How cheap is cheap?

That was the most frequently asked question among bankers and private equity experts attending a recent forum in Hong Kong, as they swapped strategies about how to pick up stressed assets during the financial crisis. 

When Lehman Brothers collapsed a year ago, everyone shared the same view: The global financial crisis was just beginning.

But one year on, many global markets have bounced off the bottom and some have recovered quite nicely. The Shanghai benchmark index, for instance, has gained more than 50 percent since the beginning of this year. As a result, views among bankers and top investment strategists about ongoing risks to the business outlook have started to diverge.

“Valuation is still a big threat,” said Michael Kim, a former senior Carlyle executive who founded MBK Partners after leaving the U.S. buyout giant.

“If a W-shaped recovery is going to happen, I think it will be a tremendous buying opportunity,” said Kim, referring to the possibility of a “second dip” market correction.

Andy Xie, former chief Asia economist at Morgan Stanley who earned his reputation in the financial industry as one of the most bearish analysts in Asia, forecast that a “second dip” in China’s market could occur next year.

“Markets will come down seriously, and China needs to increase money spending again, then you will see another rally,” said Xie, adding that speculative hedge funds could earn big profits in the subsequent rally.

But not everyone expects or is eager to see “a second dip”, especially those dealmakers who have already jumped onto the deal flow and believe they have successfully bet on the quick recovery early this year.

“How cheap is cheap? I think the price level is now reasonable, and in fact we already missed the bottom level, which was the time when Lehman Brothers went bankrupt,” said one forum delegate.

Another financial industry executive, who explained his outlook on valuations to reporters at the forum, said: ”To those who missed the chance to take advantage of the recovery in this round to buy some cheap assets early this year, they will definitely tell the public that the valuation is not yet cheap because they haven’t bought anything yet.

“To those who bought something early this year, now is the time for them to defend their investments so they keep saying prices will rise soon.”

He smiled, and posed a question for other dealmakers: ”How greedy is greedy?”

Photo caption: A man sitting at the Exchange Square in Hong Kong. REUTERS/George Chen

Top-tier casino operator Wynn has always bet on VIP gamblers. Now it is adopting the same approach with its stock market flotation. Wynn is trying to trump half a dozen recent poor Hong Kong market debuts by shunning fickle retail investors and handpicking money managers who are likely to stay the distance. It remains to be seen whether this strategy can help justify its valuation premium.

Most Hong Kong retail investors sell their shares on the first day of trading for a quick profit. By putting 90 percent of the shares in the hands of institutional buyers, Wynn is aiming to avoid the hit when its shares start trading on Friday.

That's probably why the stock has not fallen in grey market trading, even though it was priced at HK$10.08, at the top end of the HK$8.52-$10.08 range.

Wynn has specifically obtained a waiver from the Hong Kong stock market to prevent retail investors from holding more than 30 percent of the total shares offered. But this effort turned out to be unnecessary, as private investors are simply not interested.

Retail demand for Wynn Macau is so weak that small investors are only taking 10 percent of the offering. It appears that Asian high rollers are more interested in gambling in Macau's casinos than investing in their stocks. Many have been burned in the past by the stocks' high volatility.

Investors are also deterred by the rich valuation. Wynn Macau has valued itself at around 16 times forecast 2010 cashflow, much higher than the 7.5 times enjoyed by Macau gambling tycoon Stanley Ho's SJM Holdings.

That is not to say Wynn does not deserve some premium. First, it has always been an investor favourite in the U.S., with a stable institutional investor base. Money managers hold as much as 60 percent of Nasdaq-listed Wynn Resorts. SJM, in comparison, has 1.4 percent institutional ownership.

Second, Wynn's casino and hotel in Macau looks more modern than SJM Holding's dimly-lit and smoke-filled Grand Lisboa complex. The luxurious look helps it attract a younger client base and broadens its appeal to non-gamblers as a conference venue.

