All roads lead to Chongqing

 

With 102 cities in China with a population greater than one million people, estimated to reach 221 by 2025, the rate of urbanisation in China is unparalleled by any other nation. China’s urbanisation rate is expected to reach nearly 60% by 2020. There is no greater evidence of this than in the rapid transformation of Chongqing, the vast and sprawling metropolis in western China, and home to over 30 million people.

Often compared to Shanghai in the 1990s, Chongqing is the fastest growing city in China. Its booming economy is supported by the government’s “Go-west” strategy and the re-direction of investment and resources to the major western cities. In the 12^th Five-Year Plan (2011 – 2015) the Chongqing government has pledged to maintain an annual growth rate of 12.5% p.a. over the five years.

NATIONAL SIGNIFICANCE

Chongqing became a provincial-level municipality directly subordinated to the Central Government in Beijing in 1997. The strategic choice positioned Chongqing as the central city of China, establishing it as the regional leader and distributing centre for central and western China. As the fastest growing city in China in 2011 with GDP growth of 16.4%, Chongqing outstripped the growth of the other major cities of Beijing and Shanghai (8%) which are maturing into more developed and established markets. Labor costs in Chongqing are 30% lower than that of the eastern coastal cities and, as further evidence of its growing importance, by 2020 Chongqing will be the largest airport for inner China with annual transit numbers reaching 75 million travellers.

ROLE IN THE GLOBAL ECONOMY

As Chongqing evolves as the ‘financial hub’ of Western China, foreign investors are looking to capitalise on this phenomenal growth opportunity. With the rest of the world stagnating, capital drying up and growth opportunities becoming harder to find, the city of Chongqing provides a unique investment opportunity as the next frontier of China. In January 2012, Chongqing’s foreign trade had increased by 70% year on year, further evidence of its growing importance in the global market and, during the first half of 2012, Chongqing’s foreign trade value reach US$25.04bn, up 170% year on year, ranking it as the fastest growing and 12^th largest market in China.

Nearly half of this foreign trade was conducted by the private sector. Exports alone increased 2.5 times year on year and reached US$18.15bn in June 2012, primarily driven by high value electronics manufacturing such as laptop production (Chongqing exported 9.21 million laptops in FY2011/12, valued at $3.14bn). Chongqing’s role in the global economy as the hub of western China’s investment and financial services, will gain new significance with the emergence of the western Chinese consumer into the world’s retail and services markets.

INVESTMENT IN CHONGQING

Investment in world class infrastructure and technology has established Chongqing as a competitive commercial frontier for attracting international and domestic investment. In 2011, Chongqing overtook Beijing in terms of overall FDI (US$10.8bn) and is predicted to overtake Shanghai and Tianjin by 2014. Foreign Direct Investment levels are expected to grow at an average annual rate of 28.3% until 2015 when it will reach USD22bn. In addition, in 2012 it was announced that leading electronics manufacturer, Foxconn and Chongqing will collaborate to build and develop a world-class R&D centre.

The local government is committed to Chongqing’s development, with RMB181billion to be invested in 106 projects over the coming months. Chongqing invested RMB534million into hi-tech enterprises alone in 2011. Investment in Chongqing has already generated fruitful returns, particularly for the banking industry. One example is HSBC, which was one of the first foreign banks to establish a branch in Chongqing in 2004. HSBC’s client base has doubled every year since 2007 and its local business has grown to include four sub-branches and three rural banks.

LIANGJIANG NEW AREA

In 2010, the Liangjiang New Area in Chongqing was given the same status as Shanghai’s Pudong area and Tianjin’s Binhai area. It is located in the main city of Chongqing, north of the Yangtze River, and the core area of Jiangbeizui will be the new financial centre of the city. To illustrate the scale of the Liangjiang new area, the Yangtze River Delta (where Shanghai’s Pudong sits) covers an area of 210,000km² with a population of 90 million people. In contrast, the “West Triangle Area” where Chongqing is located covers 6.8million km² and holds a population of 400 million. The total output of the Liangjiang new area makes up approximately 14% of Chongqing’s total output, being home to over 646 industrial scale enterprises. There are over 70 projects invest by 60 Forbes 500 corporations in the Liangjiang New Area alone – yet this is only 30% of Chongqing’s total.

