On a fast train to Shanghai

Another day, another bullet train! This time from Nanjing to Shanghai, a journey that would have taken many hours (if not days) 20 years ago can now be covered in just 90 minutes, thanks to the white, sleek, rocket-like trains that glide at over 300 kms per hour across shiny, sturdy rail tracks, stopping at spacious, air-conditioned modern stations which look like more like airports than the antiquated stations that were built at the advent of the steam train.

China’s new modern rail network is reinventing the concept of domestic travel, for both business and pleasure, connecting their first and second tier cities at a rapid rate, facilitating easy, comfortable and reliable travel at an affordable price, and supporting the notion of an economy on the move, if not travelling at breakneck speed!

These new trains, with their plain white colouring, and discreet blue stripes, are unlikely to foster a culture of train-spotting amongst young Chinese boys with a flair for numbers and record-keeping. It’s hard to detect a single distinguishing feature between one train and the next as they speed by. But they are keeping the country moving forward, setting an example in modern infrastructure development and, most importantly, ensuring we reach our destination on time.

Is China slowing down?

Is China slowing down?

This is the big question on everyone’s mind in China this week as we hurtle from city to city by bullet train and marvel at the amazing transformation of a country which was over 90% rural only 30 years ago.  There is certainly no evidence of China’s slowing on the ground, in Beijing and Nanjing at any rate, as the locals strive to defy the gravity caused by the vanishing western consumer which has required the Government to speed up the transformation of their domestic economy to ensure more sustainable and stable growth for the future.

Yesterday I spent a very pleasant afternoon with my old friend, Xisu Wang next to a beautiful lake adjacent to the Forbidden City (see photo above) who can always be relied on to speak good sense when it comes to China’s economic growth path and the role of the Government. Xisu reminded me, as he often does, that there are no surprises in China because everything is planned in advance. The current Five Year Plan (2011 – 2015) predicts a slowing of China’s growth to a more sustainable 7% per annum which is more than sufficient to maintain the progress that is needed to maintain social stability (more jobs, higher wages and increasing wealth is the key to that) and allow China to transition to an economy which is driven more by domestic consumption (propelled by urbanisation,  innovation and aspiration) rather than exports and the availability of low cost labour.

As we drove back to my hotel, we spoke to the Beijing taxi driver about his life. Xisu says he always does this to gauge the mood of the local people who have experienced real poverty in their lives and are a reliable measure of the local mood of ordinary people.  The taxi driver was indeed very happy with his life. He owns and rents out his own plot of arable land (from which he generates a nice steady income and enough food to feed his family) his wife is working, his children were doing well at university and with his income from driving taxis he was happy and content with his lot. Xisu says this is very common amongst the poorer classes whose tastes are simple, who are grateful for everything that China’s economy has given them, and who simply want a better life for their children. Xisu felt this was in sharp contrast to more middle class urban dwellers who he says are always complaining (about trivia in his view!)

Yes, China is slowing. Its part of the plan. Its actually a good thing. And it will deliver higher quality growth in the long run. This may not please Australian miners or European politicians, but it will hopefully avoid the “boom and bust” cycles of the past and it will deliver good returns for investors, businesses and Governments who take the time and trouble to build local relationships and understand the local dynamics.

Many people said China’s economy would hit the wall a long time ago. They’re still saying it today. Will they be saying it in another 10 years?

Ted Baillieu in Beijing

Hon. Ted Baillieu, Premier of the State of Victoria, is this week leading the largest ever trade mission to China from Australia, if not from anywhere in the world. With over 600 delegates representing 400 companies attending 2,000 business events over 5 days in over 30 cities, there is plenty going on as Victorian companies spread themselves across a wide range of industries seeking potential opportunities in China and hoping to build local relationships. I learnt last night that 40% of the delegation have never been to China before, meaning that this week is bound to have a significant impact on everyone no matter what transpires.  And in a country where “big” is everything, this delegation is sure to make a big impression!

My involvement is with the Financial Services delegation which comprises around 40 delegates and represents many segments of the financial services value chain, from fund managers and investors to lawyers, accountants, IT and other service providers. We kicked off on Monday in Beijing, with a day of briefings and networking, followed by the Oriental Mining Dinner in the evening at which Ted Baillieu was the guest of honour (see above photo). As I write this blog, we are speeding at over 300 kms per hour on a bullet train to Nanjing where we will pick up the program this afternoon with a business matching event and an evening of large scale networking. Tomorrow we get on another fast train to Shanghai!

I’m pleased to say that, thanks to the wonderful Elle Wu in our office, most of the financial services delegates have taken my advice of producing bilingual marketing collateral and packing plenty of business cards (including adopting a hand-picked Chinese name, a guaranteed talking point when engaging with the locals for the first time). By my count, I’m already 50 cards down and wondering whether I packed enough!

There is a saying amongst the local expatriates in China that ‘the longer you stay in China, the less you know’! In other words, China is so complex, multi-faceted and difficult for a foreigner to understand that it becomes harder to fathom the longer you stay here.

By that measure, we'll have 600 new “China experts” by the end of this week!