Third, the majority of Wynn Macau's revenues is earned from VIP clients who typically place large wagers. This focus has given its casinos better returns per table and a better return on equity than industry peers. But high-end gaming can also be more volatile.

Some of the new investors in Wynn Macau are already shareholders of Wynn Resorts, though the proportion is unclear. Wynn's Macau casino already generates 50 percent more cashflow than the Las Vegas casino, and the offering gives investors -- who have limited opportunities to invest in the gaming industry at home -- a new outlet.

They are also attracted by the world's largest gaming market: Macau's total revenue is more than double the amount generated by the Las Vegas Strip in 2008. But local investors know very well that Macau's dependence on Chinese high-rollers can also be its Achilles heel. Changes in Chinese visa policies can lead to big swings in visitor numbers. Macau is also suffering from overcapacity in China, where there are about 30 casinos of varying sizes.

While it looks like Wynn's existing investor base has helped it to draw strong demand for the Macau spinoff, it may be a one-off. The future looks a lot less certain for highly-leveraged Macau Sands, a unit of Les Vegas Sands, which is hoping to go public in Hong Kong later this year. Without help from the VIPs, the Sands might have a harder time getting such a good valuation.

Faced with a backlash against foreign investors, Beijing may
be tempted to offer shares in the last of its big four banks to
a domestic audience.

That decision may reflect China's new found confidence in
the wake of the credit crisis. But it also means Chinese investors
will retain full responsibility for the country's weakest bank.

The Agricultural Bank of China might end up just listing in
Shanghai without any endorsement from foreign institutions,
bankers close to the deal say. The bank claims it is still
keeping its options open.

But if AgBank pursues this path, it would be in sharp contrast
to the privatisation of China's three other large banks, all of
which attracted foreign strategic investors before listing in
both Hong Kong and Shanghai.

There are three explanations for this change of direction.
First, China has become a lot more confident in its banks, which
have weathered the financial storm better than their foreign
counterparts.

This means it has less need for foreign banks to
provide a seal of approval before launching a public offering.
China's Social Security fund is expected to be AgBank's only
strategic investor, though China Life also stands a good
chance of participating, bankers say.

AgBank is probably not happy with the arrangement, as its
chairman has said it wanted to have foreign strategic investors
and failure to attract them will be regarded as a loss of face.
But the post-credit crunch list of qualified foreign investors
with deep pockets and rural banking expertise is very short.

When China formulated its plan for bank reforms at the start
of the century, diversification of the investor base was one of
its key goals. Bringing in strategic -- particularly foreign --
investors was seen as beneficial to improving the ownership
structure of the state-owned banks and breaking the "blood ties"
that existed between banks and various government departments.

Foreign investments also helped put a value on the banks'
equity which provided a guide to the flotation price. But
Beijing has rightly become more wary of foreign investors after
supposedly long-term strategic partners such as Royal Bank of
Scotland and Bank of America cashed in their
investments in Chinese banks in order to raise much-needed cash.

After the recent meltdown, the idea that Western
institutions have anything to teach China's second-largest bank
about risk management also seems fanciful.

But the authorities should not get carried away by the
history of successful IPOs of Chinese banks. AgBank is much
weaker than peers such as ICBC and CCB, whose stock prices
have roughly doubled since they went public three years ago.

The bank only published its first audited annual report this
April. As recently as 2007 it was technically insolvent, with a
non-performing loan ratio of 24 percent, before a $30 billion
capital injection and massive bad debt carve-out.

Agbank's NPL ratio dropped to a more respectable 4.32
percent by the end of 2008, but is still more than double the
level of other state-owned lenders. Its loan loss reserves as a
proportion of total NPLs was just 63.5 percent, compared with
156 percent for the 12 other listed Chinese banks at the end of
2008, according to Fitch.

Earnings have been under pressure from weak asset
quality and high expenses associated with AgBank's
massive 24,000-branch network.

Listing in Shanghai does not mean AgBank will have to
compromise on valuation. For dual-listed companies, domestic
shares trade at a 12 percent premium to their Hong Kong
counterparts because there is a lot of money chasing
a limited pool of investments.

By excluding foreign investors, Beijing can boast that it is
keeping all the upside from rural reforms and urbanisation to
itself. But if things do not work out as planned, Chinese investors
will have to bear all the losses.

Many Asia bankers and dealmakers are based in Hong Kong but nowadays many of them only stay in the territory for weekends. So where are they during the rest of the week? China, of course. 

With deal flow suddenly picking up, it’s getting difficult to fix lunch or dinner appointments with bankers in Hong Kong during the work week, because they spend more time in Beijing, Shanghai and other mainland cities to have food or drinks with the potential China clients.
 
Last week, one Hong Kong-based private equity dealmaker canceled an appointment in the
former British colony at the last minute, saying he had to remain in Beijing to wait for a Chinese entrepreneur to sign a deal.
 
In an apology email, he said: “To be honest, Hong Kong to me is purely like a weekend destination these days.”
 
Another friend who works as a private equity investor once joked he and many others are merely “so-called Hong Kong-based” workers.

The fact is, more and more “Hong Kong-based” financial professionals have started to print
double addresses and telephone numbers — listing Hong Kong and either Shanghai or Beijing contact details — on their name cards.
 
Hong Kong used to be a focal point in Asia for opportunities in property, telecom, retail and financial sectors, but the epicenter has clearly moved to mainland China in recent years due to the surge in opportunities and cheaper valuations there.
 
“There are no deals in Hong Kong now. It’s just the so-called Asia headquarters for many banks. The fact is, almost everybody is travelling,” said a financial industry friend.
 
“Hong Kong is still the financial centre without a doubt, but it remains as the financial centre because of China,” he added.
 
For many years, Hong Kong called itself “Asia’s World City” to promote its advantage in international trade, but some bloggers have begun to joke in online postings that Hong Kong is now
becoming “Just Another Chinese City”.
 
Hong Kong’s low tax rate is a key reason why many bankers spend five days a week in China but still want to be officially “based” in Hong Kong. If Shanghai were to allow low tax rates for foreigners, that might quickly change. 
 
Indeed, airlines serving Hong Kong, including Cathay Pacific and Dragon Airlines, must be happy to see the current trend continue — shuttling those executives to work in the mainland and back to Hong Kong for the weekends.  

But Hong Kong taxi drivers have started to complain and feel nervous about the rise of Shanghai and Beijing. Twice I have been asked by drivers something to this effect: “So, you are from Shanghai? Then why do you come to Hong Kong to work? Shanghai is the future. People will soon forget Hong Kong.”

My answer? ”Don’t top leaders in Beijing always say ‘Hong Kong’s tomorrow will be better’?”

Photo Caption: Skyline view of Hong Kong island. Photo by George Chen

I first visited China in June 1997.  It was eight years after the Tiananmen crackdown, weeks before the Hong Kong Handover back to China marking the end of British rule, and over a decade before the 2008 Summer Olympics. It was a family trip — my parents were looking forward to a college reunion with classmates they hadn’t seen in decades and I had just finished my second year of university. I was looking forward to finally seeing the place I’d heard so much about.

Born and raised in Canada, I grew up listening to stories of the past — lessons in history, humanity, tragedy and survival. And like many children of immigrant families, there is a constant search for a balance and a place between the different worlds that shape our identity.

(Caption: Neon lights from skyscraper and 1997 Handover signs cast a glow over Hong Kong’s Victoria Harbour and the extension of the Hong Kong Convention and Exhibition Centre (R, foreground) in this long exposure zoom photograph.  Picture taken June 21, 1997. REUTERS/Dylan Martinez)

Over the years I’ve witnessed a dramatic change in my parents’ attitude toward China. For them, the changes in China since they left — over 45 years ago for my father and 35 years ago for my mother — have been beyond anything they could have imagined in their lifetime.

Born just before Japan invaded China in 1937, my parents were children during the Sino-Japanese War and teenagers when Mao Zedong founded the People’s Republic of China in 1949.

Over the next 25 years, the dramatic upheavals, failures and deaths from the Great Leap Forward and the Cultural Revolution spared no one.

In the spring of 1952, my grandfather was falsely accused of corruption and was executed about a month later. He was posthumously cleared and declared a victim of the anti-corruption movement at the time.

The years passed, my parents married and had a daughter.

My father, who went abroad to study in 1962, was one of the last to leave before China closed its doors to the outside world. My mother stayed behind but was isolated and persecuted in revolutionary meetings and posters that denounced her “foreign” connections. My grandmother — already nearly 60 years old — was sent to a labour camp for several years. The education system in China came to a halt for roughly a decade and many of my parents’ younger cousins were part of that “lost generation”. Their stories are by no means unique, merely an example of experiences shared by an entire generation of Chinese. They were among the lucky ones. Others suffered much harsher persecution and many lost their lives.

Twelve years passed before my parents reunited again in Canada. When my mother finally left in 1974, she was among the early handful to leave after China’s doors cracked open again. My sister joined my family four years later.

China was changing fast, but not fast enough in 1989.

When the Tiananmen protests erupted in April of that year, my cousin (who prefers to remain anonymous) was a student at Tsinghua University in Beijing. Nearly everyone attended the protests at one point or another, he said, and during its relatively peaceful early days, the students found it “fun” to be part of the gathering crowds.

(Caption: Crowds of jubilant students surge through a police cordon before pouring into Tiananmen Square on June 4, 1989 during a pro-democracy demonstration. REUTERS/Stringer)

The students leading the demonstrations weren’t always particularly well liked, he recalled, “but they were supported because no one else had the interest to stand up, because we never thought students would be able to win.”

Unlike Beijing’s media crackdown around sensitive events and anniversaries today, what was unfolding in the capital at the time was no secret. “The [domestic] media covered everything and was on the students’ side. People were unhappy about their lives, so they were happy to see the students fight with the government,” my cousin, who now lives in Canada, said.

After more than a month of demonstrations, many of the university students had lost interest and were more worried with having to go back to class.

(Caption: A captured tank driver is helped to safety by students as the crowd beats him June 4, 1989. REUTERS/File)

“Most of the people I know didn’t go onto the street any more since late May,” he said. The dark turn in Tiananmen Square took him and others by surprise.

Thousands of miles away in Canada, my parents were rivetted to the television as networks continuously broadcasted the events unfolding in their homeland. I had just turned 13, and was more disturbed by my parents unusual display of emotion than what was happening on TV in a place I’d never been and over issues I didn’t really understand.

(Caption: Student protesters arriving at Tiananmen Square to join other pro-democracy demonstrators, ride pass the portrait of late chairman Mao Zedong. Picture taken May 1989. REUTERS/File)

Ask anyone in China today and they will tell you things have completely changed in the last 20 years — almost exponentially so in some cases — for better and for worse, depending on who you ask.

Construction abounds everywhere and skyscrapers are built with unimaginable speed.

For the tens of millions of Chinese living in cities, the quality of life has transformed dramatically: First came household appliances like televisions. Now everyone wants a car. The new-found affluence means being able to go on vacation or even having a different cell phone for every day of the week. The chasm between the middle class — let alone the super wealthy — and the poor is mind-boggling.

(Caption: Fireworks explode during the closing ceremony in the National Stadium at the Beijing 2008 Olympic Games August 24, 2008. The stadium is also known as the Bird’s Nest. REUTERS/Wolfgang Rattay)

The first generation of the one child policy — infamously nicknamed “Little Emperors” — are now adults, and for many, politics holds little interest.

“People do not really care too much about [Tiananmen] anymore, especially the younger generations,” my cousin said. There are bigger problems facing the country now than June 4 (as the Tiananmen crackdown is known in Chinese).

There are local bursts of labor unrest, concerns about food and product safety and corruption is rampant in nearly all spheres and levels of life — something that was almost non-existent in the 1980s.

(Caption: A bride poses as pigeons fly during a pre-wedding photo shoot at a park in Beijing July 25, 2008. REUTERS/Claro Cortes IV)

“If June 4 didn’t end in that way, China might have had a better chance to become a nicer country than what it is nowadays. It closed the door of political reformation but opened the door to all kinds of corruption as a compensation,” my cousin said. He left in the mid 1990s, but still maintains close ties to China.

“People in China are not very happy with what is happening in the country. Although they don’t care about June 4 anymore, it could become a trigger. That’s why the government is still very nervous.”

For a government that believes stability — social, economic, political — is paramount above all else, tightening security, clamping down on the Internet (even if it isn’t always that hard to circumvent) and television access from Hong Kong during sensitive events have become routine.

But my parents are pragmatic. Their experiences have shown how revolutions can create chaos and extremes. They want calm and peace and see the most effective change coming through natural, rather than forced progress. My father openly admits that now “we only see the good side” and that “the past has been forgiven.” He calls the changes in China a miracle.

Fed on a regular diet of CCTV (the official Central China Television), some may say my parents are being influenced by the powerful propaganda machine of the Chinese government. That may be true, but for them, there is also a sense of pride and optimism that a country that has seen so much suffering has come so far in such a short period of time. They go back annually now and witness the changes from year to year. They are not blind to the concern my cousin and others like him express, but it doesn’t dampen their hope.

(Caption: A young girl waves a Chinese flag as she and other school children wait for the arrival of Chinese President Hu Jintao at the Macau airport December 19, 2004. REUTERS/Anat Givon/Pool)

There is a common myth perpetrated about China — that everyone speaks “Chinese”.

There is in fact no single “Chinese” language.

There is an official language, Mandarin, taught at schools and used on the airwaves, yet even the government admits that only about half the country’s 1.3 billion population speak it fluently.

But there are hundreds, if not thousands, of other Chinese languages spoken in the country. The government calls them dialects, but linguistically the likes of Cantonese, Hokkien and Shanghainese are as distinct and mutually unintelligable as French, Spanish, German and English.

Linguists consider them separate languages, though many others are genuinely dialects. Mandarin has been promoted as a single unifying tongue by the Communists, and the Nationalists before them, as otherwise somebody from Guangzhou would find it impossible to speak to somebody from Beijing or Shanghai.

That makes total sense. But Chinese “dialects” today are increasingly marginalised, which is, I think, a great loss for Chinese people and their centuries-old culture, both in China and abroad.

I love going to Singapore and hearing people chatting away in Hokkien, Teochiu, Hakka, Hainanese and Cantonese, even if my knowledge of these languages is limited to being able to say “pai sei” (”I’m sorry”) and “ti a bo” (”I don’t understand”) in Hokkien — phrases I picked up from my time in Taiwan, where the language is normally known as Taiwanese.

I’m sad to hear more and more young Singaporeans speaking to each other in Mandarin, and more than one Singaporean friend has told me that they think they’ll be the last generation who can speak so-called dialects.

In China, there is now a recognition that dialects form an integral part of the nation’s fabric, though there are no moves, as far as I know, to introduce teaching in dialects at school, as happens to a limited degree now in Taiwan.

Tang dynasty poetry, taught to every Chinese schoolchild and extremely beautiful, sounds a lot better read out in Cantonese or Hokkien than Mandarin.

At the time they were written, the court language more closely resembled these southern Chinese tongues. Today there is only very limited official support in China for dialects: a few radio shows in Shanghainese or Cantonese, and the odd academic trying to protect dialects in danger of dying out.

