China’s authoritarian capitalism may be a victim of its own success. It is getting harder to satisfy a population that is devoid of ideology and which demands non-stop lifestyle improvements. Powerful state-owned companies are consuming the fruits of reform. Moreover, the system’s lack of checks and balances has led to widespread corruption. For China to thrive, it needs change its one-of-a-kind development model. That is the persuasive argument made by journalist-turned businessman James McGregor in his new book, “No Ancient Wisdom, No Followers”.

McGregor appears to be particularly concerned with the role of State Owned Enterprises, making them his first chapter. Over the last decade the SOEs have become much more efficient and profit-oriented, but the resurgence of these government-favoured companies, which account for as much as half of GDP, squeezes private companies. And the state-private competition is biased against the private sector. Chinese think-tank Unirule estimates that subsidies and foregone costs gave the SOEs a $1.2 trillion boost between 2001 and 2009. Without that help, the average return on equity for the SOEs would have been a negative 6.3 percent.

The combination of state support and underlying unprofitability hardly suits them for their new role as leaders of China’s corporate push abroad. McGregor suggests that Chinese leadership change priorities. The goal should be to promote true entrepreneurship by levelling the domestic playing field.

Another problem is industrial policies which aim to promote domestic champions. Foreign businesses are encouraged to transfer technology in exchange for market access. The ultimate goal is to reduce reliance on foreign technology – and to maintain the Communist Party’s control. For the foreigners involved, this Indigenous Innovation campaign constitutes a blueprint for massive technology theft.

No wonder that the policy has created an international backlash. Multinationals, which have been the biggest supporters of China in the United States and Europe, have spoken out openly about their concerns. On the ground, the foreigners may pretend to cooperate, but they often “black-box” – hide – their most valuable technology. The inability of Chinese firms to acquire key foreign expertise may have contributed to the failure of a train signalling system that led to a fatal high speed train crash in 2011.

Chairman Mao once described the United States as a “paper tiger”. McGregor has a similar analogy that describes China today. “Peeling back the layers of China’s economic onion reveals a world of weak oversight, obsessive secrecy, murky accounting, and unrestrained power. At the core of the system, behind a façade of market listings, audit firms, and government regulators sits the Chinese Communist Party, the chief architect and beneficiary of China’s authoritarian capitalist system.”

The Party’s central Organization Department appoints all important government, media, education and judicial leaders in China. That is too much power. Even the wildest conspiracy theorist would have trouble imagining a comparable American organisation. It would appoint the entire Cabinet, all the governors and mayors, the justices of the Supreme Court, the heads of regulatory agencies, the heads of major universities and the chief executives of the largest companies, including all important media outlets.

The Party’s unbridled power has led to corruption and created vested interests, significant impediments to future growth. Nepotism is a serious issue. Party officials consider SOEs a fitting place for their children to carry out the Party’s agenda, learn business skills and, in many cases, gather assets for the family.

McGregor’s has become less optimistic about China since he wrote his popular first book “One Billion Customers”. In that work, the former chief executive of Dow Jones in China offered multinationals valuable lessons for doing business in China. Then he thought companies needed to adapt to China. Now he argues that it is red capitalism which must adapt. Still, McGregor has not given up hope. He wants only a “retooling”, not an entirely new system.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Broken marriages are an unwelcome new risk factor for China investors. Shares in Longfor Properties dropped 4 percent on Nov. 20 on news that its founding couple had divorced and split their controlling stake, sparking fears of a covenant breach. Family feuds are growing more common, and investors are taking a share of the strife.

Wu Yajun gave up 29 percent of developer Longfor’s shares to her ex-husband, and lost her title as China’s richest woman. For investors, the worry was that if he chose to sell down that stake, the couple together would own less than 50 percent of the company, which means a covenant breach could be triggered and accelerated loan payment may have to follow, according to Barclays.

Longfor is not the first Chinese company to be shaken by a marital rift. The ex-wife of Tudou founder Gary Wang got a Shanghai court to freeze his entire stake. This case held up the internet video site’s New York initial public offering for half a year. Finally listed in 2011, its shares struggled, and the company was taken over by larger rival Youku a year later. The founder of Shenzhen-listed public relations company Blue Focus barely clung to his own role as the top shareholder after giving almost half of his stake to his ex-wife in 2011.

Divorces are costly for rich people everywhere in the world, but losing half a business empire is less common. What makes China different is a large number of companies still in founders’ hands, and the common presence of husband and wife teams. Prenuptial agreements are rare, probably because few founders dreamed of getting so rich so quickly, while much of their wealth is still tied up in shares. Where there’s no prior agreement, Chinese courts tend to split divorcing couples’ wealth in half.

Almost 3 million couples parted ways in 2011, up 7 percent from a year earlier, official figures show. As divorce rates rise in China, investors should note that entrepreneurs’ private wobbles can have public consequences.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The People’s Insurance Company of China is all about the power of big numbers. The insurer’s 17 investment banks have helped it sign up 17 “cornerstone” backers in advance of its $3.6 billion Hong Kong offering. Though they’re hardly big-name value investors, they improve the likelihood of getting the deal done.

Signing up cornerstone investors ahead of an IPO is largely a Hong Kong phenomenon. The original idea was that big-name investors would put a valuation on the stock in return for a guaranteed allocation. A vote of confidence from local tycoons and sovereign wealth funds would help to boost confidence among smaller shareholders.

In recent years, cornerstone investors have tended to take between 10 percent and 20 percent of the shares on offer.

Hot IPOs like Prada’s 2010 offering dispensed with them altogether. Today, however, issuers and banks are increasingly relying on big investors to help mop up the stock: PICC’s 17 cornerstones are picking up more than half of the IPO.

Some investors are buying for strategic reasons. Seven of PICC’s 17 investors are fellow insurance companies, including American International Group, insurers from France, Japan and Russia, and three domestic rivals such as China Life. These buyers tend to have a relationship with the issuer, or are hoping to build one. AIG, which is investing $500 million, simultaneously signed a deal with PICC to sell life insurance in China. That gives the U.S insurer, which was forced to offload its Asian arm in the wake of the crisis, a new foothold in the world’s most populous market.

Other Chinese companies have different motivations. Some companies, like Zijing Mining, Yuexiu REIT and Fosun International, have staged successful initial public offerings in Hong Kong. Getting approval to move the  proceeds back home may take months or years, and some may prefer to leave it offshore. Investing in familiar Chinese stocks in Hong Kong is one place to park the cash.

But there are two drawbacks to over-replying on cornerstones. First, it reduces liquidity in the stock, as cornerstones usually agree to not to sell for six months or a year. And when those lock-ups expire, the fear is that large amounts of stock will flood to the market. In a tough market, however, PICC and its 17 investment banks need all the help they can get.

(The author is a Reuters Breakingviews columnist. The
opinions expressed are her own)

By Wei Gu

HONG KONG, Nov 22 (Reuters Breakingviews) – The People’s
Insurance Company of China is all about the power of big
numbers. The insurer’s 17 investment banks have helped it sign
up 17 “cornerstone” backers in advance of its $3.6 billion Hong
Kong offering. Though they’re hardly big-name value investors,
they improve the likelihood of getting the deal done.

Signing up cornerstone investors ahead of an IPO is largely
a Hong Kong phenomenon. The original idea was that big-name
investors would put a valuation on the stock in return for a
guaranteed allocation. A vote of confidence from local tycoons
and sovereign wealth funds would help to boost confidence among
smaller shareholders.

In recent years, cornerstone investors have tended to take
between 10 percent and 20 percent of the shares on offer.
Hot IPOs like Prada’s 2010 offering dispensed with them
altogether. Today, however, issuers and banks are increasingly
relying on big investors to help mop up the stock: PICC’s 17
cornerstones are picking up more than half of the IPO.

