China: Day 4

China Day 4: Shanghai

We began this morning with a finance panel of three executives (one banker, one researcher, and one private equity) who discussed the potential challenges and rewards of financial investment work in China.

One repeating theme was the difficulty in finding reliable data. As the research consultant pointed out, China is quite opaque in what economic data it releases. It is largely believed that they engage in economic “smoothing” (i.e. releasing a certain % of GDP growth regardless of whether the real number is above/below the released %), though to what degree it’s done is debated, and each local government maintains their own data and requires different subscriptions to access it. An example of one red flag: adding up all province GDP growth for a certain year and the total never adds up to the national GDP growth for the same year. Hmmm.

This plays out in investments as well. The main lesson the private equity executive shared was to do obsessive due diligence. She cited an example where her firm recently was investigating a potential investment, and checked every single sale the company claimed for the last 3 years. Every single one. They then manually checked those sales to bank accounts, supplier records, customer reports, everything. She also recommended pulling general ledger information to see what date accounting entries are posted: she has seen several firms where years’ worth of accounting entries all had a posting date of just a couple of weeks before the PE firm arrived on scene. Hello red flags.

The court system is also a hurdle for businesses. The PE executive shared a story where a local third party clearly breached a clause of their contract with the PE firm, but the Chinese court ruled in favor of the local firm anyway. This is partly a known bias towards national firms, and party a court outlook that harmony trumps justice.

Thursday during lunch a friend from my learning team and I walked down to the Bund, an area of town with largely British influence. It is one of the clearest days we've had so far, so we enjoyed relatively smog-free pictures:

In the afternoon we visited SMIC, a semiconductor company. While publicly listed, a Chinese state-owned firm is their largest shareholder. The speaker (an ex-pat) had some very strong opinions on doing business in China – part of which involved frustration that the Chinese government seemed to be using their sway to make business more expensive for them rather than less (i.e. when SMIC needed money, China gave them a loan in exchange for shares, but they insisted be issued at a discount to them, rather than market price). We keep hearing the term “Wild West” – China has a lot of potential dangers in business, but also enormous potentials for success if you can navigate the pitfalls and be flexible enough to adapt to rapidly changing government regulations.

Thursday evening I went walking with a couple EMBAs to Nanjing Road, a main shopping area in Shanghai that’s quite similar to Times Square with a range of cheap souvenir stores and nicer department stores. We also passed People’s Square Park (complete with Starbucks), and several Chinese who came up to us wanting to practice their English: