng, President of America China Public Affairs Institute and Senior US Representative of the China-US Exchange Foundation. “I know because I met him at the Harvard Club China 15

COVER STORY event in New York. He was running around collecting business models, name cards of investment bankers and building relationships. Then 15 years later he comes to the NYSE with the largest offering ever and secures 50% of China’s online e-commerce market share. If that is not the American capital markets dream then I am not sure what is.”

Alibaba was also a dream for the US financial services industry, something that peers in Hong Kong will never forget after the Hong Kong Exchange (HKE) lost the IPO to NYSE for technical reasons. The Alibaba IPO provided underwriters with US$300 million in fees, spread across 43 investment banks as 25 institutional investors accounted for 50% of the offering.

Clearly, those Chinese companies that can crack the US capital market and generate stock trading volume are pleased with the results. According to Citi’s 2016 Midyear American Depositary Receipt (ADR) Report figures, among the 2,787 ADR programs which trade in the US, four of the top ten ADR companies by trading value are Chinese listed enterprises.

Alibaba and Nasdaq-listed Baidu Inc. are the two most liquid foreign stocks, with trading value around US$139 billion and US$77 billion, respectively for the year to June 30, 2016. Alibaba’s trading activity was more than petro giants Royal Dutch Shell, BP and Petroleo Brasiliero combined.

Current stock market tech darling JD.com Inc., came fifth on the top ten list with trading value of around US$45 billion, as its IPO jumped in price from US$32 to US$45 since listing. Ctrip.com International Ltd. (Ctrip) took ninth place. Shanghai-based Ctrip listed on Nasdaq in 2003 in a US$75 million Merrill Lynch-led offering priced at US$18 that appreciated by 86% to close at US$34. Ctrip traded at a peak of US$37.35 that day, making it the first company to double its IPO price on the f irst trading day.

During a difficult market environment for international companies, Chinese enterprises accounted for four of the five DR capital raisings totaling nearly US$750 million in first half 2016, most through Nasdaq-listed IPOs. Beijing-based biotech company Bei16

Gene Ltd. led with a US$180 million IPO while Hutchison China MediTech Ltd. closed its IPO at US$110 million. Yintech Investment Holdings Ltd. raised US$100 million and China Online Education Group closed at around US$50 million.

The market surprise was the US $1.13 billion secondary offering of Ctrip, the largest follow-on stock offering of any global enterprise.

The Other Side When Industrial & Commercial Bank of China (ICBC) chose to list its recordbreaking US $20 billion IPO in Hong Kong in 2006 rather than on the NYSE, the global financial community received a wake-up call. The world’s largest bank was sending a message that it did not need to list in the US market to attract money for its public offering. It could all be done close to home.

That is not to say that ICBC does not have respect for the power and reach of the US capital market. After all, ICBC became China’s f irst NYSE member firm at the end of 2013 under its broker dealer subsidiary Industrial and Commerce Bank of China Financial Services LLC. On hand for ringing the opening bell at NYSE was Bi Mingqiang, Chairman of ICBC, Joseph Spillane, CEO of the ICBC broker dealer and Sun Guoxiang, China’s Consul General.

“Becoming a member of NYSE will facilitate ICBC’s opportunity in the US, help promote the brand as well as get a

deeper understanding of the US capital market,” commented ICBC in a press statement. In 2010 ICBC acquired the Prime Dealer Services division of Fortis Securities LLC, previously controlled

by French BNP Paribas SA, and eventually changed the name to ICBCFS to better fit the brand to expand into the equity business.

“The reality is that Chinese companies are well received in both Hong Kong and China,” remarks Jiao Chengyue, General Manager of CMB’s New York Branch, a leading bank f inancier of China delistings from US stock markets.

“Chinese companies came to America for many different reasons. A number of them were disappointed by the experience, the inability to explain their story to US investors and the low value applied to their business. By relisting on China and Hong Kong markets they were able to multiply their values many times.”

If the ICBC Hong Kong listing was a surprise for the financial elite, another watershed was reached in August 2016 when Tencent Holdings Ltd. overtook Alibaba to become China’s most valuable technology firm. According to BBC data, Tencent is said to be valued at US$249 billion, compared to Alibaba’s US $246 billion as of mid-August. This was due to a massive increase in profit earlier this year, largely driven by its online gaming business and advertising revenues on the Tencent platform, compared to lesser results from Alibaba and Baidu. Listed

The marble sculpture over the NYSE building depicts the efforts of man and industry. www.sbrchina.com

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on HKE, Tencent did not seek a US listing, nor show interest to provide the financial reporting associated with it.

Still, that did not stop US investors from pumping money into the tech giant.

The Early Days The China capital markets experiment in the US extends more than two decades. Cross-cultural differences collided as successive waves of businesses listed on US stock exchanges. Growth pains were felt and hard lessons learned. These kinds of cross border listing exercises were a new development for China and over time unleashed a thriving entrepreneurial culture eager to test global waters. It was the start of a new role for Chinese companies in a global arena that promotes the role of transparency and competition.

“There were three major waves of listings that took place, and all of them were characterized by a different element, for instance state-owned listings versus private entrepreneur offerings,” recalls Ann Lee, author of What the US Can Learn from China and a former Wall Street investment banker and hedge fund manager. “Certainly China went through its growing pains in dealing with the delisting process. However, the nation’s leading enterprises have come out of this much stronger and they are ready to make another leap into global markets.”

The f irst wave of US listing was conducted by the blue-blood stateowned enterprise world, and the first batch headed to the NYSE between 1994 and 1998. At the time the offerings looked small, but today all these companies boast multi-billion dollar market capitalizations. One of the main watershed events took place in 1993, Sinopec Shanghai Petrochemical Co. (SPC) raised US$137.7 million in a dual NYSE-HKE listing handled by Merrill Lynch. Though this deal is small by today’s standards the IPO set SPC on a track to achieve a market cap of over US$8 billion.

One year later, Huaneng International Power Development Corp. (HIPD) launched the biggest PRC IPO ever with a US$625 million offering underwritten

by Lehman Brothers, Goldman Sachs and Morgan Stanley. Today, HIPD is September/October 2016

The NYSE on Wall Street is the largest stock exchange in the world by market capitalization.

still listed with a market cap of around US $14.5 billion. Following close on the heels of HIPD came the important offerings for Yanzhou Coal Mining Co. Ltd., Guangshen Railways Co. Ltd. After a lull to absorb the Asian financial crisis it was the turn of telecom and energy companies. China Mobile, the world’s largest telecom company, with a market cap surpassing US$250 billion was a precursor of things to come in www.sbrchina.com

1997. When markets settled, it did not take long for China Unicom (2000) and China Telecom (2002), both large-cap companies in their own right, to follow suit. At the same time, PetroChina Co. Ltd. (market cap of US$190 billion), CNOOC Ltd. (US$53.8 billion) and China Petroleum and Chemical Corp., known as Sinopec (US$87 billion), all came to market. Smaller amounts were raised on Nasdaq’s market for second tier 17

COVER STORY SOEs such as Harbin Power Equipment, Shanghai Hai Xing Shipping and Guangzhou Shipyard.

nese companies listed on US exchanges from 2008 to 2011, that number dropped to just two What Next? in 2012, the heart of the In the early days the SOEs set the capital delistings debacle, which markets stage in tandem with the largsaw the average PE ratio est American investment banks. For the of China stocks drop to most part, stocks performed reasonably single-digit lows. well and companies grew in size accordThe event precipitating to plan. It was the SOE wave that ing the delisting wave first built appetite amongst US investors occurred in 2011, when eager for a piece of the rapidly emerging short selling firm MudChina Story. dy Waters Research The SOEs were followed by a back accused a Chinese comdoor listing wave that started in the pany listed in Canada early 2000s. This trend witnessed a of accounting fraud. large number of small companies enter After an investigation stock markets, primarily that of Nasdaq, by the Royal Canadian through the purchase of existing “shell” Mounted Police and Onlisted companies. The shell companies tario Securities Comreduced the time it took for a company mission, in March 2012 to list and lessened the compliance burSino-Forest Corp. filed den. While this inevitably fuelled the for bankruptcy protecsubsequent delisting period, back door tion and announced the initiatives were complex and showed company would be sold that Chinese finance departments could or restructured with handle such a maneuver. the proceeds going to iDreamsky flies high over Times Square after their IPO launch.

Accused of accounting irregularicreditors. Chinese listed ties, 82 companies on a Bloomberg index companies experienced for Chinese Reverse Mergers lost 52% of several auditor resignations right after This is not to say bonafide listings market value in June and July 2011. Severe that and many companies came under of important companies did not come drops in the value of US-listed Chinese investigation by the US Securities & Exto market during the back door wave. companies followed. While over 60 Chichange Commission (SEC).

Around this period tech stocks like Baidu and Netease showed investors that there were still riches in China that could be mined. These companies impressed US investors with strong management, a culture similar to that of Silicon Valley and the ability to meet the regulatory requirements of the US market without much issue.

Now, with the delistings period having run its course, we are in the third wave, one characterized by large-scale tech companies and strong interest by cash-rich Chinese companies in US mergers and acquisitions. At this point, Chinese companies and US investors seem more comfortable with one another, after both sides have climbed the learning curve and taken their losses.

What lies ahead is anyone’s guess as Wall Street is an unforgiving place, where the darling of today can be the beast of tomorrow – as many a Chinese company has found out.

Nasdaq's Robert McCooey takes a selfie with China's Deputy Consul General You Weijin.

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Learning from Experience Author Ann Lee has built her reputation on understanding the differences between Chinese and US culture.

I

s it possible for two commany stayed on the OTC marpetitors to learn from one anket, trading their stocks through other? Born in Hong Kong to a d e a l e r ne t work a nd no t a parents from Wuhan and Hangcentralized exchange. zhou, American educated Ann Lee “Some of these OTC pioneers has dedicated much of the last made it to Nasdaq and, to be fair, decade to understanding this dya lot of greedy investment banknamic in the context of the Sinoers helped them to do that,” recalls US relationship. Lee wrote a book Lee, noting that many of these on the subject, carefully crafted companies would later be among and thoroughly researched, with Chinese companies that would delthe same care she once exercised ist from US markets. “Since the as a Wall Street hedge fund partsecond wave, Chinese companies ner and investment banker to exhave become a lot smarter in unamine complex structured deals derstanding how the US markets that came across her desk. work. Now a third wave of Chinese An acute observer of economic companies are listing, mainly in and historical trends, Lee left the technology and medical secWall Street in 2005 to enter the tors. These companies are of much academic world, which included higher quality and many have a stint as a professor at Peking done really well due to their ability University, where she worked on to generate much more revenue.” papers that predicted the 2008 Lee sees the evolution of Chifinancial crisis. Lee’s book, What nese stocks in America as a process Ann Lee brings her unique understanding on the Chinathe US Can Learn from China, was that has been fraught with growUS relationship to the world's policymakers. published in 2012 and she has ing pains and punctuated by select since been in constant demand as successes. “It is not surprising,” regulation and US-China relations. a speaker, professor and adviser to policy concludes Lee. “Chinese companies were “The history of Chinese stocks in the makers on four continents interested in a little naïve about the capital markets US can be described as a series of waves,” her enlightened view of the shifting relafrom the start. Anything that sounds too Lee points out. “The first wave was led by tionship between China and America. good to be true is usually too good to be a series of large state-owned enterprises Lee attended UC Berkeley, Princeton true, and they discovered that about the (SOEs) that made their way on to the University’s Woodrow Wilson School listings business. Many got burned in the leading US exchanges with high profile of International Affairs, and Harvard US, and other global markets as well, but offerings. These stocks generated a lot of Business School. After working for two now they are smarter, and have learned hype and built strong interest for more investments banks, she became a hedge from their experiences how to deal with Chinese offerings.” fund partner and a trader in credit delawyers, meet regulatory requirements, In the second wave many Chinese rivatives. She taught for a year at Pace navigate the culture and understand the companies entered the US market University, followed by a visiting profesfiner points of public relations and investor through the back door, buying shell comsorship at Peking University from 2007 marketing techniques. Given that none of panies to speed the process and avoid to 2008. From 2010 to 2012 Lee was a this has been part of local business culture, filing documentation. These were not Senior Fellow at the think tank Demos, China has done well overall in dealing with the highest quality of companies and where she worked on issues of financial the US capital markets dynamic.”

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COVER STORY

JD.com raised US$1.8 billion in an IPO that wa s ove r 15 t i m e s oversubscribed and performed very well in the secondary market.

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Nasdaq’s China Vision Nasdaq is the stock market of choice for China’s high-flying growth enterprises eager to seek US capital.

by David Lake

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obert “Bob” McCooey earned his stripes as the Nasdaq, Inc. (Nasdaq) Chairman of Asia Pacific and Senior Vice President of Listing Services the hard way. With unwavering commitment McCooey crisscrossed the China corporate landscape in search of successful entrepreneurs ready to list on America’s growth exchange. This year alone McCooey has visited China four times, staying up to six weeks on each road show. From first to third tier cities, countless executives witnessed McCooey’s Nasdaq team come through their town.

McCooey and the Nasdaq team have made waves in global capital markets as they wooed China’s technology elite. “We have travelled the highways and byways of China over the years,” adds McCooey, the Nasdaq executive responsible for new listings and relationship management with 3,700 listed companies worth some US$9.3 trillion in the Americas, EMEA (Europe, Middle East and Africa) and Asia Pacific.

“It is an eye opener. In a two-year period we closed 100 China listings. China shares a lot in common with America: we both have strong entrepreneurial cultures.”

For the most part the Nasdaq promotion of US listings in China has paid dividends for one of the world’s largest stock exchanges by market capitalization, second only to the New York Stock Exchange (NYSE) (US$19.5 trillion as of July 2016). In the competition to attract listings, McCooey’s team goes head to head with the NYSE to secure China business. Nasdaq has won the hearts and minds of the tech world for the most part, led by a strong liquidity story backed by a Corporate Solutions Group focused on investor relations (IR), thousands of indices to benchmark performance and top class trading technology.

September/October 2016

“Our message is always the same,” says McCooey, who worked on the launch of the first China office for a US exchange in Beijing in December 2007 and has a second office in Hong Kong. “When companies reach out to us to consider a US listing, we never deny that listing on a local market is a good alternative. We simply want them to know that if they choose to tap the world’s largest pool of investment capital, and meet the regulatory requirements this entails, Nasdaq is the place to list. We believe we are the best place for Chinese companies to get their message across to global investors and achieve the stock trading liquidity they seek to build corporate value.”

Flip Side Nonetheless, in the quest for listings dominance, Nasdaq has lost some hearts and minds along the way. The 2010 to 2012 period was a period of tumult for China in the global capital markets. Leading Chinese tech companies ran for the exits in search of a better valuation. It was a no brainer for many of them. They felt US foreign investors did not understand the value of their enterprise and an amazing arbitrage opportunity was spotted, as tech entrepreneurs applied stock exchange rules to make a bid in order to buy back their companies with a sense of relief.

“We made a commitment and we aim to stay in China. The delistings in the last few years do not discourage us,” explains McCooey, “We have doubled down on our efforts to provide the support companies need. We are there on a regular basis with a team in Beijing focused on talking to listed companies and new prospects as well as the shareholders that own these companies. We think China will continue to grow and be a vital part of Nasdaq for many years to come.”

In many cases, China companies listed www.sbrchina.com

in the US bought back their companies at a fraction of the value realized when these same companies relisted on the Shanghai or Shenzhen A-Share market, the Hong Kong Exchange (HKE) or were purchased by private equity investors. In some case, the differential in that valuation amounted to tens of billions of dollars.

Take the case of Perfect World on the China market. When Perfect World was privatized its market cap on Nasdaq was just US$900 million. After going private, Perfect world was merged with ShenzhenA share listed Perfect World Pictures. The current market cap of the newly merged entity is close to Rmb50 billion (US$7.5 billion).

Under the merger Perfect World commits to achieve annual profits between Rmb755 million (US $1.1 billion) to Rmb1.2 billion (US$1.8 billion) from 2016 to 2018.

To put this into perspective, with an average PE ratio of 55 times on the Shenzhen Stock Exchange, if Perfect World were to achieve the profit forecast the company would, in theory, provide a market cap value boost for these former US assets of close to Rmb41.5 billion (US$6.2 billion) in 2016 or Rmb66 billion (US$9.8 billion) by 2018. Perfect World is one of the many examples of this revaluation process.

Liquidity Building The delisting wave has been a lesson well learned by the broader US capital markets ecosystem, including global exchanges, accounting, banking and legal communities.

The general consensus is these delistings occurred due to a combination of a lack of understanding of China concept stocks by US investors, the inability of some Chinese companies to deal with US capital markets mechanics and corporate governance expectations, and a media barrage that jumped all over the disconnect to create headlines. However, all of the above were 21

COVER STORY further exacerbated by the inability of Chinese stocks to make a market – in other words to generate buy and sell volumes to deliver a proper market price.

Nasdaq knows that to keep Chinese stocks coming to America this issue of liquidity and valuation must be solved.

If not, business may be lost to the old nemesis NYSE – or worse – Hong Kong.

Nasdaq is fully aware that HKE, still smarting from its loss of Alibaba to the

there will be a consistent level of listings on Nasdaq for decades to come. We firmly believe we have a product Chinese companies want to be a part of.”

In this vision, McCooey is strongly backed by Nasdaq CEO Robert Greifeld.

Speaking at a conference in Hong Kong this June, Greifeld conceded some China companies delisted because they did not fully understand reporting requirements and others voluntarily delisted because of

Steven Brown (L) and Jeffrey R. LaRocque (R), work on the Nasdaq Market Intelligence Desk.

NYSE, is a very strong contender for the Chinese listings world, providing a solution that is much closer to home.

Exchange Competition Nasdaq and NYSE are the preferred locations for Chinese companies to launch IPOs for a number of reasons, such as share structure regulations that allow executives to retain more control and familiarity of US investors with tech models. Recently, selfie app Meitu announced plans to raise US $1 billion through the HKE. A successful Meitu IPO may improve Hong Kong’s position as it strives to win the upcoming big ticket listings of Xiaomi Corp. and Didi Chuxing Technology Co. “Sure, the competition is huge for new listings and every exchange around the world looks for China business,” notes McCooey. “We may not get back to the very strong periods of 2010 and 2011 where we captured 100 Chinese listings. But I think 22

higher China valuations elsewhere. Greifeld, however, did note that Chinese companies were not that much different than those from America, “We have a very, very long list of American companies having reporting issues throughout the years.”

Statistics tend to point to the success of Nasdaq’s liquidity and image building initiatives in China. Based on Citi’s Midyear 2016 ADR Report (see page 27), Nasdaq Chinese listed companies dominate the league tables in such areas as total capital raised, ADR liquidity and Top Ten Value Movers. While NYSE’s Alibaba leads the way in most categories, Nasdaq powerhouses like JD.com, Baidu, Ctrip and Netease have created great investor interest.

However, if size matters, the NYSE is the place to go. While Nasdaq claims 101 Chinese listings with a total market cap of US $166 billion, NYSE has 53 listings with a market cap approaching US $900 billion, according to numbers generated by www.sbrchina.com

both exchanges. In essence, most analysts feel that Nasdaq may take the day when it comes to the medical and tech growth world, stocks much in demand by investors eager for high returns, but NYSE consistently attracts the large cap traditional enterprises that are held by more conservative investors.

When it comes to the battle of the large caps, Nasdaq believes it can compete headto-head. As McCooey points out, “Nasdaq has attracted over US$800 billion in market value from the NYSE via listing exchange transfers since 2005 and is home to the world’s five largest companies by market cap (Apple, Microsoft, Alphabet, Amazon and Facebook.)”

Interestingly, both the Nasdaq and NYSE businesses extend well beyond their traditional exchanges. NYSE Group is wholly owned by Intercontinental Exchange (ICE) and operates exchanges as well as provides data and technology services.

NYSE, NYSE MKT and NYSE Arca trade more US equities than any exchange group and are capital raising leaders, while ICE Futures and London’s commodities market LIFFE provide options and futures trading.

In contrast, Nasdaq, the inventor of the electronic exchange, fuels economies and provides transformative technologies for the trade lifecycle. In the US and Europe, Nasdaq owns and operates 26 markets that cover equities, options, fixed income, derivatives, commodities, futures and structured products. Able to process over 1 million messages per second with 99.99% uptime, Nasdaq technology drives 70 marketplaces in 50 developed and emerging countries, powering 1 in 10 of all of the world’s securities transactions.

Communication Support At the end of the day it is all about IR – building the image of your stock and delivering information in a way investors can make an informed decisions. This is not always easy for Chinese companies working in a language and culture that is not their own. The role of Nasdaq in this regard is to assist these companies in making the cultural transition in every way they can.

“Before JD.com went public, I guarantee 90% of New Yorkers had no idea who JD was,” remarks Steve Brown, Managing Director of the Nasdaq Market Intelligence Desk. “The day JD went public we placed September/October 2016

this huge golden bull in the middle of Times Square, accompanied by non-stop broadcasting of the JD listing on our seven-story building display. I can confidently say the 90% who didn’t know of JD, had a good idea of who they were at the end of the day after this effort.”

Jeffrey LaRocque, Director of Market Intelligence Desk at Nasdaq notes Chinese companies going public a few years ago are gaining revenues using social media and internet based technology innovations to monetize their business. He continues saying “This quarter, Weibo figures show how mobile presence and innovation can produce revenues exceeding expectations.”

To better serve listed companies in China and around the world, Nasdaq set up its Corporate Solutions Group. With annual revenues of $350 million, this unit delivers a single, integrated platform for more effective communication and efficient decision making by public companies. The IR, PR, Communications, and Board & Leadership products at Nasdaq Corporate Solutions are so successful that even NYSE companies use the services.

“Everything is available to make sure businesses maximize potential when listing in the U.S.,” notes Brown. “We educate companies on how to fit into the US system and assist them to develop strategies to access institutional investors. Our Corporate Solutions business is unmatched as we are

Robert Greifeld, Nasdaq CEO, and Charles Chao, Weibo Chairman and Sina CEO, enjoy a Times Square moment on IPO day as another premier tech company joined the Nasdaq Composite.

the only global provider with a full suite of services like this.”

Tech Edge Nasdaq is equally confident its trading platforms and technology provide for a more efficient trading system, which in turn drives liquidity. This is combined with Nasdaq’s award winning data products and indices that cover all asset classes, countries and sectors and benchmark performance

Nasdaq's image building clout reached another level at the Weibo IPO in Times Square.

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to attract trading volume.

“Nasdaq has something our competitors lack, an index business,” explains Brown, who covers biotech and pharma sectors. “It’s the largest index business globally, calculating and disseminating over 40,000 indices daily.” Brown points out newly listed pharma companies Hutchison China MedTech Ltd. and BeiGene Ltd. already appear on the Nasdaq Biotech Index (NBI) circulating globally.

More importantly, LaRocque adds, four Chinese companies – JD.com, Baidu, Ctrip and Netease – are current components of the flagship Nasdaq 100 Index and the Nasdaq Golden China Index tracks the progress of companies on a country basis for investors. “China has the largest contingent of foreign stocks on the Nasdaq 100 and that is an accomplishment,” he adds, “something that we are very proud to have achieved.”

McCooey concludes with a final word on the China-US capital markets relationship.

“The most exciting aspect of this business is how our China team has come to understand these companies and their business,” McCooey notes. “By being over there so much we have been able to align our assets to their needs. This process is greatly satisfying to us as companies appreciate our work to bring this service to their market and they like that this process develops a strong personal and business relationship which brings comfort to their listing decision.”

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COVER STORY

A Perfect World China Merchants Bank has what it takes to make the grade in the highly competitive Wall Street world.

by Leon Qiu Yuanliang

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our balance sheet makes it possible to ho says Chinese banks cannot Shenzhen headquarters as well as runs support Chinese companies on many master Wall Street culture? a wholly-owned overseas banking subfronts, including US delistings busiIn the dog-eat-dog world of sidiary (Wing Lung Bank) and a global ness,” explains Jiao. “We have worked on American finance, spotting the next investment banking institution (CMB more than 50 delistings in the past two market trend is critical, and, more imInternational Capital Corp. Ltd.) both years, some which have gone through, portantly, figuring out how to make from Hong Kong. In support of the interothers not, and that has kept us very money from that trend is essential. That nationalization of Chinese enterprises busy. Clearly, is not easy for US investors is exactly what China Merchants Bank’s and RMB globalization, CMB has taken to understand how Chinese companies (CMB) US operation has done. Almost the lead in China’s banking industry work as the bulk of their business activione decade after winning US federal by launching its Cross-border Finance ties are in China. They are just not able approval to open a branch in New York, brand consisting of divisions such as to get investors’ attention and no one is CMB’s Madison Avenue office is teemGoing Global Finance, Overseas RMB dedicated enough to do the research on ing with bankers working in all areas of Finance, Supply Chain Finance, Hedge these companies. This is one reason why the China finance realm. More recently, Finance and E-trade Finance. the average PE ratio fell to all-time lows.”

CMB made its mark as the funding giant Perfect Delisting As one of the most active Chinese behind some 50% of all China concepts banks in the international arena, CMB stock delistings from American markets.

CMB is most proud of its work on fundowns domestic and overseas commercial In true Wall Street fashion, CMB ing the US$900 million Nasdaq delistbank branches in Hong Kong, Singapore, entered this all-important privatization ing of Perfect World Co. Ltd. (Perfect London and New York, manages an market with perfect timing. In part, this World), a leading online game developer Offshore Banking Department from its is thanks to the efforts of Jiao Chengyue, and operator based in China that builds General Manager proprietary engines of CMB’s Ne w York a n d d e v e l o p m e nt Branch. Jiao, who has plat forms. Strong paid his dues on the technolog y and Street after more than creative design, com15 years of living and bined with extensive working in New York, knowledge of the onwas tasked with openline gaming industry, ing the commercial enables Perfect World ba n k i ng br a nc h i n to introduce popular 2008. With over 500 games to cater to cusbranches in China, tomer preferences. In CMB is one of China’s a delisting bonanza l e a d i n g b a n k s a nd highlighted by large ranks third amongst scale technolog y all Chinese companies transactions, such as for net cash and equivShanda Interactive, alents at over 117% of Fo c u s M e d i a a n d its listed market capiThe9, Perfect World talization of Rmb450 is a case study that billion (US$67 billion). highlights the pro“ The st reng t h of CMB headquarters on Madison Avenue has the look and feel of any Wall Street bank. cess and explains the 24

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CMB's Jiao Changyue was tasked with opening the bank's first commercial banking branch in 2008.

intricacies of a complex stock exchange maneuver for Chinese enterprises.

“The move to delist from the American stock market was largely based on the need for management to achieve greater value for an enterprise,” explains Jiao.

“One reason the PE ratios hit such unacceptable low levels is a basic disconnection between Chinese companies and the US investment community with regards to business and cultural practices. When Chinese companies return back to the Chinese stock market they are welcomed with much more recognition and this appreciation results in a much higher market valuation.”

Perfect World went private by merging its shares with parent company Perfect Peony Holding Co. Ltd. Perfect Peony, beneficially owned by Michael Yufeng Chi, is an exempted company incorporated under the laws of the Cayman Island. Chi is founder and Chairman of the Board of Directors of Perfect World and of Perfect World Merger Co. Ltd, a wholly owned subsidiary of Perfect Peony.

Under the terms of the merger approved by shareholders at an extraordinary general meeting held on July 28, 2015, each Perfect World ordinary share issued and outstanding was cancelled and ceased to exist in exchange for US$4.04 in cash, and each American Depositary Share (ADS) was cancelled in exchange for US$20.20 in cash.

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Shenzhen-listed film and TV production company Perfect World Pictures with a current market capitalization of close to Rmb50 billion (US$7.5 billion), bought all the assets of its online gaming Nasdaq affiliate Perfect World for a total price of Rmb 12 billion (almost US$1.8 billion), thus valuing the business at more than two times the Nasdaq buyout price. Perfect World Pictures issued 614 million shares valued at Rmb19.53 per share to Perfect World Digital and Shihezi Junyang Investment in exchange for their stakes in the privatized Perfect World.

“The Perfect World stock price was hit hard due to the lack of understanding of the underlying business from the American investor community,” Jiao adds “Even though the business was getting bigger and bigger and profits were on the rise, these were not reflected in Perfect World’s stock prices. It was easy to understand why they wanted to head back to the A-Share market in this context. At the end of the day, the exercise of relisting in a market that understood the business well provided a lot more value for the enterprise than staying in a market that didn’t.”

Separately, Perfect World Pictures raised Rmb5 billion (US$750 million) in supporting funds by issuing up to 212 million shares, valued at Rmb23.56 per share, to four select investors. Among www.sbrchina.com

these investors was Chi who subscribed for Rmb4.15 billion (US $620 million).

Under the terms of the acquisition agreement, Perfect World commits to achieve annual profits between Rmb755 million (US$1.1 billion) to Rmb1.2 billion (US$1.8 billion) from 2016 to 2018. After the transaction, Perfect World Digital will be Perfect World Pictures’ largest direct shareholder with Chi owning a 57.8% stake.

To put this into perspective, with a PE ratio of some 55 times on the Shenzhen Stock Exchange, if Perfect World were to achieve the profit forecast above, it would in theory provide a market capital value boost for the former US asset and business of close to Rmb41.5 billion (US$6.2 billion) in 2016 or Rmb66 billion (US$9.8 billion) by 2018.

Next Step – Listings?

CMB will have to look for the next niche soon enough, as the delistings trend for Chinese companies has more or less run its course. One interesting emerging area is mergers and acquisitions for Chinese companies in the US, a sector that CMB has already played a major role in due to its financing prowess. Or, CMB may try a step in the opposite direction of delisting by acquiring a broker-dealer license to help Chinese companies list in the US stock markets, done differently and more effectively to avoid the pitfalls of the earlier rounds of listings.

Jiao is not against Chinese entities listing in the US market, as long as they are doing the listing for the right reasons. Where appropriate, Jiao would not hesitate to recommend a listings program if the long-term plan is clear and the structure for solid corporate governance is in place.

“It all depends on a number of considerations,” concludes Jiao. “The need to be in the US market must be balanced against the governance requirements of this market. Governance is not that difficult though it is costly in terms of accounting and legal fees. After all, for many companies in need of capital that do not have the time to wait in line for a Chinese listing, the motivation to come to the US instead is very strong in order to solve this issue.”

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COVER STORY

Structured to Excel

The American Depositary Receipt is the instrument of choice for Chinese companies trading shares in US stock markets.

by Michael Bucher

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t is no secret that US investors own a lot of foreign stocks. In the first quarter of 2016 alone, investors made over US$6.7 trillion worth of foreign investments. What is a secret – or at least a mystery – is the mechanics behind how Chinese companies list in US stock exchanges. Facing stiff competition from major international companies who want their share of the multi-trillion dollar foreign investment pie, Chinese companies have turned to listing as Variable Interest Entities (VIEs) and trading American Depositary Receipts (ADRs) to generate listings in American markets and attract investor interest.

Sounds complicated? At its simplest, an ADR is a traded stock that represents the securities of a non-US company wishing to trade in the US financial market.

These shares are denominated and pay dividends in US dollars to US investors.

They are traded just like regular stock during normal market hours through the US broker dealer network. ADRs simplify investing in foreign securities by having DR banks handle custody of the shares and deal with currency and local taxes issues. The first ADR was introduced by JP Morgan in 1927 for the British retailer Selfridges on the New York Curb Exchange.

While the capital markets world is not exactly known for making things simple, the main issue for companies remains the cumbersome nature of a system that breeds regulatory compliance and administrative cost at all levels.

VIE Structure Most ADR programs are designed to accommodate the listing of Chinese enterprises through Cayman Islands-based 26

Citi's Ganesh Sarpotdar (L) and Hank Hui (R) are leading the ADR charge to bring Chinese enterprises to US stock markets and support their efforts to generate trading liquidity.

VIE structures. Chinese companies have f locked to the VIE structure since it was first introduced by Sina.com for its Nasdaq IPO back in 2000. Stockholders have an indirect financial interest in the revenue and earnings stream of a particular company that lists as a VIE. Yet, they do not have a claim on company assets if something goes wrong, one reason being that the Chinese government prefers to limit ownership of these sensitive businesses.

“There is no secret behind the VIE structure,” clarifies Hank Hui, Director of Account Management of DR Services at Citi, responsible for servicing Chinese listing in the US stock market. “Most people understand how it works now.

Additionally, everything is clearly disclosed to investors in the listing prospectus issued by Chinese companies. Currently, quite a few listings have gone the www.sbrchina.com

VIE route, most notably the landmark Alibaba and JD.com offerings. We expect VIE to continue to be utilized in certain restricted sectors in China.”

Both the China Securities Regulatory Commission (CSRC) and the US Securities & Exchange Commission (SEC) have long studied the nature of the VIE structure. Neither has decided to put their foot down on the VIE process. Both realize it will take time to implement a new policy as the number of VIE structures listed in America, plus the massive market capitalization they represent, are issues to consider. Baidu, which listed in the US back in 2008, has a market capitalization of nearly US$80 billion and is structured around a VIE. Nor was it much of a surprise that Alibaba, the largest ever IPO in America for a Chinese company, chose to go the VIE route for its mega-listing.

September/October 2016

Top Ten Most Liquid Programs (As Measured by Trading Volume)

In many cases, the more Top Ten Value Movers Top Ten Value Movers YTD June 2016 Volume liquidity a company has in Issuer Country Exchange Value (USD Billions) (DR Millions) the trading of its shares, the YTD June YTD June Vale SA Brazil 5,815Increase / Issuer Country Exchange NYSE more value that company 2015 2016 (Decrease) Petroleo Brasileiro SA Brazil NYSE 5,436 Alibaba Group Holding Ltd China NYSE $182 $139 ($43) � can achieve. It all comes Itau Unibanco Holding SA Brazil NYSE 2,268 Shire plc UK NASDAQ $20 $61 $41 Ω down to basic economics.

Ambev SA Brazil NYSE 2,008 Petroleo Brasileiro SA Brazil NYSE $55 $28 ($27) � Buyer and seller activity Gazprom PJSC Russia LSE 2,004 Taiwan Semiconductor Manufacturing Co Ltd Taiwan NYSE $39 $24 ($15) � is the metric to determine Alibaba Group Holding Ltd China NYSE 1,866 Vale SA Brazil NYSE $37 $22 ($15) � the real price of a stock.

Nokia OYJ Finland NYSE 1,862 NetEase Inc China NASDAQ $10 $24 $14 Ω JD.com Inc China NASDAQ 1,821 Without this trading JD.com Inc China NASDAQ $32 $45 $13 Ω Banco Bradesco SA Brazil NYSE 1,809 mechanism it is hard to Royal Dutch ShellPJSC plc UK NYSE $41 $51 1,645 $9 Ω Sberbank of Russia Russia LSE determine a stock ’s true Nokia OYJ Finland NYSE $20 $11 ($8) � Source: Bloomberg and Depositary Banks value as the market is not Vipshop Holdings Ltd China NYSE $22 $14 ($8) � considered efficient. One Source: Bloomberg and Depositary Banks Source: Bloomberg and Depositary Banks issue that plagued Chinese listed companies in the past was their inability to Top Ten Most Liquid Programs generate liquidity.

Top Ten Most Liquid Programs (As Measured by Trading Value) (As Measured by Trading Value) Hui points out that while DR IPOs some Chinese companies Issuer Country Industry Value (USD 2016 Millions) YTD June Value Issuer Country Exchange have struggled in this re(USD Billions) Grupo Supervielle S.A. Argentina Banks $302 gard, others have deployed Alibaba Group Holding Ltd China NYSE $139 BeiGene, Ltd. China Pharmaceuticals $182 Baidu Inc China NASDAQ $77 ADR programs successfully.

Hutchison China MediTech Limited Hong Kong Pharmaceuticals $110 Shire plc NASDAQ $61 Yintech Investment Holdings Ltd. ChinaUK Diversified Finan Serv $101 After all, ADRs were introDutch Shell plc NYSE $51 ChinaRoyal Online Education Group ChinaUK Commercial Services $52 duced to address the comJD.com Inc China NASDAQ $45 Grand Total $748 plexities involved in buying Teva Pharmaceutical Industries Ltd Israel NYSE $41 Source: Bloomberg and Depositary Banks shares in foreign countries BP plc UK NYSE $39 and solve the difficulties asPetroleo Brasileiro SA Brazil NYSE $28 sociated with trading at difCtrip.com International Ltd China NASDAQ $27 ferent prices and currency BHP Billiton UK/Australia NYSE $26 values. Generally, company Source: Bloomberg and Depositary Banks Source: Bloomberg and Depositary Banks shareholders deposit ordinary shares with a custodian and the depositary followed closely by groups like Capital bank bundles the shares based on a desdirect involvement of the foreign comWorld Investors (US$17 billion) and Bailie ignated ratio and issues ADRs on one of pany. In other words, a depositary bank Gifford & Co. Ltd. (US $14 billion). As the US Exchanges. In return, a Chinese works with a broker dealer to collect such, the desire to attract these longcompany must provide detailed financial the shares of a foreign listed company term investors remains high. information and fulfill other reporting (from HKE in the case of Tencent) and Another interesting aspect of the responsibilities as required by the SEC. trade these shares in the open US marmulti-faceted ADR instrument is the ket through a broker dealer. So, whether ADR Advantage unsponsored ADR. On the way to sura company like Tencent likes it or not, passing Alibaba as the most valued techThe advantages of ADRs are manifold. its shares are traded and held in the US nology company, Tencent found that it For investors, ADRs are an easy and capital market. had a US following – even though it was cost-effective way to buy shares in a “American capital will always be imnot listed on a US exchange and did not foreign company while minimizing portant to Chinese companies,” remarks report in that market, Still, that did not risk. They save money through reduced Citi’s Hui. “They like the ability to extend stop US investors from pumping money administrative costs and by not incurtheir brand to the world’s largest market into the Chinese tech giant. In the first ring foreign taxes on each transaction. and are interested in doing mergers and half of 2016 Tencent was the most active Companies from Brazil to Russia, China acquistions to expand their businesses. unsponsored ADR program in the US, to Chile all prefer ADRs to manage their This is not going to change any time with 89 million shares traded to beat out US exposure and tap the deep North soon. With the delistings wave having second ranked Tokyo Electron, the forAmerican capital market. According to run its course, we expect a range of new mer leading in this area.

Citi research, top mutual fund invesissues to emerge for China to lead the Unlike traditional ADRs, an unspontor Fidelity Management & Research way on the DR rankings for the rest of sored program is established without the Co. holds nearly US$20 billion of ADRs, this year and into the future.”

September/October 2016

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COVER STORY

Mr. Crystal Ball

Fred Teng sees China’s business relationship with America as one that must be built over many generations.

by Michael Bucher

A new generation of Chinese entrepreneurs is taking the relationship with America to another level.

“I

t is all about guanxi – US style,” chuckles Fred Teng, President of America China Public Affairs Institute and Senior US Representative of the China-US Exchange Foundation, from his Park Avenue office. “When you consider the big companies that have done well in the US, you often find they had local seed money and angel investors that acted as their support system from the start. This institutional support led to institutional success and a cross alliance of contacts evolved to ensure future success.”

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Few people in the world have the perspective of Teng, who has spent his career observing and commenting on the manner in which China interfaces with the US in the areas of business and finance. Over the last three decades Teng has actively participated on many levels to develop business links between Chinese enterprises and US peers, providing a unique view on how to understand and merge these two distinct business cultures.

This merging of cultures seldom happens overnight. Teng remembers www.sbrchina.com

meeting Jack Ma of Alibaba fame at the Harvard Club in 2000, just one year after Alibaba was formed. Ma was securing contacts, and learning how to do business in the US. As Teng points out, many of the leading China tech players who have done well in the US have studied in US universities or gained valuable experience in Silicon Valley. In fact, many of these entrepreneurs applied US tech business models to kick-start multibillion dollar China successes.

For that reason, it was not a great stretch for these entrepreneurs to further the relationship-building process in America. “You cannot be a lone hunter, you have to be part of the tribe, in the right circles,” Teng notes. ”Without that network you will always be an outsider.

It may take decades to build, but the network will always help you in the end.”

Teng recalls the early days in 1990 when the China stock market experiment was just starting. At that time, he worked for Merrill Lynch Pierce Fenner & Smith and spearheaded Oppenheimer & Co.’s Asia market launch. Having witnessed the astonishing rise of the Chinese capital market, Teng strongly believes successfully gaining access to US capital and markets is an evolutionary route, a process that takes generations, to learn the ropes in the world’s dominant capital market and economy.

Cultural Evolution “Over the last 30 years China learned about capitalism,” Teng explains. “Before that everything was government owned.

Chinese businessmen are still not sophisticated about capital markets, but you cannot expect this to happen overnight. It may take generations before enterprises fully comprehend the nuances September/October 2016

A major problem faced by Chinese listed companies was the size of their market capitalization, often considered too small to attract institutional interest. Most institutional investors have little time to spend on small stocks. Many Chinese companies came to America to attract institution money only to find out they did not even qualify for the stock selection process and cannot catch the eye of money managers no matter what they did.

“Companies cannot dwell on shortterm events,” Teng concludes. “They should focus on building a business model that makes their company a great long-term portfolio investment for investors. Buying and selling is the normal course of the market and actually is the pricing mechanism.”

Next Generation Chinese businessmen flock to the US to learn from the masters of the capital market.

of how to run American businesses.”

Teng notes the Chinese system was traditionally an apprentice system. “Society was very different before,” he says.

“People worked for low wages for a long time to gain knowledge from a teacher in order to move up the ranks slowly. Today, more Chinese players have Western experience, and those who have worked at the top of the financial world, at Goldman Sachs and Morgan Stanley, are coming home. This new model, based on learning from experienced Western teachers, has amplified the results.”

Perhaps the most important point Chinese companies need to focus on is communication. As such, Teng has dedicated his life to building communications links and consensus. Most recently, Teng served as the Chief Executive Officer of China Newsweek Corporation, Publisher of NewsChina Magazine and GM of Sino Television Inc., a throwback to his long years in public affairs with telecom giant AT&T. Previously, Teng served as Chairman of the Hong Kong Association of New York and the National US Hong Kong Business Association. A recipient of the Ellis Island Medal of Honor, Teng sits as a Special Council Member of the China Foundation for Peace and Development, on the EastWest Institute’s President’s September/October 2016

Advisory Group and is a member of the National Committee on US-China Relations and Economic Club of New York.

“In many cases, listed companies failed in the area of investor relations.

They paid for IR and believed it was advertising,” Teng adds. “Then, they wondered why their stock price did not rise. Companies want access to US stock markets due to their distribution and secondary market. However, they are shocked by the responsibilities that go with that.”

Teng knows companies that have paid millions of dollars to meet US compliance rules. “Management never took into account the time and cost to meet US regulations,” he warns. “They also found out that as directors they were personally responsible for business activities. This is a process many companies are not ready for. It’s not they are not able to do business, but listing on an exchange is on a different level.”

Teng emphasizes that once listed a company has the added pressure of seeing that the value of its stock rises. So, what happens if your stock drops even though your performance has improved and profits are rising? These kinds of things happen on US exchanges and are one of the many reasons many Chinese companies chose to delist. www.sbrchina.com

Teng believes that in the next 10 years we will see the retirement of the founders of China’s big iconic companies, and the emergence of the next generation of leaders, many f luent in American business jargon and educated in Western universities. Some founders will retire for health reasons, some will want to leave the business to the next generation, for whatever reason this transition signif ies a major shift in business practices.

“There is a succession plan in place and that is a good development,” observes Teng. “In the ancient Asian way the leader will stay until the last days of their lives. So, in practice, the leader never steps down. This change in succession policy is critical for China’s business world to internationalize.”

As to whether a Chinese company should list in America today, Teng has strong views on the matter. “It depends on whether the cost justifies the amount of capital they want to raise,” he adds.

“Personally, I would consider raising debt in the current low interest rate environment. To succeed in the equity markets you need a charismatic leader with a sexy story to bring cash flow. You must take a long-term view, with a full understanding of how to expand your market.

It’s very complex, but you have to weigh all these factors together and make your decision.”

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MEDICAL REPORT

Croatian Regenerative Medicine meets TCM Led by the team of Sandra and Kresimir Pavelic, the Croatian regenerative medical world has its sights set on China.

by Leon Qiu Yuanliang

S

huttling between the magnificent Croatian seaside haven of Opatija and the port capital of Rijeka on the picturesque Adriatic coast, Sandra and Kresimir Pavelic look to bring their regenerative medicine vision to the Silk Road, with China as the first port of call.

This husband and wife duo are eager to merge their vision of regenerative medi-

cine with Traditional Chinese Medicine (TCM) to tailor services for the world’s fastest growing medical market.

Work ing out of one of t he best equipped medical laboratories in Southern Europe at the University of Rijeka – thanks to a €24 million grant through the RISK project financed by European Regional Development Fund (ERDF) –

the Pavelics lead the way with a creative approach to drug development and regenerative medicine. Their vision encompasses a range of disciplines that brings traditional medicine in line with the latest innovations. The ability to merge ageold medical concepts with the new world of regenerative medicine is expected to yield results on many fronts.

The stunning Istrian Coast looks to attract Chinese customers to a growing regenerative medicine tourism business.

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September/October 2016

developing mass-spectrometry protocols for biomarker profiling of complex samples of tissue, micro-organisms, blood and food for personalized medicine. She has published over 70 scientific papers in distinguished journals and is a member of the review panel of the Slovenia Research Agency in biomedicine.

New Age Medicine

World renowned Kresimir Pavelic wants to combine Chinese and Western medicine to provide personalized and integrative treatments to provide patients with better solutions.

“Regenerative medicine is the newest wave of medical treatment, but that does not mean we should throw away what has come before,” explains Kresimir Pavelic, who holds a medical degree and is professor of molecular biology. A member of the faculty and contributor to the University of Zagreb, University of Cincinnati, Mayo Clinic Foundation, University of Hamburg and University of Rijeka, Pavelic is not short on credentials.

“We have closely studied the techniques used in TCM and believe many aspects can be synergistic with regenerative medicine. The combination of the two can give rise to impressive treatments.”

Pavelic is in a position to make such assertions. With over 300 published papers in top scientific journals, Pavelic has contributed to the field of transformed cells, through the introduction of ion exchangers (zeolites) in human and veterinary medicine, design of anticancer drugs and methodological approaches in cancer research and human genetics. The former Secretary General of the European Molecular Biology Conference and member of the Scientific Council of the European Molecular Biology Laboratory, and European Medical Research Council, September/October 2016

Pavelic has served as the President of the Croatian National Scientific Council.

“The integrated medicine approach to combine different disciplines with regenerative medicine in a broader sense is not just another term for holistic or alternative medicine,” explains Sandra Kraljevic Pavelic. “The integrative concept encompasses all our knowledge of modern medicine and embraces the most recent biomedical innovations as well as traditional approaches such as TCM. This treatment can fill gaps in medical knowledge on the true cause of disease and the relation between disease and a patient’s genetic background as well as their emotional condition. In this way we can better understand the progression of the disease and learn more about how a person’s body can be a healing resource.”

Kraljevic Pavelic tirelessly works to forward the initiatives of her renowned husband, and is accomplished in her own right. As an Associate Professor at the Department of Biotechnology at the University of Rijeka, she works in the fields of tumor gene therapy, evaluation of antitumor drugs in vitro, specializing in the study of molecular mechanisms.

Kraljevic Pavelic’s scientific focus is on www.sbrchina.com

The Pavelics strongly believe the world is moving toward a new practice of medicine that will be both personalized in its approach to individual treatments and integrative in its use of different schools of Western and Eastern medicine.

The end goal is to overcome Western medicine’s limited treatment approach and to develop a diverse and personalized treatment aimed at refocusing on the needs of the patient. In this manner, a patient’s own regeneration resources may be harnessed to speed the healing process.

Referencing the long history of TCM, Pavelic points out that within the integrative healing approach the benefits of herbal composition and different healing techniques at the center of traditional medicine are widely documented. Conventional Western science and medicine tend to be based on a model that excludes a total concept of health. According to Pavelic, such a view on treating diseases does not work well in the case of chronic diseases since it simplifies one of the most complex systems in nature – the human body.

“Even though enormous achievements in biomedical research are presented continuously, such as those related to longevity, nano-medicine or regenerative medicine, we still lack breakthroughs in everyday practice,” explains Pavelic. “We do not work enough with the individual set-up of each patient to account for the progression and prognosis of disease.

Medicine lacks adequate solutions for the growing number of chronic diseases.

There is no substantial progress in treatment regimens and much has to be done in the field of life quality to improve the situation.”

Due to these issues, the Pavelics promote a new personalized and integrative approach. “Medicine is always personal,” adds Kraljevic Pavelic, “but when we use 31

MEDICAL REPORT the term personalized medicine today we think about sophisticated technological platforms to identify the exact type of individual background for each patient and best available disease treatment options. In spite of controversies about its implementation, an integrative approach in management of patients and adequate treatment may pave a way for holistic medicine in the next decade. We see China as an excellent proving ground for something like this.”

The knowledge that scientists gather from traditional medicine is highly relevant.

Traditional medicine approaches are traditionally seen as ‘instructors’ of our own regenerative potential. It is clear the TCM world has long understood the ways stem cells can be used for healing.”

European Direction

Stem Cell Solutions Central to the integrative approach, stem cell research is based on cell and tissue renewal in healing the damage caused by serious diseases or accidents.

There are countless possibilities for applying regenerative medicine using stem cells in the case of damaged cartilage and bone replacement, acceleration of wound healing and skin renewal, heart muscle replacement and treatment of neuro-degenerative disorders, such as Alzheimer’s and Parkinson’s.

Research on the fundamentals of stem cell biology and the identification of new drugs has opened new possibilities for new applications of stem cells, with the most important application centered on cell-based therapy for injuries, diseases or disorders. This progress is due to a growing knowledge of basic molecular mechanisms in our bodies and is immensely important in the context of regeneration potential. Currently, many procedures are based on autologous stem cells isolated from the patient’s own body, an approach that avoids a number of ethical issues raised in Western countries.

Regenerative healing procedures are not limited to the use of isolated or concentrated stem cells. Scientists are studying interactions between the human body and the environment in the broadest sense. Research is conducted on new or traditional medical products and devices directed at inducing growth of a patient’s own stem cells in tissues and organs. Such medical products may activate stem cells and regenerative processes to repair certain conditions.

The Pavelics are putting great effort into such an approach within their current research.

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Sandra Kraljevic Pavelic is searching for breakthroughs in integrative medicine.

“Chinese scientists are already testing TCM formulations used as therapeutic and preventive agents on metabolic disorders in the activation of adult stem cells for tissue repair and rejuvenation,” notes Pavelic. “As stem cell-based therapy is not a mature technology, it may pose risks such as uncontrolled cell growth that could worsen instead of treat a disease.

The Croatian school of integrative medical thought leans heavily on advances in European regenerative medicine. Over the last decade, European stem cell research has intensified and become globally competitive. Well-controlled clinical experiments focus on building upon stem cell knowledge to highlight the different functions of cells. Legislation on safe use of stem cells is in the process of being implemented, research funding is improved, and questions connected to patients previously unanswered are addressed in leading medical research centers.

There is hope in Europe that treatments for many serious illnesses may soon be available as stem cells offer the possibility for revolutionary therapies in medicine. However, this opportunity needs to go hand-in-hand with upholding ethical principles based on a shared EU concept of patient treatment. “On

This Croatian PhD student is studying microarray data in search of new treatments. www.sbrchina.com

September/October 2016

one hand, the media has strongly promoted the promise of stem cells to the public,” adds Kraljevic Pavelic. “On the other, European scientists have responsibly approached the issue while making tremendous progress in fundamental research. With the advancement of research it is clear the ethics behind the use of tissue-derived, human embryonic and induced pluripotent stem cells need to be studied in parallel.”

The Pavelic team is working on a number of projects in this regard. One is conducted in tandem with Professor Bozidar Vojnikovic and JGL Co., Croatia’s largest pharmaceutical company. The project aims to develop a remedy for agerelated macular degeneration, a cause of blindness and visual impairment in older adults that afflicts 30 to 50 million people globally. Macular degeneration results in a progressive loss of vision due to damage to the retina. While there is currently no cure, in recent years drugs that could be used to treat the “wet form” of the disease, which accounts for 10% of all cases, have been applied.

The age-related macular degeneration treatment market across seven major countries (the US, UK, Germany, France, Spain, Italy and Japan) will almost double in value from US$5 billion in 2013 to US $10 billion by 2023, according to research and consulting firm GlobalData.

The main drivers for this considerable expansion rate, a Compound Annual Growth Rate (CAGR) of 7.1%, are new therapies entering the market and an aging global population, as more elderly people develop this destructive retinal disease.

The Croatian project will bring to the market a composition for the prevention and treatment of the “dry” form of macular degeneration. This composition is a mixture of natural compounds and an inorganic substance that slows down degeneration by promoting regenerative processes in the retina. Within this project, a treatment for macular degeneration using stem cells is being explored with research partners from Belgium.

Spinal Regeneration The Pavelics, together with Professor Miranda Mladinic Pejatovic and Professor Alan Ivkovic, are at work on two September/October 2016

Sandra and Kresimir Pavelic enjoy a moment in front of the University of Rijeka's ERDFfunded super computer, one of the most powerful in Southern Europe.

critical regenerative medicine-related projects: the development and testing of nano-materials to promote regenerative processes in the spinal cord and in bone and joint regeneration. Spinal cord regeneration and recovery after injury are achieved through activation of endogenous stem cells while bone and joint regeneration is anchored on an innovative scaffold delivery system.

Spinal cord injury produces lifelong, devastating consequences for patients.

Despite improvements in early management, there are no approved pharmaceutical or medical treatments to change negative neurological outcomes. Manipulation of endogenous spinal cord neural stem cells after injury provides a valid alternative to stem cell transplantation procedure. Within the project the unique possibility to control stem cells activation and grow nerve endings essential for the regenerative process is being developed.

This is central to the recovery of injured spinal or brain tissue. To induce such a process in the body the Pavelics use a specific incompatible nanomaterial to build an inorganic scaffold. Developwww.sbrchina.com

ment and testing of biocompatible nanomaterials that control the activation and migration of endogenous neuronal stem and progenitor cells that have a positive impact on the regeneration of spinal tissue could be the next leap in treatment.

For the bone and joint regeneration project, the focus is on a third-generation scaffold delivery system made of natural materials engineered to contain synthetic molecules that act as a bioactive signal for stem cells. As the scaffold slowly degrades, it provides optimal concentration of the molecules available for new cells to attach and to be completely replaced by new bone.

“All this fits within the integrative vision we have for medicine,” concludes Pavelic. “Currently we seek more information on how TCM can fit into this mix. It is our objective to integrate the rich 5,000-year history of traditional medicine in China with the best the world can create today. There is no doubt in our minds that the ability to bring these areas together will deliver a new level of medical discipline to a world in need of new approaches.”

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COUNTRY REPORT

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COUNTRY REPORT

The iconic Matterhorn peak towers over the luxury mountain resort of Zermatt.

The Swiss Connection ChemChina’s bid to acquire agribusiness giant Syngenta cements Switzerland’s position as a major destination for Chinese investments.

by Geni Raitisoja

A

s the snows fell in the Swiss Alps in early February, Syngenta Chairman Michael Demaré made a startling announcement from their headquarters in Basel. The composed Swiss executive calmly announced to the world business press that China National Chemical Corp. (ChinaChem) offered US$43 billion to acquire the giant agribusiness in the most ambitious foreign takeover bid by a Chinese company to date. The Syngenta payout more than doubles the earlier record set by the China National Offshore Oil Corporation (CNOOC) purchase of Canadian oil company Nexen in 2012 for a comparatively modest US$18 billion.

The proposed acquisition of Syngenta is remarkable in many respects. The acquisition accounts for the lion’s share of the US$60 billion announced Chinese acquisitions in Europe for Q1 2016, making it the busiest period on record for Chinese outbound deal making, according to law firm Baker & McKenzie. The all-cash Syngenta deal easily trumps the US$23 billion of Chinese FDI to Europe for the whole of 2015 and shines the spotlight on Switzerland as a prime destination for Chinese investments and business partnerships.

The Swiss transaction highlights the increased appetite for acquiring foreign companies as well as a comfort with the business environment of that country. End of year data from international accounting services firm Ernst & Young China for 2015 states China’s outward foreign direct investment (ODI) grew by 13.3% to a historic high of US$139.5 billion. The results for the first half of 2016 are even more impressive, as information released by global financial data provider Dealogic show China’s mergers and acquisitions (M&A) volume of US$135.3 billion in the first half of 2016 already surpasses any previous full year record.

The Swiss power play illustrates the desire for China to invest in Europe.

China’s investments in Europe outpaced those in North America by a whopping 35% last year, at US$23 billion and US$15.3 billion respectively. Analysts believe that if projections by high-level China officials that call for an additional growth in ODI of another US$1 trillion by 2020, or an average outflow of about US$200 billion per year, were to be realized, it would mean hundreds of billions of dol-

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COUNTRY REPORT

The Sino-Swiss Free Trade Agreement has already had a positive effect with an increase in activity between Chinese and Swiss enterprises.

lars in ODI for countries in Europe and North America in proportion.

Switzerland has traditionally been seen as an attractive investment target due to the high level of political and economic stability that country offers, the transparency and fairness of its legal system, the reliability and expanse of its infrastructure network and its efficient capital market. Even more important, as China stands at the cusp of a new economic era Switzerland stands to benefit from this transition greatly.

New Model After three decades of dizzying doubledigit growth, China now has to cope with the challenges that come with an economy that is faced with a slower growth period. The old model based on cheap, abundant labor and powered by massive economies of scale is falling by the wayside as China moves from a middle-income to a high-income economy, a Baker & McKenzie report comments.

With Chinese investments in resources plunging in 2013, investment shifted from raw materials to services, advanced manufacturing, technology and other high value added sectors. Chinese firms, it seems, are discovering investment possibilities in electronics, financial services and healthcare – and Switzerland is an important port of call for all.

ChinaChem’s takeover bid of Syn36

genta is widely interpreted as a strategic move by Beijing to assure food security, as well as to access technology and knowhow. Syngenta, after all, is one of the leading producers of genetically modified seeds and the largest crop chemical producer in the world. The deal will likewise open new markets to ChemChina, as it is present in 90 countries through 112 production and supply sites.

Syngenta, which posted global sales of US$13.4 billion and a market capitalization of US$37 billion in 2015, was the subject of a failed takeover by American firm Monsanto Co., the world’s largest seed company.

One point of contention that hindered the deal was whether the company headquarters would remain in Switzerland, which ChemChina agreed to.

“In making this offer, ChemChina is recognizing the quality and potential of Syngenta’s business,” Demaré announced. “The transaction minimizes operation disruption and is focused on growth globally, specifically in China and other emerging markets, and enables long-term investment in innovation.” The deal is expected to be finalized within the year and has already cleared one hurdle, after receiving the go-ahead from the Committee on Foreign Investment in the US, which has the authority to block deals it considered harmful to national security. The deal could still face opposition from EU regulators. www.sbrchina.com

One of Many Prior to the Syngenta deal, the biggest Chinese acquisition of a Swiss company was the 2009 China Petrochemical (Sinopec Ltd.) buyout of Genevabased Addax Petroleum Corp., a listed company on the Toronto and London exchanges, for US$7.2 billion. Industry experts were quoted as saying that “Addax’s assets are well-structured and of good quality, contain sizeable proven reserves and have strong production volumes with great growth potential.”

In February this year, Hainan-based HNA Group, China’s fourth largest airline, completed its purchase of Swissport, the world’s largest ground and cargo handling company, for US$2.8 billion.

Swissport will be run as a stand-alone business within the HNA Group. As Eric Born, Group President & CEO Swissport, commented, “Becoming part of HNA Group will enable us to further strengthen our service offering and continue to expand our position as the global leader in ground and cargo handling services.”

The sale of Infront Sports & Media AG, an international sports marketing company based in Zug, to Dalian Wanda Group Co. Ltd., China’s largest investor in the cultural sector, is at US$1.2 billion a smaller, though no less impressive recent investment. Wang Jianlin, Chairman of Wanda Group, said, “This September/October 2016

COUNTRY REPORT acquisition of Infront will significantly increase the future impact of the Wanda Group in the culture and entertainment industry and will also drive the development of Chinese sports industry and its interest around the globe.”

China’s early foray into foreign investment was characterized by stateowned enterprises going out into the world backed by government funds.

Accounting firm KPMG believes that trend is changing. Today, outbound M&A deals are concentrated in highvalue added and consumption-related sectors. An example is the increased number of deals in the computers and consumer electronics sector, which grew from 57 in 2014 to 99 the year after. This is good news for countries like Switzerland that heavily engage in value added industries.

At this point in its economic development, China can benefit from a close partnership with Switzerland, ranked the most innovative country in the world. In sectors like regenerative

September/October 2016

medicine, companies such as the Ticinobased Swiss Institute for Regenerative Medicine (SIRM) can pave the way and work with Chinese enterprises to usher in the next phase of medical knowledge and practice.

Two Way Street The business f low between China and Switzerland is certainly not a one-way street. Led by the likes of giant enterprises like Novartis (pharma), Nestlé (food) and ABB (infrastructure), Switzerland is one of the few countries to run a trade surplus with China. Switzerland primarily exports mechanical and engineering industry (MEM) goods and pharmaceuticals to China along with watches and jewelry to Hong Kong. The richer China is, the more attractive highquality Swiss products become.

When looking for a case study of success, attention often turns to ABB in China. ABB’s relationship with China dates back to 1907, when it delivered the first steam boiler to the country. After years

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of fast growth, ABB has established a full range of business activities in China, including R&D, manufacturing, engineering, sales and service, with 18,000 employees, 40 local companies and an extensive sales and service network across 147 cities. In 2015, China continued as ABB’s second-largest market worldwide with over Rmb3 billion in revenue, some 90% of which came from locally-made products,solutions and service.

On the diplomatic front, China is intent on moving forward with the Swiss relationship. When President Xi Jinping welcomed Swiss President Johann Schneider-Ammann to Beijing in April, he hailed him as an “old friend of the Chinese people”. Not only was Switzerland one of the first Western countries to establish diplomatic ties with the PRC in 1950, Swiss traders and missionaries found their way to the Chinese empire hundreds of years before. In a country where background and history is everything, the Swiss stand to move from strength to strength.

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A Visionary Partnership Swiss Consul General Alexander Hoffet discusses the reasons behind the success of Sino-Swiss relations.

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wo years into his stint as Consul General for Switzerland in Shanghai, Alexander Hoffet is still surprised by the vitality of the city. Prior to assuming his post in Shanghai, Hoffet held many challenging positions in Asia and in a number of international organizations based in Europe. In this Q&A, Hoffet explains how China and Switzerland contribute to each other’s economic development.

professional training, health systems, outstanding infrastructure and a competitive tax system. These qualities have made Switzerland home to many leading global organizations, including the UN and IOC, and multinational companies such as ABB, Nestlé, Novartis, Roche, Credit Su isse a nd UBS. The y have now been joined by companies like Sinopec, Huawei, Yuanda and Ruida.

SBR: How would you characterSBR: Are the two cultures well ize the relationship between matched?

Switzerland and China?

Hoffet: It takes time for the Swiss to understand the f lexHoffet: Switzerland was one of the first Western countries to ibility of the Chinese mentality recognize the People’s Republic and the Chinese to deal with the of China in January 1950. This well-structured character of the Consul General for Switzerland in Shanghai Alexander Hoffet decision was both pragmatic Swiss. Cultural differences exist says Swiss and Chinese people have many similarities. and visionary. I believe it is this everywhere, but mutual undercombination of pragmatism and standing, respect and putting vision, of mutual respect and a sense of aside differences in search of common labor cost and lack of skilled workers are combined interests that makes the bilatground is beneficial. Somehow Swiss challenges that companies must tackle eral cooperation between Switzerland and Chinese people may be surprised when they decide to make a long-term and China so successful. to find that they have many similariinvestment in China.

This year marks the 66th Anniversary ties. Diligence, hard work, tolerance and The “Swiss made” label has ensured of the establishment of Sino-Swiss diplopragmatism are common traits easily top quality from Switzerland to global matic relationship and the highlight was found in both groups. customers. The success behind this is the the state visit of our President Johann pursuit of innovation and full dedication SBR: You mentioned you were taking Schneider-Ammann last April. It led to to the core technologies. Innovation is inChinese lessons? an agreement on an innovative strategic tegrated in the DNA of Swiss people. And partnership, which will give an added Swiss companies are featured for niche Hoffet: Taking two Chinese language dimension and fresh impulse to the allessons each week has become a routine products, which can hardly be found or ready excellent bilateral relations. for me. Chinese is very different from replaced in the market, which in turn other languages and it is not realistic for keeps the competitiveness of Swiss comSBR: How would you describe the busime to master Chinese during my term panies intact. ness environment? in Shanghai. However, I consider the SBR: What makes Switzerland a good lessons useful. I believe studying the Hoffet: The business environment in destination?

China has improved and become more language of every country I work in will mature over the past 30 years. Swiss help me to better understand the peoHoffet: Innovative strength and techcompanies are facing fierce competition ple’s mentality and the inner workings nology, a competitive market economy, from local competitors. The ever-rising of a country’s system. political stability, excellent education, 38

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September/October 2016

COUNTRY REPORT attract at least 20 primary component makers to settle in TEDA.

Auto joint venture FAW-Volkswagen Automotive is building a new wholevehicle manufacturing base in Tianjin.

The new base, with an investment of 19.5 billion Yuan ($3 billion), is expected to be finished in 2018 and to make 300,000 cars per year.

Covering 108 hectare of land, the new base is located at Tianjin Economic & Technological Development Area (TEDA). When put into operation, the base will require 6,000 employees, and will certainly attract its components suppliers to follow suit. Based on normal practice, a whole-vehicle base will

TEDA ADD: 19 HONGDA ST., TEDA, TIANJIN TEL: +86-22-25201111 +86-22-25201907 WEB: www.teda.gov.cn September/October 2016

TEDA’s cooperation with the auto giant Volkswagen already started since 2012, when Volkswagen decided to build a new transmission production base here, namely DQ380 and DQ500.

The two kinds represented cutting- edge technologies that were first introduced to China. With a convenient atmosphere, Volkswagen fur ther added DL382 products to its TEDA base and more possibilities are still ahead. Now its total investment on transmission alone has reached 13.85 billion Yuan ($2.1 billion).

German auto parts supplier Continental AG also invested 80 million U.S. dollars in a new factory in TEDA scheduled to start operating in 2017. Continental launched a business here in 2007 producing automotive electronic products for global clients and now expects to produce a greater range of products in China.

Another giant Toyota has been in TEDA for 16 years. Toyota’s three existing production lines can produce 530,000 vehicles annually. Early this year, the Tianjin FAW Toyota Motor Corporation started building its fourth plant in TEDA and will produce new models by the middle of 2018. The annual capacity of the new production line is expected to reach 200,000 vehicles.

The automobile manufacturing industry is one of the pillar industries of TEDA, which has gathered world-known vehicle makers including Volkswagen, Toyota, Great Wall Motor, Qingyuan Electric Vehicle, Xingma Automotive, and many component providers like Aisin, Audi, Denso, Continental, Yazaki, Hyundai Hysco, Mobis, TI Automotive, Minth Group, Freescale etc. TEDA has formed a complete auto industry chain of whole cars, motors, transmissions, auto electronics, auto moulds, tires and coatings. According to TEDA’s plan of auto industry, the annual output will reach 2 million vehicles and a total value of 30 million Yuan by the end of the 13th Five-Year Plan.

SHANGHAI OFFICE TEL: +86-21-68827776 EMAIL: shanghai@teda.net

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Free Trade Swiss Style The Free Trade Agreement between Switzerland and China provides a clear roadmap for the rest of Europe.

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hen China signed a Free Tr a d e A g r e e m e nt ( F T A ) with Switzerland it was heralded as the perfect model for a future trade pact with the European Union.

The Swiss FTA took effect in 2014, and just one year on the positive effects are already visible. For the Swiss business world, this FTA with the Mainland is all the more important given that after the EU and the US, China is the third largest trade partner.

“In the last year, the total volume of Swiss goods traded with Mainland China

many in Europe recognize with reluctance. The EU’s hesitation to accord Market Economy Status (MES) to China remains a sticking point, as it was one of the conditions for China’s agreement to enter the World Trade Organization (WTO) and is a pre-requisite for initiating free trade talks. Add to that a host of trade disputes and the possibility of an FTA between China and the EU seems difficult to achieve.

“It is fair to assume that China is using this agreement to see how it could manage an FTA with the EU, which is

The Free Trade Agreement is a major milestone between Beijing and Bern.

stood at less than US$33 billion, a rise of almost 10% of the 2014 volume,” comments Fabio Müller, Trade Promotion Director of the Swiss Business Hub China in Shanghai. “That is all the more impressive as China’s trade growth with most of its partners was negative during the same period. In all likelihood, the FTA positively contributed to that growth.”

Switzerland became the first country in continental Europe to sign an FTA with China in 2013 and is a point that 40

likely Beijing’s goal several years down the road,” notes Peter Bachmann, Executive Director of the Swiss Chamber of Commerce in Shanghai. The EU’s loss translates to gains for Switzerland. Currently, China’s FTA with Switzerland represents one of the largest free trade agreements with an OECD state.

Billion Dollar Savings Under the terms of the Sino-Swiss agreement, tariffs on more than 95% www.sbrchina.com

of all bilateral trade will be eliminated or substantially reduced. Based on a utilization rate of 60% and assuming an annual export growth of 5%, a study commissioned by Switzerland Global Enterprise finds that this translates to savings for exporting companies of almost US$6 billion by 2030.

“There are substantive provisions on technical barriers to trade, trade facilitation and customs procedure on trade in services and on intellectual property rights,” explains Müller. “FTA enhances transparency and legal certainty for companies engaged in bilateral trade.”

Switzerland is one of the few countries to run a trade surplus with China, helped in no small part by the growing purchasing power of the Chinese consumer.

Switzerland primarily exports mechanical and engineering industry (MEM) goods and pharmaceuticals to China along with watches and jewelry to Hong Kong. The richer China is, the more attractive highquality Swiss products become. While China accounts for only 8% of total Swiss exports, which in 2014 was US$16.5 billion, China’s overall contribution to Swiss export growth is almost as much as that of the US and only marginally smaller than that of Germany and the UK, according to Credit Suisse.

All these strengths combined – large size cross-border M&As between China and Switzerland, long lasting synergies of Swiss companies operating in the Mainland, financial services opportunities on many fronts and the newly operational FTA – are critical to the future growth of Sino-Swiss business relations. Both countries believe that all the pieces are now in place to form a strong foundation for growth. With the EU standing on the sidelines taking note of developments, the allimportant Sino-Swiss partnership is of the utmost importance.

September/October 2016

COUNTRY REPORT Administrative building of the Novartis Campus in Basel by Frank O. Gehry / Photo by Novartis

Canton of Basel-Stadt

& S D N I M E INQUISITIV S R E K N I H T E V I T A V O N IN

Basel and Shanghai – partner cities with a striking resemblance: Basel is the most dynamic business location in Switzerland and one of the most productive worldwide. Global players such as Novartis and Roche are based in Basel and the surrounding region. But many other companies as well from the researchoriented areas of life sciences, chemistry and nanotechnology are powerful drivers of innovation – perhaps for your own career. www.basel.ch

September/October 2016

CityBasel

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TOURISM INDUSTRY REVIEW

From the Acropolis in Athens to the Colosseum in Rome and the canals of Venice, Chinese tourists are exploring Europe like never before.

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Ready to See the World The world has noticed that China travellers are an important force to attract when it comes to securing tourism success.

by Patrick Musgrave

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hina’s rapidly growing middle class is more eager to travel the world than ever before. The number of Chinese tourists travelling each year internationally has more than doubled to a global record of 120 million people over five years, according to the China National Tourist Office and World Travel & Tourism Council, as an astounding one in every 10 international travelers now comes from the Mainland. Chinese tourists spent US$215 billion overseas, more than a 50% rise over 2014 totals, or more than the annual economic output of many countries.

The UN World Tourism Organization (UNWTO) recently reinforced what many cities of the world have experienced over the last several years. According to UNWTO, “China is by far the fastest growing source market in recent years and has been the world’s top spender in international tourism since 2012.” The UNWTO goes on to say that the “exceptional pace of growth” in outbound tourism expenditure that made this possible, an annual growth rate of 27% that created a market that spends over US$200 billion a year, is a trend that will continue for many years to come.

Leading Hong Kong-based global brokerage and investment group Credit Lyonnais Securities Asia (CLSA) attributes this trend to cultural aspirations of “China’s fast-growing, monied middle-class families, eager to expand their horizons.” While shopping destinations and easy getaways like Hong Kong and Korea (especially visa free Jeju island) “will still be a priority for many, cultural activities have become increasingly important as Chinese move up the travel learning curve and explore new locations”.

Chinese tourists are choosing to travel abroad more frequently, and they will spend more than the average tourist to do so in proper style. A recent study found that for over 40% of outbound tourists, travel accounted for more than one-fifth of their total living expenditure. Perhaps that is one reason why Chinese travelers top the world in spending per capita while abroad. Even on dutyfree goods, shoppers average more than US$1000 per person, nearly twice as much as high-rolling Japanese travelers.

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TOURISM INDUSTRY REVIEW

The World Tourism Cities Federation gathers together the world's leading touristic cities in Chongqing to discuss common interests When Beijing-based World Tourism Cities Federation (WTCF) hosts the world’s leading cities in the metropolis of Chongqing, the competition for the massive pool of tourism dollars will be the major point of discussion. With millions of upon millions of tourists jetting around the globe each year, the global tourism industry is well aware that no country contributes more to this flow of tourism business than China.

Since its launch in 2012 WTCF has become a rising tourism industry star. The WTCF Fragrant Hills Summit, named after the imperial garden where it was first held, is an increasingly prominent meeting ground for the industry. The first city-based international tourism organization in the world, WTCF is committed to facilitate exchanges between members to promote sustainable growth in the tourism sector. Guided by the slogan of “Better City Life Through Tourism,” WTCF facilitates cooperation between members to realize sustainable tourism growth for a membership that boasts 113 cities and 55 institutions.