Hong Kong as a Financial Services Centre

Many years ago, prior to the handover in 1997, I lived in Hong Kong and worked in the financial services sector. A common topic of conversation involved the speculation about Hong Kong’s role in the future. Would Hong Kong continue in its traditional long term role as the gateway of business and investment into mainland China? Would China respect and preserve Hong Kong’s freedoms, laws and practices? Would Hong Kong continue to prosper and grow?

Or would Hong Kong become irrelevant once China was able to build its own mechanisms and markets to attract international capital and, more importantly, to provide confidence to foreign investors and businesses?

Fifteen years later, this question has largely been answered, at least in the short term. Amidst the economic growth story of China, Hong Kong has emerged as not only the gateway for investment in the mainland, but as a world class financial centre in its own right.

A low-tax haven, modern metropolis and fusion of east and west, Hong Kong has flourished as a financial services centre and banking hub for international corporations. As an example, Hong Kong now has one of the highest concentrations of banking institutions in the world, with 71 of the world’s largest banks managing their Greater China operations from Hong Kong. And, with around 8000 skyscrapers, Hong Kong almost doubles the equivalent measure in New York.

Hong Kong has been anointed by the Chinese Government as “China’s international financial services centre” and plays an important role in managing the internationalisation of the RMB, one of the world’s most significant “mega-trends”.

To prove the point, Hong Kong hosts the largest pool of RMB liquidity outside the mainland, with offshore RMB deposits reaching nearly RMB600 billion (70 per cent of which is held by corporations, with 15 per cent from overseas) and the rapidly growing demand for RMB financing and investment will solidify Hong Kong’s position as the main market for “dim-sum bonds” outside the Mainland.

In 2011, there were 81 issuers of dim-sum bonds combining to a value of RMB100billion, three times that of 2010 and projected to grow rapidly in the future.

Hong Kong’s reputation as a global financial industry leader is underpinned by its ability to offer services to non-resident third parties and its banking sector plays a crucial role in establishing Hong Kong as a major loan syndication centre in the Asia-Pacific region. Hong Kong is the second largest banking centre in Asia (in terms of the volume of external transactions), placing it second behind Japan, and the Hong Kong dollar was the eighth most traded currency in the world (by volume) in 2011.

Free market, with a cushion

As a free market international economy, Hong Kong is highly dependent on international trade and finance and could have been vulnerable to the economic shocks encountered in other countries (notably the US and Europe) as a result of the GFC. However, strong levels of growth and economic activity trickling down from Mainland China has cushioned Hong Kong’s economic slowdown.

Hong Kong’s banking centre emerged from the crisis in much better shape than the rest of the world. Its collective capital ratio rose to 15.9 per cent in June 2011 and its tier-one capital adequacy ratio rose to 12.5 per cent. The potential draconian restrictions on riskier practices that are likely to be faced by the European and American financial sectors will create opportunities for Asian markets to capitalise further, with Hong Kong leading the way.

In December 2011, the World Economic Forum’s fourth annual Financial Development Report Financial Stability Index ranked Hong Kong in first place as the world’s top financial hub, above the US and the UK.

Hong Kong was the first Asian financial centre to achieve this position, bolstered by strong scores in non-banking financial services such as IPO activity and insurance. At the end of August 2011, 1,463 companies were listed on the HK Stock Exchange with a market capitalization of HK$19,432 billion, of which 617 were Mainland enterprises which have raised a combined value of HK$3126 billion in the Hong Kong market since 1993.

As a leading funds management, hedge fund, banking and ETF trading centre, Hong Kong provides the regulatory environment of a Western democracy, but with access to the rapid growth and wealth of the Greater China and Asian regions.

Five advantages

Hong Kong is a gateway to over 3 million high net worth individuals in the Asia Pacific, with wealth totalling approximately US$9.7 trillion dollars, significantly more than their equivalent European counterparts. It is interesting to note that Hong Kong was actually one of the first jurisdictions worldwide to allow hedge funds to be sold to retail investors.

Hong Kong’s competitive advantage stands out in five key areas: its people, business environment, market access, infrastructure and cost competitiveness. The foundations of such a business environment are established in its freedom, English common law system, robust regulatory regime, a simple and transparent taxation system and a time zone that links American and European markets with the Asia Pacific region.

Hong Kong’s future as China’s international financial services centre seems assured. On my regular visits back to Hong Kong, I am delighted by the local confidence shown in Hong Kong’s economic future. Many expatriates now make plans to retire there, an idea which would have been laughable 15 years ago, and property prices are rising rapidly, a sure sign of local optimism.

A recent survey of over 450 UK investment bankers showed that more than two thirds believed that Hong Kong, Shanghai and Singapore would be the world’s top financial centres by 2022.  All of these cities are within a short flight of Australia.

Four Years to Rio

With the London 2012 Olympics closing in style this week, all eyes are now on Rio de Janeiro, the host of the 2016 Olympic Games. I was recently in Brazil meeting with the Rio Government and Olympic sponsors to discuss their plans to build a business legacy program over the next 4 years, and there is a great deal of optimism, excitement and anticipation amongst local businesses and entrepreneurs. See the latest issue of "Think Global with David Thomas" to learn more about how Brazilians are preparing themselves for Rio 2016: