China Money Podcast – Audio Episodes

[This interview was done inside a train, so background noises are loud] In this episode of China Money Podcast, guest Jim Rogers shares his bearish views on the Chinese property sector, and explains why those who argue that the RMB is approaching fair value are wrong. Listen to the complete interview in the audio podcast, watch a shortened video version, or read an excerpt below. Q: We are in this high-speed train from Tianjin to Beijing going at 350km per hour. Are you impressed? A: Yes. I am. I came over today and it’s very quiet and very smooth. I couldn’t believe how wonderful it is. It’s better than an airplane. Q: This is a perfect showcase of China’s infrastructure boom during the past few decades. How much longer can this boom go on? A: I’ve driven across China a few times. I know there are a lot of space and a lot infrastructure needed to be done, so there will be more to come. Q: Last time we talked, you said the Chinese property bubble will have an ugly burst. We’ve seen housing prices drop, but by small margins. Will it get much worse? A: It’s actually been dropping a lot in some places. But, what I’m worried about is that the Chinese government is loosening interest rate and bank reserve requirement ratios too soon. If they loosen too soon, as they did once before, the bubble got much worse, and people will lose more money ultimately. Q: You predict that the U.S. economy will go into a downturn next year and 2014. How will that affect the Chinese economy? A: With the largest economy in the world having problems, everybody feels it. If you sell to Wal-Mart, you will feel the pressure. By the way, Europe is slowing down. So you have two of the largest economic blocks slowing down, China's (prospects) will be clouded too. Q: As you know, many economists are calling for the Chinese economy to warm up again, if not during the second half of this year, then early next year. You don’t think it’s the case? A: No, because I expect the U.S. and Europe to slowdown in 2013 and 2014. Sure, some parts of the Chinese economy will be fine, but most of China, especially those dealing with Europe and the U.S. will have problems. China is spending billions of dollars to clean up its air and water, so (environmental technology and) water treatment sectors will do very well. If you are in agriculture, you will not care if America is in trouble. Also, some parts of the Chinese economy will still have a hard landing, such as the property sector. So it’s a mixed bag.

[Note: this is recorded outside and there are background noises.] In this episode of China Money Podcast, guest Nick Cao discusses China's commercial property sector, which has gone through an explosive growth phase after early 2010, when home buyer restriction policies dragged down the residential property market. http://www.chinamoneypodcast.com Q: Since the government launched home buyer restrictions, the commercial property sector has been going rapidly. Some are concerned about a bubble. Are you? A: It depends. I would say China's commercial property sector is still less developed than the residential side. We see two different groups in the commercial sector. One is the large developers in China, such as China Resources and China COSCO. They moved into commercial properties before the tightening measure was initiated. But the other group is forced into the commercial sector because their residential sales have stalled. And they operate the commercial sector as if they are still running residential properties. Lots of these (commercial properties) are poorly designed. Some of them are in tier two and tier three cities. Take the city of Shenyang. There are oversupply issues. We see ten large shopping malls within two kilometer distance. So that’s scary and there are a lot of concerns for investors. But, overall I wouldn’t say it’s a bubble because in China, there still lacks good quality shopping malls (in many cities). Q: For the past few years, the transaction volume in commercial property has doubled. Do you see that continue? A: I would say, yes. Because China's economy is moving from manufacturing-based to services-based, so this generates stronger demand for office space. Some international firms are expanding into second tier cities in China, which requires high quality office space. Also, the government is promoting domestic consumption. That’s demanding more retail shopping malls. Moreover, the insurance industry in China is just allowed to invest in commercial real estate so (investment) demand will still be quite high. Q: We have seen residential property prices double in the space of one to two years. Will the same happen in commercial property? A: No, I don’t think it’s going to happen that fast. It’s all case-by-case. For example, if there were two shopping malls next to each other, their prices would move very differently (depending on how well they are managed). Q: But we often read reports on ghost shopping malls across China. It seems as if you still believe that the fundamentals of commercial real estate is strong demand driving up supply? A: When you talk about ghost shopping malls, you still have to look at it case by case. In China's tier two and tier three cities, it’s still very hard to find good quality shopping malls. Yes, there are lots of them that are vacant. But that's because the developers don’t know how to run a successful shopping mall. Our Guest Today: Nick Cao is the China head of investment and capital transaction at global real estate consultancy, Knight Frank. Nick has six years of experience in real estate investment and has advised on six billion RMB real estate investment deals involving office, retail serviced apartments, hotels and joint-ventures. Mr. Cao graduated from the London School of Economics.

[Apologies for the sound quality of this podcast as the interview was done outdoors.] [This podcast is also in video, please check it out on our website: http://www.ChinaMoneyPodcast.com] In this episode of China Money Podcast, guest Ludvig Nilsson discusses the challenges facing China’s private equity industry and where he sees attractive investment opportunities. Listen to the podcast, watch the shortened video or read an excerpt: Q: Last year, you described China’s private equity industry as a hyped market with strong fundamentals. Have you changed your opinion? A: Not really, I think the hype is still on. The inflows of new capital into China are actually increasing, not just from overseas investors but also from local institutions. Specifically, China’s insurance companies. The insurance industry is only now allowed to allocate significant money into private equity. On an overall basis, the potential is very large. The combined assets of the insurance industry are a few hundred billion dollars. If you apply a percentage of two to three percent that could arguably be invested into private equity, that’s a quiet a large number. Q: You answered the first part of the question, but how about the fundamentals? People are concerned that there is now too much money chasing too few deals? A: Yes, but that’s always been the case for as long as the industry has been around. There are new opportunities right now and they derive from two areas. One, there are a range of newly emerged industries that need capital for consolidation, the consumer industry, for example. On macro basis, China has never seen as tight a credit condition as the present ever. Some six months ago, it was the tightest condition I’ve ever seen since I moved to China 15 years ago. China has always had lots of money sloshing through the system. Now a lot of that money has dried up. What I think we will see is that there are currently two thousand (private equity) funds. They will consolidate into perhaps one thousand or so funds. And, only half of them will make seasonable returns. That sounds like a lot, but (it means) 75 percent of the funds you see in the market will not do well. Q: Is there any particular industry or strategy that you think presents better opportunities at present? A: We are looking at western China regions more. Given the new development phrase that the western China regions are going through, we see a lot of opportunities of investment ahead of the curve. Some of the managers there tend to have strong local connections and very good deal flow and very good understanding of risks at that area. They have been able to do deals at very attractive valuations. There are a large number of fund managers that emerged in Chengdu, Chongqing and Xi’an. Most of them started out as small RMB funds backed by leading industrial families in those regions. Many of them are looking to increase their capital base as the investment opportunities there are huge. Q: But going to a frontier market represents unique risks and challenges. How do you manage that? A: Exactly. The reason we want to work with local funds over there is because they know how to manage that risk. Some of the funds from Shanghai going to China’s western region, they are as foreign as I am. So, many of those local risks can best be managed by those with local connections. Our Guest Today: Ludvig Nilsson is a co-founder and managing director at Jade Invest, a Shanghai-based private equity fund-of-funds manager focused on China. Prior to co-founding Jade Invest in 2005, Ludvig was a consultant at PricewaterhouseCoopers where he focused on commercial due diligence for private equity clients. For more information, go to http://www.ChinaMoneyPodcast.com

In this episode of China Money Podcast, our host Nina Xiang reads the tea leaves of an important signal from Beijing that China is determined to deliver its economic growth objective this year, whatever it takes. According to Chinese state media, the Chinese government is stepping on the pedal of fiscal stimulus. Organizations and local authorities were notified to report infrastructure and other investment projects earlier than scheduled. Beijing looks ready to accelerate approval process and appropriate funding for them as soon as possible. After disappointing statistics in April, China’s central bank has cut reserve requirement ratios, but there are a few challenges relating to monetary loosening alone. Number one, businesses are unwilling to take bank loans as the economy is cooling. Number two, opening the monetary faucet could make the government’s target on inflation more difficult to achieve. The Chinese government has the ability to use fiscal stimulus and it is a more appealing method as it does not tend to induce a credit bubble or drive up inflationary pressure. Public debt to GDP in 2011 in China was 43 percent, compared with 103 percent in the U.S., 82 percent in Germany and 120 percent in Italy. (Should we mention Greece, 165 percent?) The effort is already underway as first quarter fiscal expenditure growth reached 33.6 percent, highest for the past two years. In addition, Beijing is speeding up the spending machine so that the economy does not continue to cool down further. That means we might see some stimulus effect in the real economy as soon as the third quarter.

In this episode of China Money Podcast, guest John Barnes examines investment opportunities in China’s drive to achieve a more sustainable and greener growth. In particular, he explains the enormous potential of wastewater treatment businesses in China...

In this episode of China Money Podcast, prominent China economist at the Organization for Economic Co-operation and Development (OECD), Richard Herd, takes on China’s tax systems and financial reform. Contrary to popular opinion, Mr. Herd disagrees with policy suggestions to cut taxes as fiscal stimulus. As he sees it, China’s tax burden on companies and individuals is still light. Listen to the podcast or read the excerpt below. Q: In your research report, you pointed out the strong fiscal position of the Chinese government. The government has little net debt, and fiscal revenue has been growing at an average of 1.5 times of nominal GDP. Therefore, some Chinese economists are calling for tax cuts. Do you think that will be a good policy move? A: Over the past 15 years, the growth in tax revenue has been quite rapid. But it was needed and was rooted in the tax reform of the mid 1990s. It lifted, in total with social security, government tax revenue to around 30 percent (of GDP). I think 30 percent, or perhaps 35 percent (of GDP), should be enough to cover most of the governmental expenditure needs. It will allow for a considerable increase in social benefits that’s so badly needed. Beyond that, there is a need to reform taxation so that tax revenue doesn’t grow too rapidly. The disincentive effect is still quite limited because most people still don’t pay income tax. The main problem on incentives with the taxation system is in social security, where social security contribution (by employers) is around 40 percent of a person’s wage, that’s probably too high. Some of that too should be transferred to general taxation so that the incentives for employing labor are not cut too much. As to whether taxes should be cut at this moment, I think that some of the main calls to cut taxes have come from those who think that the Chinese economy is going to a hard landing this year. I don’t think that seems at all likely at the moment. The need to reduce taxes is much less than a trillion Yuan. In fact, the government has announced income tax cuts and also stimulus programs to slightly raising the deficit to around 400-500 billion Yuan. That will go quite a long way to getting the economy going again. Q: The domestic economists are arguing that the tax burden for individuals and companies are too heavy. Sounds like you have a different opinion? A: I think that the tax rate for companies is 25 percent. That’s quite low by international standards. The tax rate for most individuals is, well, only a very small proportion of the Chinese population actually pays income taxes. You could perhaps say that in relation to other transition countries, China’s top tax rate is quite high because it’s at 45 percent. It’s much higher than in Hong Kong for example, which is 15 percent. But on the other hand, China has a bigger social system than Hong Kong. The 45 percent tax rate doesn’t come until someone earns 36 times of the average wage, even then it’s just very few people who pay 45 percent. There is certainly a case for trying to move some of the social security contributions paid by the employer to a more general tax base. Q: You said the government’s increasing the deficit to around 500 billion Yuan is sufficient to stimulate the economy, but of course, you still think that the government should (further) loosen monetary policy, right? A: Yes, indeed. The People’s Bank of China has reduced the reserve requirement ratio (RRR) twice now. That’s had an impact on interbank interest rates. Some more RRR rate cuts is likely in the next few months. Also, the growth of credit has picked up as well. That too should stimulate the economy. Q: Lately, there have been many new policy initiatives in Beijing to reform the financial sector, including an experiment program on private lending in Wenzhou, setting up another offshore RMB center in London, significantly increasing QFII (Qualified Foreign Institutional Investors) quotas.

In this episode of China Money Podcast, hear what Mr. Ewen Cameron Watt has to say about China's property sector. Mr. Cameron Watt is a managing director and portfolio manager at BlackRock, Inc, and below is an excerpt of his viewpoints. On the Chinese property market, is it a bubble and is it bursting? What’s happening in the real estate market in China is fascinating, where the government has deliberately engineered a decline in prices to deflate a bubble. It’s really an experiment because it’s the first time in the fifteen years or so there has been a private housing market in China. The big question for us is to what extent does it hurt activity levels and to what extent does it impact the financial systems. On the outlook for the property sector and how will it impact other parts of the economy? One of the big risks in China is that, investors in property invest on the basis that the value will always rise. This is the first real decline in prices induced by the central government in the 15 or so years of the private housing sector in China. No one knows what’s going to happen for sure. On the positive side, more urbanization, household formation and all that supports the idea that there is an ongoing demand. That’s certainly true. On the negative side, how will that demand manifest itself? I think that here the rate of return is important because there are very few avenues for real returns for savers in China. They've gone into real estate, gold, wine and jade, because they think they get a real rate of return, which they don’t get for bank deposits. Bank deposits are 90 percent plus of the savings vehicles in China. So it’s a critical question how the psychologies recover. If I’m honest, at this stage, I don’t know. For global investors, what key indicators in China should they monitor closely to better position themselves? One of the things we have watch closely is the rate of money growth. There are some opportunities for the government to relax restrictions on banks to help the growth of monetary supply. Monetary supply has got to grow at nearly 15 percent to get 10 to 11 percent nominal growth. We will give it an inflation rate of four percent, then you got a seven percent real growth that people have come to believe is minimum growth for Chinese society and Chinese stability. If you think about what investors would monitor, they should monitor Chinese money supply, loan growth, and watch closely if these really decelerate; if that’s the case, then the global financial risk is rising, not just Chinese risk.

In this episode of China Money Podcast, well-known British writer and China expert Jonathan Fenby gives his diagnosis of China’s long-term challenges. Will the world’s second largest economy go on to surpass the U.S. in a couple of decades? Or, is an apocalypse in the cards? Listen to the podcast above, or read an excerpt below. Q: In your latest book, Tiger Head, Snake Tails, you point out that China’s future dominance is far less certain than people have been led to believe. Why is that? China has certainly achieved a lot in the past thirty years. But China is now in a stage where it must rethink its economic model. The assumption that China will continue in the rapid pace of economic growth and that it will bring in political dominance is far from established. Its economy needs re-balancing, reshaping and remodeling. China will spend the next ten years or so on getting its economic model up and running rather than thinking about dominating the rest of the world. Q: The Chinese government certainly understands that the model needs to be changed, but with the complicated system now China finds herself in, it seems hard to find a starting point? The difficulties with reforms in a situation like China after all those years of growth is that everything is interconnected. If you start reform in one area, for example, if you privatize farm land, people can then build up much more efficient farms in China. That would be good, but if you do that, the local authorities which own the farm land and rely on selling them for revenues, they will need to introduce new tax systems to give the local authorities much more power to raise taxes locally and spend it themselves. If that happens, Beijing will lose an element of control over local authorities. Another example is energy and water, which is under-priced in China. If you freed water prices and they rose rapidly, it will have an effect on inflation. If you can start in one place, I would say the one area where you could consider is the Hukou registration system. You could allow migrant workers, especially second generation migrant workers, greater rights and the possibility to buy properties in the cities. Our Guest Today Jonathan Fenby is co-founder and managing director of the China research team at UK-based consulting firm, Trusted Sources. He is formerly editor of the UK newspaper, The Observer, and Hong Kong-based daily, South China Morning Post. A prolific writer, he has published 12 books in the last 14 years. His latest book, Tiger Head, Snake Tails: China Today, How it Got There and Where it is Heading, analyzes China’s future.

In this episode of China Money Podcast, guest Michael Shaoul discusses his view on the Chinese economy. He is bearish and expects the current economic slowdown to last until the end of this year, in stark contrast to the consensus view that the economy will pick up speed during the second half of 2012. Here are his main points: - The major concern of the Chinese economy is the real estate sector. The softness we have seen in this sector is only the beginning of a broader and deeper correction that will affect peripheral industries such as materials and commodities more harshly than people expect. - China’s real estate cycle will be different from the US housing cycle. Though China’s property sector is less leveraged, the losses are still real on behalf of property owners. - Even after the Chinese policymakers loosen monetary policy sometime during this quarter, the stimulus effect will not translate into economic improvements immediately. The economic deterioration will continue well into the end of this year, if not longer. - The current transition will be difficult for the Chinese economy and for investors who are exposed to the Chinese “growth” story (as well as other emerging markets such as Brazil and Hong Kong). - China’s economy is 25 to 35 percent of the U.S. economy, but China has 140 percent of the money (M2) that the U.S. has. The massive amount of liquidity will take time to unwind. - We only have short exposures to some H shares in Hong Kong. It is difficult to find good investments in China right now as it was difficult to find good investments in the U.S. in 2007. Investors will have to hold through a difficult period and endure losses. Our Guest Today: Michael Shaoul is chairman of Marketfield Asset Management, a New York-based investment firm that oversees over $1.5 billion. The Marketfield Fund beat 97% of its peers in 2011. Mr. Shaoul also serves as chief executive officer of Oscar Gruss and Son Incorporated, a New York Stock Exchange member firm. Between 1992 and 1996, Mr. Shaoul ran Park Square Associates, a Manhattan-based real estate investment and management company.

In this episode of China Money Podcast, guest Powell Yang discusses Chinese investors’ increasingly important role in fine and rare wine investments. How mature are Chinese wine investors? What common mistakes do they tend to make and what potential returns are they after? Here are his main points: - Wine investment is similar to other commodity investments. The key is to do your own research. As much as 99 percent of the wine produced will never go up in price. Only the very top wines of Bordeaux and some Burgundy wines are traded in high dollar prices. - Everyday investors without deep wine knowledge can still invest in wine by buying the tried-and-true labels. If bought at the right price, it is likely to earn a decent return. More knowledgeable wine investors can explore the up-and-coming labels that could potentially yield greater reward. - With Chinese wine investors growing, wine producers are catering more to the Asian and Chinese markets. They are shifting availability to China and hosting signature wine conventions in locations such as Hong Kong. - The mistake Chinese wine investors tend to make is to chase the market in disregard of the price. They could also be impatient to see their wine collections increase in price, though generally it is recommended to hold wine for at least five years to achieve a reasonable return. Our Guest Today: Powell Yang is director of consignments at Spectrum Wine Auctions, an auction house of fine and rare wine established in 2009. Yang’s primary focus is to explore potential wine investors, particularly in the fast-growing Chinese market. Previously, Yang worked at Anheuser-Busch and Diageo Chateau & Estate Wines, Winebid.com. Spectrum Wine Auctions is a subsidiary of Spectrum Group International, Inc.

In this episode of China Money Podcast, guest Alberto Forchielli discusses China-Europe cross-border deals, the challenges Chinese companies face when expanding overseas, and the mistakes he has made but never regretted. In his own words: - There are great valuation arbitrage opportunities between Europe and China. We have never bought companies at more than seven times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). We were even able to buy companies at as low as 3.2 times EBITDA. But in China, valuations are likely 20 times or 30 times, sometimes as high as 40 times EBITDA. - Chinese companies face many challenges when doing overseas M&A. They are still not insiders and often do not have access to deals. Getting the required approvals from Chinese government also takes time and hurts their competitiveness. - We were able to achieve our accomplishments because we have made all the mistakes possible. One pitfall is working with people who are interested to gain insights from you, rather than doing a real deal. Another is co-investing with Chinese companies that dragged down the whole deal process. We also stay clear from pre-IPO deals now after learning a lesson. - We are just in the beginning of an enormous trend where Chinese companies will become more and more dominate in overseas investment. As investors, we have to stay head of the pack. Our Guest Today Alberto Forchielli is managing partner at Mandarin Capital Partners, a private equity fund that focuses on investing in Chinese and European companies. Primarily, the fund invests in Chinese companies seeking overseas expansion and European companies in search of local presence in China. Among many previous positions, Forchielli was at the World Bank in Washington, D.C. for three years. He was also president for Asia Pacific at Italian industrial conglomerate, Finmeccanica S.p.A.

In this episode of China Money Podcast, our host Nina Xiang reviews this week’s investment news: - China initiated a financial reform in Wenzhou, legalizing private or underground lending and possibly allowing direct overseas investments by local residents - IPO market remains the toughest in years for China’s A-share market

In this episode of China Money Podcast, guest Dan Ikenson discusses the latest U.S.-China trade frictions and if there is really a trade war between the two countries: - People often forget that the vast majority of U.S.-China trade is healthy - Bilateral trade relationship could improve after this year when government transitions are accomplished in both countries - Recommended action is that the U.S. should grant China market economy status and China should improve intellectual property and technology protection Our Guest Today: Dan Ikenson is the director at Herbert A. Stiefel Center for Trade Policy Studies at American think-tank, the Cato Institute. Having worked in international trade since 1990, Ikenson’s research focuses on WTO disputes, regional trade agreements and U.S.-China trade issues. Ikenson is the coauthor of book Antidumping Exposed: The Devilish Details of Unfair Trade Law. “The U.S. and China together have brought 18 cases to the WTO… (but) there have been around 54 cases between the US and Europe at the WTO. So I don’t think these actions necessarily reflect a deterioration of relationship as much as a late maturing of the relationship.” - Dan Ikenson

Yukon Huang is senior associate at Washington D.C.-based think tank, Carnegie Endowment, where he researches on China’s economic development and its impact on Asia and the global economy. He was the World Bank’s China director from 1997 to 2004, and also served at the U.S. Treasury previously. Mr. Huang holds a B.A. from Yale University and a M.A. and Ph.D. from Princeton. In this episode of China Money Podcast, special speaker Yukon Huang discusses China’s unbalanced economy. Is it really a problem, or in fact a virtue? - Deng Xiaoping is the unbalanced reformer who favored the coastal regions in the beginning of the country’s economic development - Other countries all went through similar unbalanced growth periods in their history - China’s unbalanced economy is the result of its unfinished urbanization process “Unbalanced growth is actually associated with tremendous economic strength rather than a liability.” - Yukon Huang

In this episode of China Money Podcast, guest Ben Simpfendorfer discusses China’s manufacturing sector and its challenges to improve productivity: - China will remain number one in manufacturing, but it is transferring higher costs to consumers - China needs to focus on expanding the private sector and the services sector to avoid failing into the so-called middle-income trap - China’s interior provinces will likely stagnate in economic growth if major reforms do not take place Our Guest Today: Ben Simpfendorfer is managing director at Hong Kong-based consultancy, Silk Road Associates. He is the former chief China economist at the Royal Bank of Scotland and the former senior China economist at JPMorgan. He published the book The New Silk Road in 2009 on China’s economic relations with the Middle East. “China will remain number one (in manufacture) even though we will see erosion at the margin. The implication is that the country will start to pass on higher production costs to the rest of the world — so higher prices in Wal-Mart and Tesco. The era of cheap goods is over.” - Ben Simpfendorfer