The WTCF Fragrant Hills Tourism Summit gathers together top government officials of tourism cities and the senior executives of tourism-related institutions to create a dialogue designed to reach consensus and increase mutual trust. The WTCF fits all the working parts together to generate mutually beneficial cooperation. As such, mayors from high profile tourism haven cities hope to seize opportunities with the WTCF and are leading delegations to the 2016 Chongqing WTCF Fragrant Hills Tourism Summit to collaborate with the Chinese tourism sector and benefit from the WTCF’s international focus.

Inbound Tourism To better serve its membership WTCF has established a platform to invest in promising tourism ventures with the China Association of Private Equity (CAPE), a group with over 400 members that manages over Rmb1 trillion (US$150 billion) in funds. At the 2016 Chongqing Fragrant Hills Tourism Summit members will form an Investment Committee to be jointly administered and sponsored by the experienced CAPE team. The two-day event will lead to the World Tourism Cities Federation Chongqing Declaration that will guide the WTCF focus for the next half decade.

On the inbound tourism front, China has a proven track record. Currently, China is the world’s fourth most popular destination in terms of tourist arrivals, according to UN World Tourism Organization (UNWTO). The country climbed to third position worldwide in receipts following a double-digit annual growth rate that totaled nearly US$60 billion, excluding major spending destinations like Hong Kong, Macao and Taiwan. China led such sought-after destinations such as France, Italy, the UK and Germany.

With all the elements for successful partnerships and cooperation in one place, with even “sharing economy” industry giants like Airbnb participating, the 2016 Chongqing Fragrant Hills Tourism Summit will be an investment bonanza of sorts. About 20 landmark projects will be pitched to investors hoping to cash in on China’s ancient cultural sites and burgeoning urban centers. China’s inbound tourism market is expected to grow further and investors look for a piece of early entrants.

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A g r a ' s Ta j M a h a l , t h e pyramids of Giza, Dubai's Burj Al Arab Jumeirah Hotel and the temples of Cambodia are all must see sights for Chinese tourists.

September/October 2016

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TOURISM INDUSTRY REVIEW To k y o ' s S h i b u y a , Hong Kong's Central district and the Sydney Opera House are all Asian highlights on the tourist beat.

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September/October 2016

Chinese tourists choose to travel more frequently these days and they spend more than the average tourist to do so in grander style A report by global consulting firm McKinsey estimates that by 2022, more than three-quarters of China’s urban consumers will earn between US$9,000 and US$34,000 a year. Considering the price of consumption goods in China, this is comfortably middle-class. That is an interesting statistics as nearly half of all outbound Chinese travelers last year earned only between US$10,000 and US$18,000 annually. Consider the numbers: China’s continued urbanization is the largest human migration in history, and in a few short years 75% of these urban consumers will be middle-class and willing to spend a sizeable portion of their rapidly growing income to travel the world.

Cultural preferences for a specific travel experiences are not the only things changing. The fusion of information technology and the tourism industry changes the behavior of tourists in a profound way. The Internet changes their habits of acquiring information as well as their consumption habits. The Internet Plus strategy, a buzzword popularized by Premier Li Keqiang to refer to IT applications and their impact on conventional industry, has an increasingly prominent impact on outbound tourism. More than two-thirds of Chinese tourists use the Internet, often through mobile devices, to book hotels and air tickets, search tourist guides, find information on destinations and buy tickets.

Internet Travel The domestic tourism industry is dominated by large online travel booking giants Ctrip and Qunar, with a combined value of over US$15 billion, according to Bloomberg. The companies recently agreed to a partnership in the form of share swaps and formal alliances on several new offerings. This type of cooperation, according to Ctrip CEO James Liang, fosters “a healthy travel ecosystem”, much like what the Meituan-Dianping merger and the combination of Kuaidi Dache, Didi Dache and Uber have done for their respective industries.

In a similar spirit, tourism industry players and the government hope to bring together all stakeholders to collaborate in development of outbound tourism. According to the China National Tourism Administration, in the first half of 2016 alone China unleashed about the population of Italy on the world. Even as global economic troubles loom and wider performance slows, the outbound tourism industry is leading the charge, developing much faster than both the macro economy and global tourism sectors. The challenge for the tourism industry is to ensure this growth is structured well to benefit all involved.

The next five to ten years will be an amazing time for the Chinese tourism sector, both domestic and outbound. The China Association of Travel Services predicts a steady rise in travel as growing wealth in second- and third-tier cities means that more and more tourists will head overseas in the years to come. Visa policies toward Chinese tourists continue to improve and integration with the Internet makes it easier and more convenient than ever to learn about and arrange travel to anywhere in the world. The excitement for this booming industry is just getting started and the WTCF cities are rubbing their hands in glee.

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TOURISM INDUSTRY REVIEW

Rising MICE Tide

The MICE industry remains resilient in the face of changing market conditions and cutbacks in government spending.

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ike a rising tide lifts all boats, China’s Meetings, Incentives, Conferences and Exhibitions (MICE) industry has been a primary beneficiary of the country’s decades-long economic boom. An enormous and free spending public sector, lavish local government hosts, and international purchasing travel, were a boon to the MICE industry and fuelled the influx of a host of local and international players eager to share in the growth opportunity.

Still, the market has gone through its ups and downs. Rising costs are driving central government “rebalancing” policies amidst an economic slowdown; the public sector is tightening its belt; and international conditions are less promising. Yet, the MICE sector has proven astoundingly resilient to market conditions that have swamped other industries.

Global management consultancy AT Kearney finds that “the industry is still experiencing meteoric growth and is far from reaching a saturation point.”

to entertainment, travel and vehicle purchase. MICE expenditures, a key constituent, continue a downward trend and came in nearly 15% below budget last year as cost saving orders rippled throughout government ranks.

“The government’s new belt tightening policies are a major factor driving changes in the MICE industry,” according to the Incentives, Business Travel and Meetings Expo of China (CIBTM), which plans to launch a major event at the China National Convention Centre (CNCC) in September. “These are altering the landscape of the meetings market as they have curbed the expansion of extravagant events funded from the public purse.” This is reflected in the numbers.

The Beijing Daily and Beijing Times re-

cently reported the list of 318 designated venues authorized by the city’s municipal procurement department included none of the city’s top 27 hotels.

“Such major shifts in demand have led many to worry that market demand may not catch up with supply,” notes Reginald Wang, Resident Manager of Fraser Suites Chengdu. “Hotels running without a great deal of profit and not being able to live up to owners’ expectations of investment return are central worries.” Despite these concerns, the MICE industry has taken the changes in stride.

Private Sector Refocus While the public sector still makes up a large portion of MICE revenues, composition has undergone a meteoric

Belt Tightening A “key takeaway” of a 2013 strategy report on China’s hospitality industry was to “invest in government relationships.”

The report suggested that a “multipronged effort, focused on both the central government, such as the National Tourism Administration, and various local and provincial governments, is the best approach”.

In just a few short years, times have changed significantly. Chinese President Xi Jinping’s long anti-corruption campaign has become broader in focus. In keeping with the original spirit, the program has brought about major cutbacks on banquets and other non-essentials – grouped as the “three publics” to refer 48

The popularity of cities like Hangzhou shows China’s rising upmarket appeal. www.sbrchina.com

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TOURISM INDUSTRY REVIEW shift in a few short years. “The Chinese international and private business conference and events sector is a rising star, estimated to be growing at a rate of 20% annually,” according to Deborah Popely, a hospitality sector veteran, founder of Green Events Source and professor of hospitality management.

According to a CIBTM Venue Trends survey, the industry has been positioned to attract foreign business travel by massively ramping up prerequisite training, with over 80% of venue managers recently reporting such a shift. “A dynamic economy depends on its talents,” Wang explains. “Foreign involvement brings advances in management and technology, and enhances productivity and professional talents coming up in the field. Even as traditional revenue sources weaken, I am optimistic this renewed focus on manpower, creation and renovation will help the MICE industry prosper.”

In times past, the industry saw consistently “good” quality, regardless of

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Exhibitions and conferences are the order of the day in the major centers of China.

location, as both a prerequisite and a determinant of market success. The lucrative government market demanded quality, but not necessarily world-class extravagance. The industry is now frag-

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menting into higher and lower end markets, expanding the scale of differentiation at an unprecedented pace.

One key focus of China’s 12th and 13th Five-Year Plans is on distributed devel-

September/October 2016

opment — especially in the Western regions, which covers essentially any place not on the Eastern coast. According to China Economic Review, a new MICE economic belt is forming, incorporating second tier cities like Chongqing, Xi’an, Wuhan, Zhengzhou and Yinchuan. These destinations can reduce MICE package expenses by up to 40%, as average packages to first-tier destinations like Shanghai and Beijing climb to around Rmb600 per head per day.

Geographic expansion is just that: expansion, not relocation. This is too often skimmed over in discussions of the undeniably vast opportunities China’s geographic-interior hold. While key hospitality players look to serve growing demand in the West, capitalizing on land and labor value, they are by no means overlooking the first-tier and coastal cities. Instead, MICE sector investors are rebranding these locations as world-class, upmarket, business and tourism hubs.

Chris Dexter, Vice President of Op-

September/October 2016

erations and General Manager of the Wyndham Grand Plaza Royale Hotels and Resorts, sees a bright future in differentiated market segments. First-tier cities and tourism destinations that face increasing costs and competition will shift upmarket to appeal to deep pockets in the international arena. Meanwhile, inland development outside of tourist destination cities like Chengdu and Xi’an will focus on the economic market. “From a company view,” Dexter says, “continued growth in the internal domestic market will give a platform for our brands to grow, especially in the lower end segment, such as Super Eight and Days Inn, along with our Howard Johnson and Ramada product.”

Hangzhou Success Hangzhou, the picturesque capital of coastal Zhejiang Province just south of Shanghai, is a shining example of China’s new international upmarket appeal.

“Cities like this are receiving more and more investment,” says Carey Wang, Di-

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rector of Sales and Marketing for Luxury Collection Hangzhou. “It is adjacent to Shanghai and has convenient transportation. Many international companies choose to hold events in Hangzhou and our research indicates this will scale up significantly over the next few years.”

This year’s G20 Summit was held in the city during the first week of September. “The event was a great opportunity for the MICE sector, and enhanced awareness of our city worldwide,” says Wang. “Diversification into high-end markets is paying off. With the majority of hotel meeting rooms around 500 to 1,500 square meters in size, hosting events like G20 is a massive opportunity to improve service quality.”

Wang sees such investments in quality as a key opportunity to attract more private sector and international events.

“We are closely related with the development of various fields, such as automobile, investment banking and insurance,” she says. “International companies like BMW, Samsung, Deloitte and PwC have

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Since the Beijing Olympics and Shanghai Expo the MICE industry has focused on appealing to a broader global market for its clientele and the initiative is paying off with higher-end business.

set up operations, as have four major national banks.” These developments, in turn, have attracted tech firms like Cisco that have chosen Chengdu as their national headquarters.

Wyndham’s Dexter believes staying ahead of worldwide market trends is key to the high-end segments of his company. “We do client research regularly according to different industries and purchase updated equipment and facilities popular in the market.” This has garnered Dexter’s hotel the “number 1 position on TripAdvisor, a high score on Chinese Ctrip, and many quality awards including from TripAdvisor, Travel + Leisure magazine, and CBN.” Another opportunity the high-end segment can seize is customized services. This follows what has proven to be a profitable trend in other industries: in the technology sector, providing software as a service (SaaS) rather than a concrete product is on the rise. In a saturated market, services are often easier to differentiate than fungible products, and the hospitality industry is learning that the greater the differentiation into highly specialized market segments, the less direct their competition. The Wyndham Hangzhou has taken full advantage of this, by offering meeting packages that are a far cry from the standard offerings other hotels offer.

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For the G20 meeting in September, for example, the Wyndham Hangzhou installed a massive venue for outdoor activities, allowing sundowner cocktail parties and events with breathtaking views of the Westlake and Baochu Pagoda. These and other Initiatives backed by solid market research, such as an organic vegetable garden which helps supply the hotel restaurant, are paying off.

Welcome Strategy China’s large enterprises, especially SOEs, have been encouraged to “Go Out” and seize opportunities abroad. This has meant bringing Chinese goods to market during the mass-manufacturing era and moving into foreign markets through acquisition strategies as of late.

Fervent promotion of China’s hospitality industry is in many ways a renaissance of a nearly forgotten “welcoming in” (yin jinlai) strategy pursued at the very beginning of China’s opening up.

Now that China’s decades-long modernization project has come close to fruition, the MICE industry is becoming more confident to deliver world-class experiences, not just keeping up with foreign rivals. Since hosting the 2008 Olympics and 2010 Expo, the industry has taken off in its drive to appeal to the world stage.

This goes hand in hand with a governwww.sbrchina.com

ment drive to deliver modern infrastructure that such events expect, with technology key to widespread development.

Hangzhou as an example has a worldclass airport for domestic and international arrivals. The new Hangzhou East Railway Station is praised and as the importance of transportation links as a determining factor for launching new projects becomes ever clearer. This effort will expand to all second- and third-tier cities as China infrastructure development continues.

“China has invested billions of dollars in infrastructure,” states Vincent Wolfington, Chairman of travel services company Ambassador Concierge. “Continuing and increasing investment human resources and skills development is the key to maintaining the industry’s current success and agility.” This realization has been integrated with government planning including documents like Guidelines to Accelerate the Development of the Tourism Industry. The overall aim is to develop the hospitality and tourism sector and make it a significant segment of China’s economy.

Continued Success According to a 2016 H1 report by the Global Business Travel Association, a 7,000-member strong international organization that monitors these trends closely, China has surpassed the US as the world’s largest business travel market. The market is expected to continue to grow at a double-digit year-on-year rate, to reach US$320.7 billion this year.

The organization’s Executive Director Michael McCormick calls this development a “major inf lection point” in China’s ascension to the world stage.

The MICE industry’s ability to adapt to rapidly changing circumstances amid “concerns about a potential hard landing for China resulting in collateral damage to the global economy” and reach this “exciting milestone for the travel industry is nothing short of incredible,” according to Visa VP of Global Commercial Solutions David Henstock. The future looks bright for this industry, as ingenuity and quick-thinking pragmatism continue to guide development to new heights on both the domestic and world stage.

September/October 2016

A Roaring Success Chengdu and its surroundings are the undisputed economic powerhouse of Sichuan Province and the Western region.

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hengdu’s economic prospects are everyone eager to trail-blaze into excitFrontier Tech the best in the country. This was ing industries in a new locale. This trend US-based commercial real estate serthe conclusion arrived at by the is reflected in market statistics: the provices organization Colliers International Santa Monica-based think tank Milken portion of GDP coming from tertiary inestimates that even given the frontier Institute’s Asia Center after analyzing dustry continues to expand, comprising market of Chengdu, the cutting edge factors such as job growth, foreign innearly 54% of the city’s income, according growth appears in its high-tech zones. vestment and value-added industries. to a recent numbers from the Chengdu “By area,” the Colliers report notes, High levels of “human capital, central Statistics Bureau. ”demand in the emerging submarkets government support, established inThe core thrust behind the tertiary in(Dayuan and Financial Town), located dustries in high-end aerospace and dustry’s ascent is “aerospace-related inwithin the Hi-tech Zone jumped ahead aircraft design, and a recently developed dustries and the more recently developed of mature submarkets” like the CBD, electronics manufacturing sector” have electronics manufacturing sector,” says East Avenue and South Renmin Road. contributed to creating a region awash regional economic expert Perry Wong.

This says something about the type with opportunity.

As Oakwood Residence Funder Chengdu of companies that sets up in Chengdu.

A combination of attractive location, General Manager Gabriele MontevecWhere Silicon Valley attracts eccentric an educated populace (the city is home chio points out, the city’s wealth of highcoders, Chengdu attracts the pioneer to several top universities) and favorable tech R&D talent is “now able to compete spirit like nowhere else in China, with government policy have helped achieve worldwide in all fields.” an average GDP growth rate of nearly 14% since 2008, all the more remarkable given the tough global economic environment. Wharf China Estates General Manager (Operations) Christina Hau notes, “ The stable growth Chengdu has maintained over the past decade is expected to be sustained over the ten years, with the city maintaining a top growth rate worldwide.”

Given Chengdu’s position as the economic hub in Southwestern China, Hau points out that the city’s market “not only covers the over 80 million people of Sichuan Province, but extends to some 20% of China’s population in cities and districts of the Southwest.” How are these incredible numbers possible? The area’s industrial composition tells a large part of the story.

Some believe that Chengdu has the best economic prospects of any major city in China.

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TOURISM INDUSTRY REVIEW

Oakwood Residence’s Montevecchio sees Chengdu as a meeting point between West and East.

In examining talent concentrations across China, consultancy Dezan Shira & Associates find that Chengdu deserves its reputation as one of the four main “science and education” centers in the nation. This has attracted over half of the world’s Fortune 500 companies to establish a presence in the city; about 252 have “set up branches in Chengdu by the end of 2013,” according to Chen Fu, Vice Director of the Chengdu Municipal Board of Investment.

“As an established source for engineering talent across China, as home to most colleges and universities in the province,” states a progress report coauthored by Dennis Chen, Government Affairs Manager at the US-China Business Council, Chengdu shows incredible promise in China’s new economy. Along with Xi’an in Shaanxi province, the Business Council finds that Chengdu provides the majority of highly skilled labor in the Western regions.

and higher growth to the Greater Western region of China.”

The Milken Report explains the city plans to serve as the most critical hub for the entire Western region, with radial growth extending to medium and smaller cities alike. Its position as hub of the West

is buttressed by the “Great Western Development Strategy”, an industrial policy derived from the 12th Five Year Plan (20112015). The strategy further ramped up the central government’s support for the economic dynamo that is Chengdu.

Wharf China's Hau believes this puts Chengdu in a “prime position to benefit from the New Silk Road campaign.”

The vast infrastructure project to connect Chinese markets to the world, with cumulative investment estimated at between US$4 and US$8 trillion over the project lifetime, will surely benefit the city. To more effectively capture these benefits, says Hau, the “Chengdu municipal government has worked hard to help the city become an international shopping paradise and a world class travel destination.” In 2016 H1, Chengdu IFS achieved a 14% YoY increase in foot traffic and a 13% increase in sales revenue, with occupancy rate at nearly 100%.

Chengdu’s location is indeed ideal.

Located near Chongqing, one of China’s five direct controlled municipalities (cities with province-level status) and home to more than 30 million, Chengdu enjoys the scale of economies and educated population offered by the big city.

Close to the Yangtze River, Chengdu has

Go West A ccor d i n g t o t he M i l ke n r e p or t , Chengdu is “the lead city of the central government’s Go West development initiative,” referring to the central government policy started in 2000 to bridge the coastal/inland economic divide. The vast development initiative “aims to bring new infrastructure, high-tech jobs 54

Chengdu recently hosted the G20 Finance Ministers and Central Bank Governors Meeting. www.sbrchina.com

September/October 2016

easy access to both inland regions and the coast. The strategic river traverses 11 provinces, drawing from tributaries in the Qinghai-Tibet Plateau far in the West and snaking all the way to the coast near Shanghai. All these markets are at the fingertips of industry in Chengdu.

Finally, high-tech industries employ vast engineering forces and are abundant because of the city’s recent ascension as a “cradle of military manufacturing. Chengdu Aircraft Industry Group, which designs and manufactures China’s advanced military jets, for example, will continue to expand and draw on the existing talent experience in planning nationally important projects.

Western Meeting Point Oakwood Residence’s Montevecchio sees Chengdu as a fulcrum in Western China and an invaluable international link. The city is “becoming more and more important as an international hub and a meeting point between West and East,” Montevecchio remarks. “The New Silk Road will emerge and create a new era of wealth and

business opportunities for all.”

This melting pot status derives largely from history, Montevecchio explains.

“Sichuan is close to Tibet geographically and located in the heart of Asia. Many cultures have met and done business together here and developed different kinds of cultures and trade.”

“Recent events such as hosting the Fortune Forum send a clear message to the world: Chengdu is the future of China,” adds Hau. “Not only have international brands, governments and events chosen Chengdu as a strategic base for the Chinese market, tourists too are flocking to the city as a must-go destination, bringing endless possibilities to the tourism and retail sectors.”

Perhaps Chengdu’s opening to the world was best exemplified by the G20 Finance Ministers and Central Bank Governors Meeting which was held in Chengdu on July 23, marking another milestone in the Sichuan capital’s internationalization and showcasing its burgeoning inf luence over the Southwest region and the entire global stage.

This is the first time the inf luential meeting was held in Western China, reinforcing the Chinese government’s efforts to foster business opportunities with the Go West strategy, New Silk Road and other efforts.

The G20 meeting brought together officials from countries comprising some 90% of global GDP, as well as the highest levels of the World Bank, IMF and OECD, for discussion to “encourage and foster economic growth through co-operation and mutual shared responsibilities”. “The G20 is a milestone event,” concludes Yuan, “both in the sense of political economy and to businesses in the city and surrounding areas.”

Chengdu’s Mayor Liangzhi Tang emphasizes that “hosting the G20 Finance Ministers and Central Bank Governors meeting reinforces Chengdu’s pivotal role within the Western China, its burgeoning finance industry and its trajectory to become an international metropolis. These meetings are a vital step for Chengdu to establish itself as Western China’s financial epicenter.”

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HY D E RA BA D

BANGALORE BANGKOK BEIJING BRISBANE CHENGDU GUANGZHOU HANGZHOU H O C H I M I N H C I T Y I N C H EO N JA KA R TA KUA L A LU M P U R M A N I L A PUNE SEOUL SHANGHAI SINGAPORE SURABAYA SUZHOU TOKYO

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LAW & TAX

Regulatory Update Regulatory Update is a comprehensive overview of the latest legal and tax developments affecting foreign enterprises in Shanghai and across China.

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his edition of Regulatory Update looks at important developments on the legal and taxation front. This column provides briefs on the latest State Council announcements, news on the eligibility of foreign nationals to practice appraisal, the temporary deregulation of four Free Trade Zones, changes to VAT exemptions for financial services as well as revisions to tax regulations affecting export enterprises.

LEGAL NEWS Five Certificates into One to be implemented on 1 October The General Office of the State Council announced in August that a new system to increase the ease of doing business will be officially implemented on 1 October 2016.

According to the notice, based on the implementation of the “Three Certificates into One” system, which sought to combine the business license, organization code certificate and tax registration certificate into one, it has been decided that the social insurance registration certificate and statistics registration certificate will be added to the bundle. The new registration will be known as “Five Certificates into One; One License, One Code”.

Foreigners may provide appraisal services The new Assets Appraisal Law, adopted in Beijing on 2 July, has opened the way for foreigners to engage in the appraisal business.

The law allows the practice of asset appraisal by certified Chinese professionals who have passed a national exam as well as those who have special appraisal knowledge and practical experience.

Lai Yongtian, Deputy Director of the Ministry of Finance Department of Laws & Regulations, said in a press conference that while foreign nationals cannot become certified appraisers by passing the exam, this does not preclude them from offering their services in China nor does it prohibit foreign institutions from offering the same.

SPC and CSRC launch pilot program The Supreme People’s Court (SPC) and the China Securities Regulatory Commission (CSRC) have launched a pilot program to resolve securities and futures disputes. The program, which will be tested in 36 regions, will involve People’s Courts at different levels as well as 8 securities and futures dispute resolution organizations across China.

The pilot work introduces a raft of important system and 56

mechanism innovations, including increasing the authority of the pilot mediation organizations of the securities and futures industries; allowing the filing of an application with the people’s court for mandatory enforcement of the mediation agreements; allowing the party concerned to apply to the people’s court for the payment order; permitting collective mediation of disputes that meet certain conditions, with the people’s court announcing legal rules through judicial judgments and unifying the application of laws to provide reference for resolving similar disputes; and clarifying the effectiveness of multiple flexible and convenient mediation methods, including online mediation.

State Council temporarily deregulates FTZs The State Council released a document on 19 July temporarily relaxing restrictions on foreign companies investing in the free trade zones of Tianjin, Shanghai, Fujian and Guangdong.

The revised regulations allow the establishment of wholly foreign owned enterprises in several key industries, including steel production. It will also open formerly heavily regulated sectors ranging from transportation to agriculture.

A total of 51 items have been revised, one of the most significant of which is the temporary shift from a lengthy review and approval process to a registration-based process. However, specific industries will still be subject to regulatory oversight by the relevant authorities.

Stock ownership incentive measures released Deng Ge, spokesman for the China Securities Regulatory Commission (CSRC), recently announced the release of the official Measures for the Management of Stock Equity Incentive Plan of Listed Companies.

The measures specify information disclosure requirements, such as the timeframe, content and process of disclosure. It also clarifies the permissible use of equity plans and defines the scope of incentive objects. The measures identify who shall be eligible for equity incentive plans. Foreign employees working in China, for example, may be included in the plan while supervisors may not.

Apart from relaxing certain conditions for the granting and exercise of equity incentive plans, the measures also improve the implementation procedures and decision making process while distilling the administrative follow-up, internal accountability setup and punitive measures.

Shanghai FTZ pilots financial supervision program The General Office of the People’s Government of Shanghai offi-

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cially released detailed implementation rules for a pilot program on the supervision of the entire financial services industry, covering all financial products. The program also aims to improve information sharing related to financial services and supervision.

The main measures include standardizing the design, publicity and marketing practices of financial products, stepping up monitoring and setting an automatic alert for financial advertisement information. The rules specify the responsible department for oversight based on the contractual legal relationship and product property, makes overall arrangements for assigning supervisory resources, and steps up comprehensive functional supervision.

Internet-based taxi services legal, Ministry says The Ministry of Transport has officially upheld the lawful status of internet-based taxi services. Before the publication of the ruling, car hailing services, most notably Uber and Didi Kauidi operated in what could be considered a legal grey zone.

The ruling defines the types of taxi services, including traditional taxi services and those that are booked from online sites or apps. This decision paves the way for private car owners that meet the requirements to offer taxi services that passengers book online. Ride sharing in private cars is also encouraged as a way to lessen heavy traffic and reduce pollution.

The new policy, which takes effect on 1 November, defines the scope of the service as well as the responsibilities and conditions that service providers must meet. The rules specify, for example, that the operator of the taxi business shall sign a labor or operation contract with the taxi driver and the legal liabilities business owners face.

TAX NEWS

financing and import & export, among others. The co-signatories to the Memorandum will be responsible for implementing the incentives in their particular area, with the NDRC and SAT maintaining oversight over the joint incentive program.

SAT revises export tax refund/exemption measures The State Administration on Taxation announced in July revisions to the Administrative Measures on the Classification of Enterprises for Export Tax Refund (Exemption). Businesses fall under four categories based on their tax credit rating, with enterprises in Category 1 and 2 able to take advantage of simplified filing procedures and expedited tax refunds. Category 4 businesses on the other hand are subject to stricter oversight.

The measures revisit assessment criteria for Category 1 enterprises, based on the type of export activities, such as manufacturing, foreign trade and service enterprises. The measures also define the criteria for classifying companies into the other three categories.

MOF and SAT expand VAT exemptions for financial services The Ministry of Finance (MOF) and State Administration of Taxation jointly issued the Supplementary Notice on VAT Policies for Same Trade Transactions among Financial Institutions (Cai Shui [2016] No.70) to further expand the scope of tax exemption on same trade transactions among financial institutions.

The Notice includes same trade loans, same trade borrowings, same trade payment under entrustment, same trade certificates of deposits, buy-out-type purchase of financial products sold back as well as holding of financial bonds into the applicable scope of “same trade transactions among financial institutions”, which means that the interest income of these types of businesses may be exempted from VAT.

SAT updates transfer pricing regulations The State Administration of Taxation (SAT) has issued new regulations related to the reporting of related-party transactions and contemporaneous declarations. Bulletin 42 will replace the transfer pricing documentation regulations implemented under Circular 2, released in 2009.

Bulletin 42, which takes effect from 2016, was informed by the discussion draft from September last year. The SAT was clear to update not only that the definitions for the related-party relationship but also expanded them to ensure that relationships between natural people are also given consideration in the context of two-party relationships.

The update also spells out, among other things, how to determine debt-to-equity ratio and that two parties will be considered related if they have “other substantial common interests.”

SAT to launch Certificate of Chinese Tax Resident Identity The State Administration of Taxation (SAT) issued the Announcement on Matters Concerning the Issuance of the Certificate of the Chinese Tax Resident Identity (Announcement [2016] No.40).

The Announcement, which shall take effect on 1 October 2016, aims to support the opening-up strategy and to optimize tax working procedures. The certificate will allow a company or individual to benefit from tax preferential treatments set out in tax treaties entered into between China and another party.

Eligibility will be determined by the supervising tax authorities and will depend on the applicant’s status as set out in the Corporate Income Tax Law, the Individual Income Tax Law, their respective implementing rules, among other factors.

Incentives announced for taxpayers with class-A credit ratings Chinese regulatory authorities, including National Development and Reform Council (NDRC), SAT and the People’s Bank of China, signed a memorandum of cooperation in July with the aim of offering better incentives to companies with class-A credit ratings.

The incentives include 41 measures covering 18 areas that range from project management, tax services, credit grants for

Regulatory Update is provided monthly to SBR by CCH Ltd., a Beijing-based expert specialized in China taxation and legal matters.

September/October 2016

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MARKET INSIGHTS

Infrastructure Dilemma One of the world’s leading global think tanks raises an important warning on infrastructure deficits.

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Douglas Betts

Infrastructure is a global requirement that is growing.

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cKinsey’s business and economic research arm, McKinsey Global Institute (MGI), has raised its voice on the subject of infrastructure. The news should, but probably will not, cause political leaders around the world to take note. This warning comes at a time when China is embarking on a major infrastructure revamp of the Silk Road nations, and continues to expand its domestic infrastructure projects.

According to the MGI Global Infrastructure Report, there will be a global deficit for investment in infrastructure of between US$250 billion to US$350 billion per year commencing in 2017. Today, the world invests about US$2.5 trillion a year in the transportation, power, water, and telecom systems on which businesses and populations depend. These categories are the cornerstones of the term “infrastructure”, though the meaning can extend much further.

Even with global investments of US$2.5 trillion, the capital requirements falls dramatically short of the world’s ever expanding needs for these basic elements of a modern society. McKinsey estimates that from 2016 through 2030, the world must invest about 3.8% of GDP, or an average of US $3.3 trillion a year, in economic infrastructure just to support expected rates of economic growth. Emerging economies account for some 60% of that. But, if the current trajectory of underinvestment continues, we will fall short by roughly 11%, or US$350 billion a year. The funding of the gap triples if we consider the additional investment required to meet the new UN Sustainable Development Goals.

Critical Issues There are a number of important takeaways from the McKinsey findings. First, www.sbrchina.com

infrastructure investment has actually declined as a share of GDP in 11 of the G20 economies since the global financial crisis.

Cutbacks have occurred in the European Union, the US, Russia and Mexico. By contrast, Canada, Turkey, and South Africa increased investment. However, there is substantial scope to increase public infrastructure investment. Governments can increase funding streams by raising user charges, capturing property value or selling existing assets and recycling the proceeds for new infrastructure.

In addition, public accounting standards could be brought in line with corporate accounting so infrastructure assets are depreciated over their life cycle rather than adding to deficits during construction. This change could reduce public investment behaviour. Overall, unleashing capital investment in privatized sectors requires regulatory certainty and the ability to charge prices that produce an acceptable risk adjusted return as well as enablers, such as spectrum or land access, permits and approvals.

Institutional investors and banks have US$120 trillion in assets that could support infrastructure projects. Some 87% of these funds originate from advanced economies, while the largest needs are in middleincome economies. Matching investors with projects requires solid cross border investment principles. Impediments that restrict the flow of financing from regulatory rulings on investment in infrastructure assets to the absence of an efficient market must be addressed. The most important step from the finance perspective, however, is to improve the pipeline of bankable projects.

While much of this SBR issue focuses on the US capital markets, we must remember that the needs for infrastructure are global, and will be particularly important September/October 2016

for developing nations in Asia, Africa and along the Silk Road. Capital requirements in the infrastructure sector are staggering and political leaders must address these needs now or their people and economies will suffer.

Hidden Benefits Infrastructure investment produces results difficult to understand for the average person. A new highway, a power distribution grid or a waste water treatment system, any of which will take three to four years to complete, is not an immediately recognizable benefit to an unemployed person seeking to provide for his family. Yet, this type of investment will in the future be incredibly beneficial for everyone. Benefits of investment in infrastructure are longterm and the benefit of a dollar spent today is not recognized for many years.

MGI estimates infrastructure typically has a socioeconomic rate of return of around 20%. In other words, one dollar of infrastructure investment can raise GDP by 20 cents in the long run.

Still, electorates are fickle. They expect

over the last four years is a good example, pressures strongly resisted by the IMF and other groups more focused on economic change and less on political immediacy.

Unfortunately, public investment tends to be pro-cyclical. It is one of the few discretionary spending items governments cut without strong opposition. Despite the fact that infrastructure-related expenditure tends to account for only 5% to 8% of public budgets, it is often the target of the budget axe. The Eurozone’s fiscal plan that deals with public spending cuts to move closer to a fiscal target is a prime illustration of this trend.

Capital Needed So, if governments have issues with continuity of funding where will the tremendous amounts of capital come from?

As McKinsey has identified, institutional investors seem like an obvious source of capital for infrastructure projects. These investors hold about US$120 trillion in total assets under management.

It is interesting to consider where these US$120 trillion of assets are held. The banks take a cool one-quarter at US$40 trillion in

The world invests about US$2.5 trillion a year in infrastructure projects.

their leaders to deliver immediate and positive change. As Shakespeare would say, “There is the rub.”

In times of financial crisis, the first sector to be cut is infrastructure. It is easier and more remote than budget cuts to social assistance, bloated bureaucracies or other sectors more central to sovereign financial issues. We need to look no further than the EU’s recent responses to some of the European countries fiscal problems.

The pressures put on Greece by the EU September/October 2016

assets. Investment companies (including investment banks, asset managers, wealth managers, family and multifamily offices, investment trusts, and investment companies) control US$29 trillion. Insurance companies and private pensions are not far behind at US$26 trillion. Public pensions and superannuation plans account for US$11 trillion, with sovereign wealth funds at US$6 trillion.

So to solve this funding problem governments may address the issue without www.sbrchina.com

excessive public expenditures if they can accept a simple concept, one that is extremely difficult for most governments, and certainly for all politicians to grasp: investors, institutional or otherwise, wish to control their financial commitments while governments by nature seek to control their infrastructure.

It is this inherent contradiction that in many cases restricts the flow of funds from institutional investors into infrastructure assets. Most governments are prepared to issue treasury securities to fund infrastructure works that they will control. Few are prepared to release control of infrastructure assets to encourage risk capital and investment funding from institutional investors. The solution lies somewhere in the middle.

By releasing control, loosening ownership restrictions and encouraging private sector capital in public sector projects, governments can address these huge funding needs and the impending funding deficit.

Governments do not like to lose control of their assets and projects. But to encourage private sector investment, governments must provide a stable regulatory regime with appropriate safeguards for those prepared to invest in infrastructure or quasi government projects. By providing a clear regulatory environment, protection from confiscation or financial restructuring changes and certainty of a fiscal stability, institutional investors can assess risk and price projects accordingly.

The impending infrastructure deficit will impact all those in the affected regions. Strangely, this is as much as warning to those in the Western world as it is to developing nations. Both the US and Europe have been sorely remiss in developing their infrastructure needs.

China on the other hand has met and exceeding any reasonable expectation of infrastructure development. McKinsey’s warning is as much a wakeup call the US and Europe as it is a warning to developing nations.

Douglas Betts is a Director and Founder of a number of private equity funds and is the Executive Director of Sunwah International Ltd, and Senior Counsel at McMillan LLP. 59

LAKE'S LAMENT

A Trip Down Memory Lane The faces have changed since the early days of China’s capital markets experiment, but the vision remains the same.

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David Lake

The Wall Street bull has watched the rise of China finance with interest.

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t felt like I was in a time warp when I headed back to the canyons of Wall Street to work on the US capital markets cover story this summer. The stif ling heat of the Big Apple brought back memories of a summer long past, more than two decades ago, when I covered the Wall Street beat for what was then the newly emerging China capital markets experiment.

The names of the various banks and exchanges were all more or less the same, with slight variations and additions here and there. Though the faces were for the large part new, they looked a lot like those I remembered from days gone by.

These Americans may have been part of the new generation of China stock listings promoters, and certainly much water had passed under that bridge, but for the most part they dealt with many of same challenges of those of yesteryear.

I flew into Beijing as a young journalist at the invitation of Citibank’s American Depositary Receipt team in 1992.

They were headed to China to sponsor the first formal high-level conference on stock listings in America and the ADR sales team suggested it would be interesting for me if I tagged along. Having never been to China, except for a quick tourist visit to Guangzhou, I thought this would be a good time to have a look.

Life was much different in the capital city at that time. The tree-lined streets were made for bicycles, not the millions of cars that rule the city today. Back then if you were lucky enough to have a car you could park on the street for 10 cents a day, compared to the Rmb10 per hour car drivers fork out now. When I looked at the night skyline from the window of the Shangri-la Hotel in the western corner of www.sbrchina.com

Beijing, a five-star icon that remains to this day in an expanded version, the city was dark, smattered with the glow of fluorescent white lights twinkling away like stars in the night.

Listings Experiment That was the Beijing I remembered – and enjoyed so much. It was not the amazingly modern metropolis it is today, a financial center of epic and growing proportions. But it was special. And, I fondly recall the bankers and financial executives that made their way to Beijing for this unique summit. There were high-ranking financiers, Nobel Prize Winners as well as top rank Wall Street lawyers and accountants. They were all there to bring the message that America was open for business, and Chinese listed companies were welcome to the bastion of capital.

That was the start of the capital markets experiment. Local stock exchanges were in the throes of opening their trading floors in buildings that looked more like warehouses than the cubic magnificence of the Shanghai Stock Exchange today in Pudong. In fact, there was no Pudong as we know it today, just rice paddies. Still, the vision was there. Pudong was on the drawing boards, and, you know what, today it looks pretty much like the plastic model that Pudong’s architects showed me back then.

I guess that was the point of it all. China had an idea of where it was headed and the grandeur it could attain, if only the investment could be attracted to realize the dream. The country knew that it needed to form a capital markets culture to woo the largest pools of money in the world, and to do so China had to provide September/October 2016

value and returns to investors. In retrospect, on the whole, China has done that, as most of the world’s leading investors now have some China exposure in their investment portfolios.

In this experiment, China never promised that its companies would provide returns in the many thousands of percent, like Alibaba and Tencent eventually did two decades or more later.

The financial planners of that age only knew in their hearts that China was about to embark on one of the greatest growth spurts of any nation in the world, one that would turn heads and make global news for years to come. Perhaps they were not sure how all this could actually be achieved, but I am sure they had a good idea.

American Pioneers Still, in those days the first American capital markets pioneers that made their way to China were more down to earth.

They simply hoped that a new market for their financial products and services would emerge, and that their bonuses would be all the better for it. These seasoned Wall Street veterans had seen it all before with the Asian Tigers, the Lost Continent of Latin America, the stellar emergence of the Land of the Rising Sun. But, there was something special about this discrete summit in Beijing that everyone felt.

China was ready to do business and wanted to hear what Wall Street had to say. Leading politicians and influential bankers made time to see the various delegations. From the halls of the central bank to the inner chambers of the State Council, the meetings and banquets were arranged to host their American guests at the Diaoyutai State Guest House.

Perhaps what I remember most about that trip, besides the sumptuous Beijing Duck and burning white liquor, was a summit with one of the senior leaders of China’s economic reform. Harry Markowitz was on hand that day. He had just received the 1990 Nobel Memorial Prize in Economic Sciences. Best known for his work in modern portfolio theory in the study of the effects of asset risk, return, correlation and diversification on probable investment portfolio reSeptember/October 2016

Wall Street and Broad Street market the entrance to America's capital market for Chinese enterprises.

turns, Markowitz was eager to make his well-rehearsed presentation to the high level gathering.

Shocking Revelation We were all seated in the formal conference room, plush rugs with deep chairs covered in silk positioned around the perimeter. Tea was served and the usual pleasantries were being exchanged, translated for the leader of the Chinese delegation. After all the formalities were finished, those present settled in to hear what Markowitz had to say. It was not every day that a Nobel Prize Winner addressed the China leadership.

Markowitz started by introducing the American capital market in basic terms.

He noted that the world’s largest capital market was a prime vehicle for those interested in the formation of capital. At that moment, the senior leader cleared his throat as a sign that he wanted to say something. He whispered a few words to his translator. “Excuse me Mr. Markowitz,” the translator said. “But is not Hong Kong the world’s largest stock market?”

There was a nervous silence in the room, as the Americans looked at one another in search of an answer. Finally, Markowitz raised his voice. “No sir, www.sbrchina.com

Hong Kong is a formidable market, but it is nowhere near that of the US in size or scope at the moment.” The economic reform leader nodded his head that he understood, and the meeting continued.

However, there was a clear change in the attention level.

That is how it was during the early days of the capital markets experiment.

The education curve was sweeping, and information was being exchanged with China’s decision makers on a regular basis. Not long after that meeting with the economic reform leader, the first American listing from China was being readied for market. It would be the first of a long line of listings, one that would culminate in the largest IPO offerings ever.

At this later stage in the capital markets experiment, China’s financial leaders are as savvy as any when it comes to the finer points of the US arena. And, that small group of capital markets pioneers that made their way to Beijing back in 1992 has been replaced by a legion of new marketing teams. However, as the education process continues to deepen the general theme remains the same as the relationship that started back in the days of the Markowitz meeting: it is never too late to list.

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VIEW FROM THE TOP

Agriculture Provides Returns In a world where technology investment is all the rage China agriculture provides an alternative for investors. million of China’s population of 1.3 billion living in rural areas. Employing over 300 million farmers, China must continue to rank first in global farm production to feed 20% of the world’s population on only 8% of the earth’s arable land. In general terms, China produces close to 20% of the world’s cereal grains, almost 30% of its meat, and 50% of its vegetables and ranks as the largest global producer of pork, wheat, rice, tea, cotton and fish.

Opportunity Knocks

David Tang

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he agriculture sector of China holds tremendous opportunity for private equity investment, more so today than at any time in recent history. The economic miracle that witnessed China’s emergence on the global stage over the last 35 years is well documented. However, the evolution of the world’s largest agriculture economy is no less impressive, impacting the lives of hundreds of millions of farmers and over a billion consumers.

China is the world’s largest agricultural market and the statistics are staggering by any measure. China produces 70% more than the entire agricultural output of the European Union, 150% more than India and 205% more than the US. Driven by a rise in income and massive changes in consumer spending, the growth rate of the segment is following the rise of the economy as a whole, and in certain sectors surpassing the current growth rate.

The potential for further growth in this primary sector is impressive, with over 900 62

In recent years, there has been a steady stream of agriculture investment from the most unlikely corners. China’s biggest private equity investors and technology leaders have followed the trend with fervor. Yunfeng Capital, established

by Alibaba founder Jack Ma, together with CITIC Private Equity, the private equity arm of one of China’s largest financial institutions, spent some US$320 million back in 2014 to acquire dairy giant Yili Industrial Group.

Two other technology leaders entered the agriculture arena in that year as well.

Internet leader NetEase stepped into the market with an investment in an 80-hectare pig farm in Zhejiang Province. Computer maker Lenovo set up an agricultural subsidiary, Joyvio, to invest between US$160 million to US$320 million over the next five years in agriculture. Lenovo has already commenced its initiative in the sector with investments in blueberry and kiwi fruit farms.

There is no doubt that investment in the China agriculture sector is not a passing fad. As renowned financier Jim Rogers noted when launching his China Agriculture Index the Chinese people have to eat, whether the economy is booming or not. With the population continuing to rise and the economy conwww.sbrchina.com

tinuing to expand at a relatively strong rate, there will be more people that need to eat and this growing population will have more money to spend on buying the foods they like. The ongoing globalization of the supply chain, food security and more Chinese travelling aboard will impact spending and consumption habits on many fronts.

Ongoing Trend In line with most analysts’ expectations, the OECD forecasts GDP growth to gradually slow over the next decade from the current 8% average range to close to 6%. Still, at this level, per capita income will more than double over the next decade, and the effect on domestic demand for food is positive, particularly for foods with higher income sensitivity. This picture will improve further if income growth reaches the lower income groups.

It is expected that the recent trend to more private equity investment into the China market and the outf low of capital to invest in agribusiness and food companies overseas to meet consumer demand and secure safer products, will continue at a strong pace. As a result, a further but modest opening of the agricultural sector is anticipated and this too bodes well for investment.

Having completed numerous private equity agriculture investments over the last few years, in tandem with the Chinese Academy of Agricultural Sciences in the Agricultural Fund of China, I can assure that the returns available in this most traditional of business are far from conservative.

David Tang is CEO of the Agriculture Fund of China and Chairman of KBC Investment Holdings Group.

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