CHONGQING ATTRACTS FOREIGN BANKS

The strength of Chongqing’s financial sector is closely tied to the rapid state-backed economic development on the region. By 2015, the financial services industry will account for 10% of Chongqing’s total GDP, a 2/3 increase above the current level which is already the third largest in China.

Chongqing’s workforce is already well educated with over 300,000 tertiary education graduates entering the workforce each year. People employed in finance-related industries are expected to more than double to 160,000 by 2020. To support the growth of the finance sector, the National Government is offering tax subsidies and preferential policies to banking enterprises establishing their operations in Chongqing, including additional incentives for foreign institutions employing large numbers of laid off workers and exemption from city maintenance construction fees and extra education fees. There is a maximum 15% income tax rate for all industrial enterprises in Western China, as opposed to 33% in eastern cities.

Foreign banks have an important role to play in the development and growth of Chongqing as an international financial services centre and, unlike in the more established cities of Hong Kong, Shanghai and even Guangzhou, there is less competition, more opportunity and the potential for local Government support in the form of subsidies, incentives and concessions. Is this China’s final frontier for Australian banks?

Foreign Investment in Australia

This article was written by my friend, Bruce McLaughlin, of Sinogie Consulting Australia Pty Ltd. I believe he raises some interesting issues regarding foreign investment in Australia, and has articulated these well. Rather than trying to summarise his views in my own words, I am simply re-producing them here.

I was deeply concerned by aspects of Tony Abbott's speech in Beijing on Tuesday, and his subsequent comments.  Mr Abbott seems to be saying that he intends to make it almost impossible for Chinese State-owned enterprises ("SOEs") to invest in Australia: this would be a reversal of long-standing Coalition policy, and would pose a severe threat to the Australia-China relationship, and to Australia's economic future.  Mr Abbott appears to be unaware of the need for foreign investment in Australia, or of the nature of Chinese SOEs.  The latter problem is understandable: very few people who are not China specialists understand the nature of Chinese SOEs, their connection to the Chinese government, or their influence on the countries in which they operate. 

Mr Abbott’s position raises a number of serious issues. 

The need for foreign investment

• Foreign investment in areas such as agriculture, mining and technology is essential.  Agriculture and technology (and to a lesser extent small-cap and medium-sized mining enterprises) are starved of capital, and it's only going to come from abroad.  Without foreign investment, these industries will be unable to invest in new equipment, new business practices, or expansion.  They’ll therefore be unable to increase their efficiency, and they'll be unable to compete in international markets. 
• Foreign investment in these areas brings more than just capital.  It provides opportunities for vertical and horizontal integration, access to new markets, access to new technologies and management practices, and scope for economies of scale.  This isn't something that benefits only the direct recipients of the investment: there's a ripple across the whole industry.  For example, if a Chinese dairy invests near a small country town, that dairy will become more efficient, and it will export some of its products to China.  But it will need milk from surrounding farms too, meaning that local farmers have access to a new market, and are no longer beholden to the supermarket duopoly that is currently squeezing dairy farmers on price.  The whole town will benefit.  

Provenance of foreign investment

• Given economic conditions in Europe and North America, we're not likely to see too much foreign investment from these sources in the near future.  We need foreign investment, and, realistically, much of it is going to come from China and India.
• At the bigger end of the market, a lot of this foreign investment is going to come from Chinese SOEs.
• Australia has thrived from foreign investment in the past.  The bulk of it has been from Europe and the US, and we haven't had a problem with that.  Objections to foreign investment only seem to have arisen when more of it started to come from China.
• The argument that we only have a problem with SOEs is something of a red herring.  Foreign SOEs (from countries other than China) are already major players in Australia in sectors including telecom, finance, dairy, arable agriculture and public transportation, and there have not been significant objections to these investments.  Again, the objections seem to have started when Chinese investment increased. 

Understanding what an SOE is...

• It seems pretty clear from Abbott's quotes that he doesn't know what an SOE is or how it works.  Like most laypersons, he thinks an SOE is purely an instrument of government policy, and that all SOEs are owned and controlled by the Central government.  This isn't the case: while some SOEs are occasionally used as instruments of government policy (although, these days, this is very rare), the vast majority operate on a commercial basis, and are subject to broadly similar influences to those affecting private enterprises.  Also, the bulk of SOEs are controlled by local governments, not the Central government.  Even those that are controlled by Central government are mostly controlled by individual ministries, which often have differing interests.  There is not a single entity controlling and coordinating Chinese SOE investment. 
• Where there are differences between an SOE and a private enterprise, the SOE is often the more suitable investor.  As some small country towns have found to their cost, a private enterprise is driven by the next quarter's bottom line, and this can mean that the biggest employer in a town suddenly closes its doors.  An SOE is in a position to make longer-term plans, and this can bring a degree of stability to the employment market. 
• To the degree that there is any central government influence on SOEs, perhaps the most important issue is the Central government guideline that Chinese SOEs investing in Australia must be excellent corporate citizens.  The Shenhua investment in Gunnedah, with its localisation of labour and investment in local infrastructure and services is a prime example of this. 
• I don't understand how an SOE's majority shareholder being the investment department of a small city government somehow makes that SOE's investment in Australia disadvantageous to the Australian people, when investments by a foreign-listed private company owned by anonymous Swiss corporations or a local company owned by one billionaire are somehow beneficial to society.  

The potential effect of Abbott's speech

• I don't know whether Abbott is serious about these proposals, or if this is more of a “thinking out loud” thing that can be immediately reversed.  My hope would be that it’s the latter.   
• If he is serious, and if he follows through on his promises, this will be catastrophic for the future of Chinese investment in Australia, by SOEs and private companies.  And a disastrous outcome for Chinese investment in Australia is a disastrous outcome for Australia, and especially for the country towns that rely on agriculture and mining. 
• If he's not serious, his comments were profoundly unhelpful.  Chinese investors are already scared.  They're unnecessarily scared of FIRB - explaining that FIRB is not to be feared is something that I've worked on a lot, and I know other people have too.  They get very jumpy when shock jocks and extremist politicians make anti-Chinese statements: I spend a lot of my time explaining to Chinese investors and officials that what an extremist politician or low-brow TV or radio report says does not reflect mainstream policy from Labor or the Liberals.  I can eventually get across the message that the Australian political and media environments mean that not all media and politicians sing from the same hymn sheet, and that their opinions do not necessarily matter.  But when our probable next Prime Minister says he's going to restrict Chinese investment, I can't counter that.  
• I have in the past heard leading Liberal Party members make some excellent comments on Chinese investment, which left me feeling comfortable about the investment environment for Chinese companies here.  But this week’s comments from Tony Abbott turn all of that upside down. 
• If Mr Abbott doesn't clarify his statements, Chinese investment will move to Europe, South America and Africa, and we'll be left as an economic backwater.  At the moment, if I ran a Chinese SOE, I'd be rapidly losing interest in Australia and weighing up my options in friendlier investment environments.  If I were head of a private Chinese company, I'd see the potential ban on SOE investment as the thin end of the wedge, and I'd be worried about Australia.

One would hope that Mr Abbott will conduct more thorough research into the effects of investment in Australia by Chinese SOEs, and publicly revise his position.

Lost in Translation

Translating professional documents into Chinese (or vice versa) is not as simple as asking a bilingual member of staff or friend to do it for you. This is a very common mistake. It may get the job done quickly, painlessly and at no cost, but how would you like your business described in Chinese as striving to “succeed when the horse arrives”(马到成功)

The process of translating a document from English to Chinese is an art aswell as a science. Professional translators spend years perfecting their craft, a process of study, practice and observation. Not only do they need to be highly proficient in both languages, but they also need to learn the method of capturing the meaning, flavour and expression in the language, which is so much more than a simple translation of the actual words.

We are fortunate to work with Elle Wu (吴博雅) who does great work for our clients and is in the process of finishing her formal “Conference Interpreting” degree at Macquarie University.

Here are Elle’s observations of the five common mistakes made in the process of translating documents from English into Chinese:

1. Registers and tones

Business documents can take a variety of forms. Some formal documents, such as a proposal, letter of intent or even a legal contract, will be relied on to interpret the written (and sometimes unwritten) intentions of both the writer and the reader. It is therefore important for translators to keep the translation formal, precise and strictly in adherence with the substance of the original document. Otherwise, the reliability and integrity of the documents can be seriously affected.

However, when translating other less formal documents like brochures, profiles, web sites and even advertisements, which aim to attract or motivate the reader to act in a certain way, translators should put extra effort into creating additional colour, flavour and “spin” into the words. However, in many cases, the translation can often be dull or tedious or, worst still, even over-exaggerated and/or distorted.

Remember, translation is an art and not only a science. If you want it done well, ask a professional to do it.

2. Word for word translation

One of the most common mistakes in translation is the “word for word” approach, where translators work strictly from the original text and avoid the often time consuming task of doing some background research on industry specific phrases or jargon. Translation is not as simple as it looks. Some words may lose their original meaning when they are included in a particular phrase or a sentence (e.g. “floating policy”, “weighted average”, “compound interest” etc.). Professional translators always carry out background research on the relevant industry before getting down to work. Additionally, their previous knowledge and experience from past jobs ensure that they capture the meaning as well as the intent in producing an accurate translation.

It is always wise to ask professional translators if they have ever worked in your specific industry before asking them to quote for a job.

3. Poor language proficiency and the absence of translation techniques

Good translators are naturally bilingual and fluent at speaking in one or more languages. However, it should never be assumed that native Chinese speakers who have worked for years in English speaking countries are naturally professional at working with both languages. Professional translators spend years doing language training in schools and universities and preferably will have lived in their language speaking countries for years. Only after they have had acquired outstanding language proficiency and experience can they proceed with a professional translation and interpretation practice.

However, good language proficiency is not the only requirement for good quality translation. There are many important translation techniques and solutions involved in the training process that takes years to master, for example omitting, adding, reconstruction, combination, text analysis, minimizing cultural differences, keeping the translation in its original style and flavour, etc. In addition, good translators should also maintain a Code of Ethics to be a reliable and responsible translator for their clients. Experience, training and practice is essential in building a career as a translator and achieving a high standard in this specialist field.

4. Inappropriate word choice

Translators are never too careful about making a word choice. Dictionaries will only present a range of choices without understanding the full context or meaning. For example, when promoting a product or service, companies often use words such as “promotion” or “publicity” which are often translated in Chinese to “propaganda”. An inappropriate word choice like this could easily pose threat to a company’s image and negatively influence the way they are perceived by clients or business partners.

5. Ignorance of Language conventions

You may have read the English version of a Chinese web site and noticed a phrase or sentence which you can understand but it is a long way from being correct. For example, a Chinese company’s profile was being translated as “Now we are working hard to reach our aim of “creating world-wide famous brand and build a first-class company”, which barely conveys the meaning but could not be regarded as a good translation. This is known as “translationese”, a term coined to describe a translation which is technically correct in meaning but awkward or uncomfortable for native language speakers

All languages have their own conventions, rules and idiosyncrasies. For example, it is not uncommon for a Chinese sentence to start without a subject (e.g. A full Chinese sentence could be “Deepen the reform of our company, implement new policies and strive for our annual goals”, while its English version is a phrase not a sentence.), or for a long English sentence to be simplified and translated into a four-character Chinese idiom (e.g. take measures without attention to the changes in circumstances: 刻舟求剑). It is also widely acknowledged that the frequent use of nouns is one of the typical features of English language, while in Chinese they would usually be replaced by verbs. If overlooked the translation, whilst technically accurate, would sound awkward and unnatural, and not be regarded as a high quality translation.  

It takes years of study, practice and experience for professional translators to perfect the art of converting an English document into Chinese (and vice versa) in a way which will faithfully captivate, motivate or even delight the reader. As can be seen from the above, this involves more than just simply translating the words from one language to another. Next time you need a document or web site translated, don’t assume that a bilingual member of staff or friend can achieve the level of professionalism that you naturally expect with the English version. Whilst you may not be aware of what’s been written, the people you are trying to impress with your translated version will form an opinion of you from the quality of the translation. You wouldn’t take this risk with your English version, so why do it with your Chinese translation?

For advice, guidance or support in this area or to obtain an obligation free quotation for a professional translation, please contact ellewu@thinkglobal.com.au

China’s Funds Industry to triple by 2015!

When I led my first financial services delegation to China in 2005, I was surprised by the lack of progress being made within the local funds management industry. There was a lot of talk of future growth potential but a combination of confusing regulations, investor indifference and a somewhat closed environment meant that the industry was still in its infancy. This was not lost on our delegates from the wealth management sector who concluded that it was far too early to consider China as a serious business proposition.

How much has changed since then. In a recent report commissioned by Citi and published by local researchers, Z-Ben Advisors, entitled “China: The world’s best opportunity for asset managers?” they make a number of startling and eye-opening predictions and observations, including the following:

• China's mutual fund market is expected to triple in size to RMB6.8 trillion (approx A$1 trillion) in on the next three years (by 2015)
• The above figure is expected to double again by 2020
• Very few foreign asset managers have a definable China strategy when it comes to targeting institutional investors
• Whilst China represents 11% of global market capitalisation, the total amount of offshore money invested in China is very small (between 1% and 2% of total global portfolio allocations if Taiwan and Hong Kong are included) meaning that a rebalancing will inevitably take place and a likely ten-fold increase in future allocations to the Greater China region

The above should act as a 'wake up call' to all financial services companies, particularly with an interest in funds management, who now have a once-in-a-generation opportunity to significantly ramp up their engagement in China. 

Distribution

China’s local banks dominate the local savings and wealth management market due to their national reach, their size and scale and, above all, the high levels of trust they command from local investors. Whilst this is unlikely to change in a hurry, the Z-Ben report predicts that foreign banks will soon be given approval to promote mutual funds to domestic investors. This is a significant step forward and opens up numerous possibilities for the four largest foreign banks in China (Citi, HSBC, Standard Chartered and Bank of East Asia) but also smaller players and potential new entrants. China is a huge market with deep niches across different cities, regions and investor segments. As the report concludes “with distribution as one of the most lucrative elements in China’s funds management industry, the rewards for a commercial bank that manages to get a solution right are significant”. New entrants are advised to look for opportunities to innovate, disrupt and/or diversify the current offerings rather than adopting “follow-the-leader behavior”.  This demands a fresh and new approach for China by Australian business leaders looking for growth in the current environment.

Regulation

China has many challenges to overcome in building a modern, dynamic and diversified financial services industry to rival the rest of the world. At the same time, they have to grapple with the problems of an ageing population, an unfunded domestic pensions system, a non-convertible currency, restrictions on international capital flows and maintaining a sensible balance between the influence of local and foreign players.  All of this at a time when global financial markets are in turmoil due to the aftermath of the global financial crisis and the debt problems in Europe.

Despite, or because of, all of the above, Chinese regulators are now moving swiftly and purposefully to introduce a number of changes, announcements and adjustments to open up, improve and diversify their financial services sector, including:

• The internationalisation of the RMB, with the ambition for the RMB to one day become an international reserve currency
• The expansion of cross-border investment programs – QFII, RQFII and QDII to encourage foreign players to play a greater role in the local funds management industry
• The introduction of programs to encourage pension savings, insurance investment and co-operation between financial firms
• The opportunity for foreign firms to establish their own 100% owned subsidiary (wholly owned foreign enterprises “WFOEs”) in China rather than relying on joint ventures or representative offices to serve their local interests

All of the above is designed to improve operational flexibility, access and business scope for foreign players and, at the same time, open up the market to those who have the ambition to play a direct role in the opening up of China’s global capital flows.

It’s now or never!

As the authors of the report conclude “you’ll never hear the word “easy” when describing the Chinese asset management industry”. The challenges are numerous, complex and often hard to predict in advance. However, with global financial markets in turmoil, resulting in bail-outs, job losses and an increasing cost of capital, China offers a potential which is unmatched anywhere else in the world. Foreign firms across the whole financial services value chain (banking, funds management, research, technology, software, back office etc.) who take the time and make the effort to do proper research, build local relationships, develop innovative solutions and target the right customer segments have the opportunity to participate in the world’s fastest growing market.

(This article was first published in AB+F magazine - July 2012)

Chengdu - China's Banking Back Office

Back in the year 2000, with all foreign roads leading to the glittering cities of Shanghai and Beijing, China’s Government decided to commence a “Go West” strategy, a deliberate long term policy to re-direct foreign investment, people, jobs, construction and wealth towards their inner and western cities, with the Province of Sichuan being the main target.

Like many of China’s long term policy initiatives, they began slowly; experimenting here, consulting there and watching to see how the market reacted.  The massive earthquake in 2008, which killed almost 87,000 people in Sichuan province, and 4,000 in the area around Chengdu (80 kms away from the quake’s epicenter at Wenchuan) accelerated the process due to the urgent need to invest in new buildings and infrastructure, and to create jobs and incomes for the displaced families. By 2010, with the launch of China’s 12^th Five Year Plan (2011 – 2016) the “Go West” policy was in full swing, and Chengdu (the capital of Sichuan province) and neighbouring Chongqing (a municipality of Beijing) are now regarded as two of China’s most important ‘second tier’ cities.

Chengdu is China’s fourth largest city with a population of over 14 million and a GDP of RMB 555.1billion (A$90 billion) the 13^th largest in China. Chengdu has a reputation for being China’s ‘silicon valley’, with its 6 km long Science and Technology Street attracting China’s best IT talent and some of the world’s leading software brands, but its in Banking and Finance that Chengdu is gaining worldwide recognition.

Chengdu has the largest financial transaction volume and highest number of foreign banks in central and western China. Currently, the People’s Bank of China, China Securities Regulatory Commission, China Insurance Regulatory Commission and China Banking Regulatory Commission have all set up their regional headquarters in Chengdu and there are an increasing number of foreign banks establishing operations in the city, including OCBC, Bank of East Asia, HSBC, Citibank, Standard Chartered, ABN AMRO and UOB. Currently, Chengdu is planning to build itself into a back office banking services centre, and 12 of the world’s largest financial institutions have launched back office services projects in what is becoming their their new Financial City.

The insurance sector in Chengdu has also experienced rapid growth driven by local economic development and the soaring income of the city’s local population. Chengdu is already the largest insurance market in inland China, with the highest number of premiums and largest number of insurance institutions.

ANZ Bank, Australia’s most established bank in China, opened its Chinese language operations centre and back office capabilities in Chengdu in March 2011, employing almost 300 people and servicing ANZ China’s customers in its 6 retail branches (planned to increase to 20 in the next 5 to 10 years according to recent announcements). According to Mike Smith, ANZ’s CEO “Chengdu has a large, well-educated workforce and has already established a reputation as one of China’s leading business processing destinations.” ANZ has been operating in China since 1986 and was locally incorporated in Chengdu on 1 October 2010.

In 2011, Citibank opened a new smart-banking branch in Chengdu. Citi China’s CEO, Andrew Au, commented, “Citi is committed to continued investment in China, and Chengdu is an important part of our plans. We have had a branch in Chengdu since 2005, and I am pleased we are extending our business in one of the key commercial centers of Western China through this new consumer outlet.”

The Chinese State Council has approved Chengdu as the “technological, commercial, financial, transport and telecommunications centre of south-west China”. The current development plans for the 5 km² “Financial City” is in three phases:

Chengdu’s new “Financial City” will be “a modern metropolis that has complex and efficient transportation, infrastructure, information systems and energy systems” and will undoubtedly lead to a shift in China’s financial services sector from Shanghai into the inner western regions of the PRC. International Banks, insurance and financial services companies are beating a path to Chengdu’s door to tap into their lower cost, highly educated workforce and to leverage their world class modern infrastructure.

(This article first appeared in AB+F magazine, 20th June 2012)