Some investors are buying for strategic reasons. Seven of
PICC’s 17 investors are fellow insurance companies, including
American International Group (AIG.N: Quote, Profile, Research), insurers from France,
Japan and Russia, and three domestic rivals such as China Life
(601628.SS: Quote, Profile, Research). These buyers tend to have a relationship with the
issuer, or are hoping to build one. AIG, which is investing $500
million, simultaneously signed a deal with PICC to sell life
insurance in China. That gives the U.S insurer, which was forced
to offload its Asian arm in the wake of the crisis, a new
foothold in the world’s most populous market.

Other Chinese companies have different motivations. Some
companies, like Zijing Mining (601899.SS: Quote, Profile, Research), Yuexiu REIT (0405.HK: Quote, Profile, Research)
and Fosun International (0656.HK: Quote, Profile, Research), have staged successful
initial public offerings in Hong Kong. Getting approval to move
the proceeds back home may take months or years, and some may
prefer to leave it offshore. Investing in familiar Chinese
stocks in Hong Kong is one place to park the cash.

But there are two drawbacks to over-replying on
cornerstones. First, it reduces liquidity in the stock, as
cornerstones usually agree to not to sell for six months or a
year. And when those lock-ups expire, the fear is that large
amounts of stock will flood to the market. In a tough market,
however, PICC and its 17 investment banks need all the help they
can get.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:

www.breakingviews.com/TOPNewsSubscription

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CONTEXT NEWS

– People’s Insurance Company (Group) of China (PICC) secured
$1.9 billion in commitments from 17 cornerstone investors for
its $3.6 billion Hong Kong initial public offering, Reuters
reported on Nov. 21.

– PICC Group has got pledges from American International
Group (AIG), Chinese utility State Grid Corp, the country’s
leading gold miner Zijin Mining Group, defence contractor
Spacechina and China Life Insurance Co Ltd.

– China International Capital Corp (CICC), Credit Suisse
Group AG, Goldman Sachs Group Inc and HSBC Holdings Plc won
mandates as sponsors of the deal.

– The list of banks also helping to underwrite the IPO
includes Bank of America Merrill Lynch, Morgan Stanley and UBS
AG as well Chinese firms such as ABC International and BOC
International.

– Reuters: AIG, others to take up half of China PICC’s $3.6
bln HK IPO [ID:nL1E8MKG2X]

– For previous columns by the author, Reuters customers can
click on [GU/]

(Editing by Peter Thal Larsen and Katrina Hamlin)

((wei.gu@thomsonreuters.com))

((Reuters messaging: wei.gu.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS HK CORNERSTONES

(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Weibo has reason to “open sesame” to Alibaba. A possible purchase of a 15-20 percent stake in China’s Twitter by the country’s largest e-commerce group, Alibaba, as reported by China Business News, makes strategic sense. It could pave the way for owner Sina to spin Weibo off, and create revenue synergies for both.

Micro-blogging service Twitter is powerful in shaping public opinion, but weak at monetizing its 400 million person user base. Alibaba could help. Its Taobao and Tmall commerce sites are popular with small businesses, who could be incentivised to pay for sponsored sites on Sina’s micro-blogging service. Alibaba might benefit too, by directing more high quality Weibo users on to its shopping sites.

Getting an anchor investor may also be the first step in a Weibo spin-off. Sina’s chief executive has said the company is considering such a move, to help Weibo garner a better valuation. An Alibaba investment would give an indication of value. The $3 billion valuation mooted in Alibaba’s talks compare with analyst estimates from $1 billion by Goldman Sachs to $4 billion by Credit Suisse.

