VC Road Trip Across China

For much of the past week I had the distinct honor to travel across China (Beijing, Xi’an, Suzhou, Guangzhou, and Hong Kong) as a guest of one of the leading foundations and investment firms in country as they introduced a number of their exciting portfolio companies to the local investment community. Notwithstanding significant issues facing the country – environmental concerns, restive political tensions in some of the western provinces, bad debt from the “shadow banking” system, potential real estate “bubble” – one is struck by the deliberate and coordinated efforts to solve these problems, much of it through reforms recently introduced by the third plenum of the 18th Communist Party of China Central Committee; some of the reforms are quite forward-thinking I might add.

And what an extraordinary week to be in China: Alibaba is poised to go public (rumored to be raising at least $15 billion at a $200 billion valuation), JD.com did go public (raised $1.8 billion at a $25 billion valuation), Comrade Putin was in town signing historic business deals (49 deals after 10 years of negotiations), and the US Department of Justice decided to go after five Chinese military officers for stealing trade secrets, further distancing the two countries – at the exact wrong time.

Whenever I find myself in foreign countries I make it a point to read the local papers – this past week a number of fascinating articles jumped out at me in the China Daily. First to the business section: in isolation any of these items would be of limited interest but when looked at collectively – and in light of where China has come from – an extraordinary pattern emerges.

  • China Securities Regulatory Commission anticipates at least 100 IPO’s of A Shares in 2014; there were 43 IPO’s in January 2014 alone although only 5 since then.
  • This after a 14-month suspension of IPO activity while new rules were drafted.
  • There are 358 companies in registration, preparing to go public.
  • A May 19 China Daily editorial applauded the pending Alibaba IPO stating “the merchant rating system has evolved outside of the realm of government interference…provides shoppers a sense of democracy and self-management on an everyday level.” WOW.
  • In 1Q14 Chinese VC firms raised $1.07 billion, which is a 35% increase from 1Q13.
  • And on May 20 the Ministry of Finance in China announced that 10 provinces and cities will now be allowed to issue local municipal bonds. Think about that – independently financed cities – quite a departure from a centrally planned government.

Financial liberalization appears to be in part a response to the looming “shadow banking” crisis which analysts estimate to be as much as $2.9 trillion of local borrowings not officially recorded. To put that in proper context that would be twice the disclosed debt of the central government. Undoubtedly this has also contributed to a dangerous speculative real estate “bubble” which seems to be deflating quite rapidly now – real estate is estimated to be 15% of China’s GDP so this is a non-trivial issue. Importantly though, over time these steps should create a more robust and sophisticated capital markets ecosystem to fund future innovation which is now evident all across the country.

The other area of concern and at the top of the government’s agenda is the state of the environment. It is quite apparent that the authorities are very focused on this as poor environmental conditions, coupled with the associated impact on health, risks leading to significant social unrest. Many articles last week highlighted steps being taken to address the staggering environmental concerns.

  • With great pride, the local Beijing government announced that 288 companies were relocated out of the city in 2013, resulting in 7,000 fewer tons of sulfur in the air. Between now and October 2014 there are another 300 companies slated to leave.
  • In April 2014 air quality “improved” from prior periods as 70.6% of the time the national air quality standards in the top 74 cities were met and for 29 fortunate cities, the standard was met 80+% of the time.
  • The critical air quality metric is the “PM2.5” which measures the amount of particles less than 2.5 microns which happens to be the size that particles can penetrate the lungs – unfortunately recent measurements were 156% of safety levels in Beijing.
  • China has 20% of the world’s population but only 9% of the arable land which is driving great innovation in the food industry.
  • With a much greater commitment to public transportation, it was announced this week that there were 2.9 billion subway rides in Beijing last year (or 7.9 million each day!).

Interestingly, and perhaps not surprisingly, according to something called the Bureau of Exit and Entry Administration of the Ministry of Public Security over 26.3 million people visited China in 2013. The vibrancy and rapid economic growth in China are attracting people from around the world, and yet even China is struggling to attract highly trained talent as its economy matures. The authors of “The Fourth Revolution: The Global Race to Reinvent the State” (John Micklethwait, Adrian Woolridge) noted that as carefully as China has reinterpreted capitalism, it is now recasting the role of central government – which is evident in everyday life in China. The authors go on to observe that Chinese leadership looks to Silicon Valley and Route 128 instead of Washington DC for inspiration and insights. Quite a troubling commentary on the US, frankly. It used to be that the US system of government was the envy of the developing world.

An interesting juxtaposition for me was seeing the Terracotta Warriors in Xi’an, which arguably is one of the greatest archaeological finds in modern times. Assembled nearly 2,500 years ago, the 8,000 terra cotta statues are arrayed to protect the tomb of Emperor Qinshihuang. What an extraordinary display of central planning.

Terracotta Warriors

And as I listened to a number of US and Israeli entrepreneurs pitching their disruptive new technologies across China last week I was struck by the level of directed coordination focused on solving profoundly important financial and societal issues. Each of these entrepreneurs – brilliant, passionate, driven – had developed solutions to many of the problems confronting the Chinese today. And in China they found an incredibly engaged audience. The rest of the world should take note.

 

 

5 Comments

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5 responses to “VC Road Trip Across China

  1. Hello! A friend forwarded this blog posting to me thinking it would be of interest since I returned to Boston, recently, from 8 months living/studying in Kunming, Yunnan Province, China. She wondered if your take on the country would be different from mine (an artist – not a woman in the business field). It turns out that your take is not much different from mine. Since life was rather status quo living for me in Kunming (i.e., I was not travelling around the country much), I wrote about subject matters that were of interest to me about China. I have decided that my next posting will be a squeeze-in and will link to this blog post of yours. Thank you.

    • super – thanks for the note. would love to hear your perspectives.

      • I write about a number of topics in “China Impressions” – topics range from a) Chinese fashion entering the Western market to b) food to c) the disjuncture between the city and the countryside – the relentless expansion of cities and the government’s push to move those in the countryside into the city and a number of other disparate topic entries. Please do check them out at: http://tamargranovsky.com/category/china/china-impressions/ Since you grew up in HKG and seem to have a familiarity with China, I’d be keen to hear your impressions on any of the topics of I’ve written about if you have anything to add/comment on. I really would (this is not why I initially commented but since you do mention being interested on my perspectives…). Thanks

      • will check it out – all fascinating topics. to see some many come of age so quickly is extraordinary on every dimension.

  2. Pingback: China Seen Through the Eyes of a Venture Capitalist | Tamar Granovsky | Wanderings Afar and Near

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