SCMP | A More Complete and Balanced View on China is Needed

Edward Tse
South China Morning Post 2016-02-23

One of the most talked-about topics these days is undoubtedly China. Is the country going to have a “hard landing”, as George Soros has proclaimed, or will it continue its transition to stability andprosperity?

Of course, numerous people have expressed their views on China over the years and these views cover the entire spectrum, from hugely negative to widely optimistic. For such a big and complex country, to expect smooth sailing all the way when it tries to reform itself is pretty naive. The world’s most populous country has a long history and civilisation but only a relatively short, though influential, period of a planned economy; its transition to a market economy is a complicated process, to say the least. Anyone can poke into China’s transition at any given point in time and find imperfections.

To start with, we must recognise the reality of what the Chinese government has done, lifting hundreds of millions of people out of poverty to a reasonable standard of living and enabling a significant degree of connectivity with the rest of the world. This, by any measure, is no mean feat.

People’s views on China will depend on who they are and, insome cases, their motives. A hedge fund speculator who has shorted China would, of course, propagate the view that the Chinese economy is going to crash or at least slow down. However, is this based on facts or merely a hope to maximise financial gains? In any case, these views tend to have a very short-term focus.

On the other hand, a chief executive of a multinational corporation would probably have a more balanced view of the short, medium and longer terms. It would be shaped by the experience he or she has had in China and the industry sector the company is in. If, for example, they run Home Depot, a US retail store whose business is built on customers’ “do it yourself” (DIY) habit, they would certainly be disappointed by China because Chinese don’t really “DIY”. Or, if their business is in China’s steel industry, which is suffering from excess capacity, they would probably concur that China’s short-term outlook is pretty gloomy.

For the past couple of decades, when China was growing at 9-10 percent every year, the tide was rising fast and as long as you jumped into the water, you would be carried upwards. Today, the tide is no longer rising as fast, though a 7 percent increase of the world’s second-largest economy still produces an annual increase the size of Switzerland’s gross domestic product.

With a slowing tide,the diversity in China’s landscape has become more pronounced in several ways. Some parts of China are growing much faster than others, for one. According to government statistics, the western municipality of Chongqing grew by 11 percent last year while the northeastern province of Liaoning grew by a mere 3 percent. Sector divergence is also becoming more visible. Some sectors, such as steel and cement, are experiencing serious overcapacity while those revolving around China’s digital revolution, and the consumer and service industries, are generally doing well. Some sectors are being left behind as newer forms of technology are adopted.

The type of company could also make a difference. Large state-owned enterprises continue to enjoy some policy advantages; however, as technology and other enablers kick in, more sectors are opening up (intentionally or unintentionally) and large state-owned firms have found it increasingly difficult to outpace their competitors.

By contrast, many private companies are leveraging their nimble, agile and entrepreneurial ways to gain competitive advantages. Pockets of opportunities are popping up in China, even in the midst of a slowing tide. Urbanisation, technological upgrades in manufacturing, environmental improvements, the service economy and the internet will be key drivers of growth opportunities.

In 2015, China’s box office sales reached US$6.3 billion, making it the second-largest film marketin the world. Chinese travellers spent US$184 billion abroad, making them one of the largest tourist segments globally by spending. China has become the world’s largest robotics market, with purchases making up 25 percent of the global total. The on-demand mobility app Didi Chuxing totalled 1.43 billionrides in 2015 alone, in contrast to Uber, which took six years to hit 1 billion rides worldwide.

And, to top it off, global acquisitions by Chinese companies totalled nearly US$1 trillion. Perhaps in recognition of these pockets, foreign direct investment into China continued to rise in 2015 and multinational corporations’ confidence didn’t seem to dwindle much.

China’s service sector has already exceeded 50 percent of the country’s total GDP. The size of China’s middle class is significant. Depending on calculations, it is now anywhere between 150 million and 250 million people, or more. And all estimatesare projecting further growth.

Importantly, with more exposure, Chinese people are increasingly interconnected with the rest of the world. Social media such as WeChat, Weibo and LinkedIn (and, for those who can climb over the “Great Firewall”, Facebook and Twitter) ensure that the information they receive from China and the rest of the world can be received “anywhere, anytime”.

And, of course, the Chinese development model, which is built on a combination of the government’s “visible hand” and bottom-up entrepreneurship, continues to function in its ownway. This model, which created the so-called “China miracle” over the past 20 years, also has many issues. The model is likely to change, given China’s transition, but its effectiveness – as well as its problems – will continue to reveal themselves.

So here we are. A big and influential China will continue to evolve in its own way, well, with Chinese characteristics. The path forward won’t be perfectly smooth, but it won’t be doomed, either. The immense diversity of the country is both an issue and a major source of resilience.

It’s very easy for people to focus on China’s problems but they should also appreciate the immense progress it is making. To fully understand what’s happening, a more sophisticated view is needed.

Edward Tse is founder and CEO of Gao Feng Advisory Company, a strategy and management consulting company, and author of “China’s Disruptors” (Portfolio, 2015).

January 25, 2016 10:30 am JST | Nikkei Asian Review
Edward Tse, Alexander Loke and Alan Chan

An unusual hostile bid from a small property and insurance group for China’s largest listed property developer is prompting speculation that the country may be on the brink of a new era of domestic takeover battles.

The target, China Vanke, is actively trying to fend off a potential takeover by Baoneng Group, a lesser-known Shenzhen-based conglomerate that has suddenly emerged as Vanke’s largest single shareholder. The battle marks the first time in the Chinese equity markets that such a large and well-established listed company has been targeted by a corporate raider.

Chinese corporations have become increasingly comfortable in recent years with launching hostile bids for companies overseas. Examples include Guangdong Rising Assets Management’s bid for Australian miner PanAust and China Petroleum& Chemical’s move on Hong Kong’s China Gas Holdings in 2012.

However, Chinese companies have been noticeably more docile at home, perhaps because of the lack of precedent and resulting uncertainty about how hostile bids might be treated. Success for Baoneng, however, would set a precedent for similar bids by other Chinese companies. It might also mark the beginning of a higher profile role for insurers in bringing about consolidation of the property sector, among others.

Vanke’s management has labeled Baoneng’s equity purchases a “hostile takeover,” clearly worried that the group could build a controlling stake and step into the boardroom if it continues its buying spree. Wang Shi, Vanke’s chairman, has said that the company does not welcome Baoneng’s move, which it fears will harm its reputation and credibility.

Wang said that Yao Zhenhua, Baoneng’s chairman, lacked business prospects and questioned his company’s financing capacity, noting that Baoneng’s property transactions totaled only a few billion yuan in 2014 compared with Vanke’s 215.1 billion yuan ($32.7 billion) the same year. Yao has responded that Baoneng is a law-abiding company and that he believes in market forces.

Baoneng’s “barbarians at the gate” bid has posed challenges to Vanke’s corporate culture and operational style, and may harm its plans for a strategic transformation. In 2015, Vanke took its first steps toward building a new business ecosystem, including entering new business areas and adopting a trial-and-error entrepreneurial approach to searching for opportunities.

The takeover tussle has attracted enormous public interest. Chinese social media are full of chatter about its implications and there are suggestions among analysts that the bid may be part of a game being played for personal advantage between Vanke and senior executives at Baoneng.

At this stage, both companies’ actions can be presumed legitimate since Baoneng has every right to purchase Vanke’s shares in the secondary market and Vanke is justified in sticking to its view of the quality of its capital and management.

Chinese regulators are watching the battle closely. The China Securities Regulatory Commission has confirmed that it is working with the China Insurance Regulatory Commission and the China Banking Regulatory Commission to examine Baoneng’s bid in the hope of ensuring “an open, fair and just market order” and to “protect those involved, especially small and medium-sized investors’ legal interests.”

If any malicious intent crosses legal boundaries, this will likely be exposed by the authorities. Meanwhile, the bid and Vanke’s response suggest that the reform of China’s market economy has come a long way. Hostile takeover bids are an integral part of a market economy, and Vanke’s actions suggest an increasing level of confidence in dealing with them.

Share suspension

On Dec. 18, Vanke suspended trading in its shares to avoid price fluctuations and to gain time to seek outside capital or alternative partners. It said it would announce details of a major asset-restructuring plan by the end of January.

Various possible further moves were discussed in leaked internal conversations and in social media postings. These included the possible dilution of Baoneng’s shareholding through an issue of new shares by private placement.

On Dec. 23, Anbang Insurance Group, which previously owned 5.69% of Vanke, raised its stake to more than 7% by acquiring shares worth more than 2.8 billion yuan. The share purchase was followed by a public announcement by Anbang that it will actively support Vanke’s management team, including Wang, and help fend off Baoneng’s bid.

This helped to reinforce Wang and his management colleagues, who together with Anbang hold about 30% of Vanke, compared with Baoneng’s 23.52%. China Resources, a large state-owned enterprise, holds 15.23% and is also opposing Baoneng.

Wang is a well-known entrepreneur and has cultivated a high profile that has included studies at the universities of Harvard and Cambridge at an advanced age and sharing his personal experiences and perspectives with Chinese youth.

Wang has been vocal on social media sites, sharing his views on the clash of corporate interests between Vanke and Baoneng. As the parties fight for control, the battle has become a social media event as much as a corporate tussle. Revelations have included the disclosure by social media users that Wang gave an internal speech to Vanke’s employees stating that Baoneng did not deserve to be Vanke’s top shareholder.

In the main, social media has turned a corporate event into a personality clash, focusing on the character of those involved rather than the takeover itself. This aspect of the bid battle is likely to make Chinese business leaders rethink their social media strategies — especially on the crucial issue of how to get their stories out while negating or controlling any negative aspects.

Beyond the immediate corporate battle, the bid highlights the trend of Chinese insurance companies acquiring good assets and their increasingly critical role in consolidating industries. The Chinese government has been advocating supply-side economic management to consolidate overcapacity in many sectors and cull weaker companies.

Shanshui Cement Group has been at the center of a similar battle for control since April last year, when China Tianrui Cement increased its stake to more than 28%. Tianrui’s acquisition of such a large stake highlighted the potential for consolidation of the cement industry as well as corporate governance issues arising from decentralized equity structures.

Such external pressures from potential corporate raiders will encourage companies to focus more on improving productivity, management capabilities and asset utilization. How the confrontation between Vanke and Baoneng pans out will serve as a test for China’s capital markets and corporate governance. The end result should solidify China’s development of a more transparent and stable market economy.

Edward Tse is founder and CEO of Gao Feng Advisory, a global strategy and management consulting company, and author of “China’s Disruptors” (Portfolio, 2015). Alexander Loke is a consultant at Gao Feng and Alan Chan is a senior consultant there.