Social networks are increasingly important to Alibaba. Almost 4 percent of Weibo’s total traffic goes on to Tmall and Taobao, according to online marketing blog HitWise. Sites like Meilishuo, a site part-owned by Sina rival Tencent, bring traffic too. But an investment in search engine Sogou had little strategic impact – Alibaba sold its stake back for $26 million to original owner Sohu in July.

The two companies have reasons to work together to fight off pressure from Tencent, which is becoming a threat to both. Its communication and social networking service Weixin has grown to 200 million mobile phone users. Tencent, a newcomer to e-commerce, could challenge Alibaba’s lead, with its own Web-based micro-blogging service and mobile application Weixin.

How to agree on a Weibo valuation may be the biggest challenge – the service has only just started to create revenue. Still, an early deal could leave both sides better off.

(The author is a Reuters Breakingviews columnist. The
opinions expressed are her own)

By Wei Gu

HONG KONG, Nov 20 (Reuters Breakingviews) – The Amazon of
China defied the down-round blues. With a new investment round
unveiled last week, e-commerce upstart 360buy.com, aka Jingdong
Mall, saw its valuation swell by 15 percent in a year. Despite
widening losses, venture capital continues to pour money into
China’s crowded e-commerce space. But as players feverishly
compete for market share by discounting, profits look ever more
elusive.

After snagging another $300 million from Tiger Global and
Ontario Teachers Retirement Fund, 360buy is now valued at some
$7.6 billion. That’s up from $6.6 billion a year ago, when
Digital Sky Technologies, Sequoia Capital, Tiger and the family
controlling Wal-Mart injected capital, despite speculation among
VCs in China that Jingdong would struggle to raise money at a
higher value.

Trouble is, more money is likely to lead to more promotions.
Heated competition and widespread discounting by new entrants
pushed early comers, such as Dangdang (DANG.N: Quote, Profile, Research), into the red.
Analysts don’t expect the online bookseller to turn a profit
until 2015. Jingdong’s loss is expected to widen in 2012 to $300
million as it strives to triple its sales and catch up with
Alibaba’s Tmall. Online clothier Vancl’s goal to become
profitable in the fourth quarter still looks a tall order.

New arrivals in recent years have led to more frenzied
competition. Amazon (AMZN.O: Quote, Profile, Research) and Wal-Mart (WMT.N: Quote, Profile, Research) have both
invested in local players. Even eBay (EBAY.O: Quote, Profile, Research) is mulling a
return to the Middle Kingdom, inking a recent partnership with
domestic luxury goods site Xiu. Meanwhile, domestic electronics
chains Suning (002024.SZ: Quote, Profile, Research) and Gome (0493.HK: Quote, Profile, Research), as well as China’s
most valuable Internet firm Tencent, have launched their own
online shopping sites.

Alibaba, thanks to its first-mover advantage, still leads
the pack. Its Tmall and Taobao sites saw $3 billion combined
sales in just 24 hours on Nov. 11. That makes their “Double
Eleven” sales worth more than double America’s entire “Cyber
Monday” shopping spree, which brought in $1.3 billion in 2011,
according to ComScore.

The market’s growth makes it alluring. Last year, e-commerce
volumes in China rose 29 percent year-on-year to almost $1
trillion, or 13 percent of GDP, as generous investments like
360buy’s have enabled uncompetitive players to tough it out.
360buy’s existing investors, along with its promotion-addicted
customers, may cheer another up-round. But at some point the
industry must learn to support itself beyond equity capital.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:

www.breakingviews.com/TOPNewsSubscription

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CONTEXT NEWS

– Jingdong Mall, which runs online shopping site 360buy.com,
closed a fourth round of funding last week, raising $300 million
of new investment from Tiger Global Management and Ontario
Teachers Retirement Fund. The company is valued at $7.6 billion,
according to people close to the transaction.

– In April 2011, Jingdong raised $1 billion from Digital Sky
Technologies, Sequoia Capital, Tiger and the Walton family,
allowing a valuation of $6.6 billion post money, said the
sources. At the time, Chinese media had widely reported DST
invested $500 million for a 5 percent stake, implying a
valuation of $10 billion.