Yet two places in the Chinese world buck this trend — Hong Kong and Taiwan. In Hong Kong, Cantonese is still very much alive and kicking. The more racy newspapers fill their columns with stories written in colloquial Cantonese, using Chinese characters which only exist in Cantonese, and make no sense to a Mandarin speaker like myself. I now have a Cantonese dictionary to try and make sense of some of these words.

And in Taiwan, where the Nationalist government once ruthlessly supressed Taiwanese and Hakka in a bid to get everyone to speak Mandarin, Taiwanese is once more very much back in the limelight, thanks to the Democratic Progressive Party of President Chen Shui-bian, which has tried to promote the island’s native culture. Taiwanese words are liberally peppered into everyday speech, almost as a fashion statement, and appear in newspapers. I learnt a new expression in March when in Taipei to cover the presidential election. “Ao bo”, meaning “dirty tricks”.

Now that I have mastered Mandarin (I would never dare call myself fluent as I’m not a native speaker), I’d like to learn another Chinese language. It would either be Cantonese or Hokkien — both have some great swear words. Yet the one thing that rather daunts me is the number of tones in these two languages.

Mandarin has just four, and it took me rather a long time just to master even them. Hokkien has 5, 6, 7 or 8, depending on how you classify them and in what part of the Hokkien-speaking world you are in. Cantonese has around 9. Again, there is debate on that. I think I’ll be sticking with Mandarin in the short term.

Picture of a sign promoting the use of Mandarin by Alfred Cheng Jin

I love to shop – I’m not afraid to admit it. And I passionately believe you can never have too many T-shirts, shoes or bags (and that you should never underestimate the power of a good moisturiser either).

One of the great joys of living in China, and especially in Beijing, is the shopping.

Sure, it’s not as sophisticated as Hong Kong or as off-beat as Taipei, and very few places in Asia can trump Bangkok, but China’s smokey capital has its charms when it comes to a bit of retail therapy.

So here is a personal list of my favourite top 5 shopping destinations in Beijing, in reverse order to keep everyone in suspense.  

5) Spin. Pottery’s not sexy, right? Wrong. The master craftmen (and women) behind this store sure know how to whip up a storm with the clay. Simple, clean and understated is the order of the day. And it’s not too expensive. Word on the street is a certain well-kown European fashion designer liked the shop so much he snapped up 20,000 sets of plates during a winter swirl through the city. 

4) The cashmere sweater place. Nobody really seems to know what it’s called, but it’s quite well located near the new Dengshikou subway stop. Simply take in a jumper, hat or other top you want copied, pick a colour, and they will produce a copy for you in softest cashmere. It’s very adictive. “I can’t wear anything that’s not cashmere these days,” another cashmere junkie remarked to me recently. And it’s quite understandable. Not cheap, but then luxury never is.

3) This recommendation isn’t one shop, but the part of Beijing’s famous Panjiayuan, or antique market, where they sell old books. I can spend hours here, picking out hidden little gems printed in China’s Communist heyday. This includes glossy hardback coffee table books, sometimes with English text, on China’s provinces. The two books I’m most proud of finding, and have given me the most pleasure, are a book on the remote and rather mysterious province of Qinghai, and another entitled “New China Builds”, full of the brutalist and minimalist architecture that marked the 1950s, 1960s and 1970s.  

2) I don’t know what this store is called either. All I know is that it is at the Nali mall in Sanlitun, next to Alameda restaurant. But what I do know is they sell the most gorgeous belts covered with traditional Chinese floral and animal designs. My mother disapproves, so obviously I wear the belts all the time. But you can also get funky scarves, socks and bags.

1) Plastered. As the owner of a fine collection of T-shirts (I think I have close to 200 now) I’m somewhat obsessed by this place. Retro-Communist-cool designs from the 1970s and 1980s reinterpreted for the new millenium, and printed on T-shirts. My own little piece of heaven. According to the owner, I am one of only two people who bought the most unpopular design ever — the word “Sharon” printed in black felt onto a pink T-shirt. And now I can’t find it, it having been swallowed into my closet.

Pictures by Claro Cortes IV