– Reuters: China’s 360buy closes funding round, valuing
company at $7.3 bln-media [ID:nL3E8MD2LZ]

RELATED COLUMN

Open sesame [ID:nL4E8GL3LL]

– For previous columns by the author, Reuters customers can
click on [GU/]

(Editing by Rob Cox and Katrina Hamlin)

((wei.gu@thomsonreuters.com))

((Reuters messaging: wei.gu.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS JINGDONG IPO

(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

China’s leadership reshuffle extends to its financial sector. The country’s central bank chief may step down after being left out of the Party’s central committee. The heads of the China’s sovereign wealth fund and Bank of China’s chairman are among the candidates for promotion. Although the state maintains a tight grip on financial matters, personal styles still matter.

The most high-profile change is at the People’s Bank of China where Zhou Xiaochuan, governor for the past decade, is now expected to retire. That’s prompted speculation about his replacement. Xiao Gang, chairman of Bank of China, who was promoted to the 205-member central committee, should advance. A former deputy governor, who is also young enough to serve a full ten-year term, Xiao may have a chance of succeeding Zhou. But the heads of China’s banking and securities regulators, who are more senior, could also get the nod.

Other candidates for promotion include Lou Jiwei, chairman of China’s sovereign wealth fund, who could become finance minister. A former deputy finance minister, Lou’s international experience should come in handy as China becomes increasingly integrated into the global financial system.

Picking a new central banker in China is not as momentous as, say, selecting a new chief for the U.S. Federal Reserve. Monetary policy is still  believed to be set behind the scenes by the country’s premier or its State Council. Running the central bank may be more about following the party line, as Zhou showed last month when he cancelled a high-profile speech in Japan following a territorial dispute. Moreover, the likely new heads aren’t much different from the ones they are replacing. Most of them, including Lou and Xiao, earned their promotions in the era of former premier Zhu Rongji.

Still, personality matters in China’s hierarchy-driven society. Under Zhou, the PBOC has developed a more open culture with lively debates. Although it may not have the final say on interest rates, it can lead key initiatives, such as yuan internationalisation, which helped to loosen the country’s rigid control on the exchange rate. China’s new financial guard won’t automatically lead to faster reforms. But at least they have plenty of experience in pushing for changes from within.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Chinese IPO hopefuls are getting mixed messages. Foshun Pharmaceutical, whose name means “revival” in Chinese, has raised $500 million in the first Hong Kong offering for three months. At the same time, however, a real estate trust backed by Li Ka-Shing has cancelled its Singapore listing. Despite a market recovery, the summer lull isn’t over yet.

Fosun, a healthcare holding company which already has a Shanghai listing, managed to push through its Hong Kong offering by pricing it at a hefty discount to its existing shares. The new shares were placed at 9.9 percent below the 20-day volume-weighted average price of the Shanghai stock. That’s just inside the maximum 10 percent discount permitted by Chinese regulators.

Fosun also benefited from some big-name backers. The offering attracted interest from respected investors such as Prudential Financial and International Finance Corporation, which together took 15 percent of the offering. Fosun stands to benefit from China’s hefty ageing problem and lack of social safety net, which should create opportunities in private healthcare.

However, interest from other big funds was subdued: the tranche reserved for institutions was reduced to 80 percent from its original 90 percent. And the stock still doesn’t look particularly cheap. Fosun’s Shanghai-listed shares are up 23 percent this year, against a 4 percent fall in the index. After stripping out the value of the firm’s stake in Hong Kong-listed Sinopharm, the holding company trades at 15 times this year’s expected earnings – in line with local rival Shanghai Pharmaceutical.

Meanwhile, prospective offerings must contend with other poor omens. In Singapore, investors have turned their backs on Dynasty, a property trust which was to have been the city-state’s first yuan-denominated IPO. The company cited poor after-market performance by several other recent listings and lacklustre earnings from large global corporations as the reason for pulling its $777 million offering. But wariness about the downside in Chinese commercial property probably also played a role.

A slew of Chinese companies, such as People’s Insurance Company of China Group and China Everbright Bank, are anxiously waiting for the Hong Kong IPO window to open again. Yet despite Fosun’s auspicious name, hopes of a revival look premature.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

At 7.4 percent, China’s third-quarter GDP growth rate was the lowest for three years. But it looks like the worst of the recent de-acceleration is over.

The headline number looks weak, at least in comparison to the 10 percent rate of the last decade. But a closer reading of the statistics is more encouraging. For one thing, UBS calculates that the seasonally adjusted annualised quarter-on-quarter growth rate was 7.6 percent, up from 6 and 7 percent in the preceding two quarters.

The government’s efforts to spur activity seem to be working. Property sales rebounded in the third quarter. That helped furniture sales, up 27 percent in the quarter year-on-year. Medicines, telecom equipment and apparels all posted 20 percent or higher growth. While heavy industries such as steel and chemicals are still cutting back on inventories, technology, pharmaceuticals, and food processing remain strong.

The monthly data also suggests a modest pickup of the growth rate. September’s retail sales were 14 percent higher than in the same month a year ago. In August, the annual growth rate was 13 percent. Investors probably need to become more positive. Earlier this month, they were expecting a 5.0 percent annual increase in exports, according to Reuters estimates. The actual number was 9.9 percent.

Many investors are reluctant to give up on their expectations of a big slowdown, possibly because they would welcome the effect of a huge stimulus programme on asset prices. But while September’s consumer prices inflation rate was a low 1.9 percent, leaving room for an official push, the new generation of leaders is likely to believe the Statistics Bureau, which is confident that the full-year target of 7.5 percent GDP growth will be met. Besides, the target rate in the latest five-year plan is just 7 percent.

If unemployment were perceived as a serious threat, things might be different. But Foxconn, an Apple contractor, reports difficulties in recruiting and retaining workers. Job vacancies continue to outnumber job seekers at labour bureaus in the third quarter. Overall, it looks like Beijing has done a pretty good job of fine-tuning this still fast-growing economy.

By Wei Gu

Sinopec’s failed bid for China Gas leaves business unfinished. The Chinese oil producer had to drop its $2.2 billion offer after failing to secure regulatory approval to buy the gas company. As a state-owned bidder, the political sensitivities were too great, and the price probably too low. Yet China’s fragmented gas industry still needs to consolidate.

Launching a hostile bid alongside ENN Energy in December was an opportunistic move. China Gas’ shares were halved in ten months, after co-founder Liu Minghui quit, dogged by embezzlement allegations from which he was subsequently cleared. Investors expected a better price. Even after Sinopec’s offer failed, China Gas’s shares closed 18 percent above the offer price on Oct. 16.

Liu’s return to the company and the emergence of other big shareholders helped fend off the hostile takeover bid. A venture set up by Liu and London-listed Fortune Oil now own 21 percent. Korea’s SK Holdings also increased its stake slightly to 10 percent at a price above Sinopec’s offer. The surprise sale by Oman Oil of its entire 13 percent China Gas stake to Beijing Enterprises Group, another state-owned company, made it clear Sinopec would have to offer more.

The deal also faces political difficulty. The bid has overtones of “guo jin min tui” – Chinese for “the state advances, while the private sector retreats”, which is a sensitive topic in China. For a state company to scoop up a private one on the cheap doesn’t look good.

Demand for natural gas has been robust despite China’s slowing economy. It is a cleaner alternative for oil, while supply remains constrained by bottlenecks. China’s nature gas operators are largely regional players, with national giants like China Resources starting to consolidate the sector. Despite the failed attempt, consolidation in this industry isn’t done yet.