Collison Course: Observations from Shanghai…

Jet lag is a strange and mysterious thing. In the middle of the night a few weeks ago I found myself on a treadmill in my Shanghai hotel gym riveted to the Poland vs Iran men’s volleyball match on Chinese State Television. It was a welcome respite from CNN International and the battering ram of worsening news on U.S. – China relations. As many of you know, Twitter, Google, Facebook, etc are blocked in country and even certain CNN segments are blacked-out when covering awkward China-related stories. Whenever the recurring piece on the disappearance of Fan Bingbing played, my tv went dark as if someone pulled the plug from the wall.

The headlines in the U.S. are often at risk of masking some of the extraordinary advancements in the Chinese capital markets as well as the dramatic success stories in their innovation economy. While there certainly does appear to be troublesome signs in China’s $12 trillion economy (softening consumer spending, signs of inflation, currency weakness, debt levels in the shadow banking system, level of venture funding), the pace and consistency of global success stories is impressive and feels profoundly disruptive. That was certainly brought home when visiting what is considered to be the largest Starbucks in the world.

China Starbucks

Over the four days that I was there, economists pointed to several indicators that suggested the U.S. – China trade war was starting to have some measurable impact, particularly on the consumer class. For decades, my greatest concern for China has been the “revolution of rising expectations” (some may know that I grew up in Hong Kong so have marveled that nearly a quarter of the world’s population has come of age over a generation). With wealth and greater access to information, many Chinese will continue to insist (demand) better goods and services like food, education and healthcare. Obviously, the government is also worried about how best to manage this. A selection of some of the troubling headlines in the local papers over those few days included:

  • The renminbi (Chinese currency) has weakened by 10% since mid-summer
  • Auto sales in July 2018 were down more than 5%, leading to widespread discounting between 11% – 27%
  • Asian gaming stocks have declined between 15% – 18%, directly attributed to reduced Chinese gambling
  • Pork prices spiked in August 2018 by 8% due to concerns related to import restrictions and in part to an outbreak of African Swine Fever, which is fortunately not transmitted to people

Arguably, over the arc of history, this is just background noise for the Chinese – and that is clearly how they view it. The “One Belt One Road” Initiative, which seeks to connect China through Central Asia to Europe via massive public works programs such as ports and highway infrastructure, will recreate the Silk Road. The notable escalation of hostilities and militarization of the South China Sea with the Nine-Dash-Line framework seeks to extend its footprint over major trading routes. These initiatives underscore the country’s super power ambitions – and increase the likelihood of an inadvertent international incident (as evidenced by the incident involing U.S. and Chinese warships coming within 50 yards of each other last week).

China Collide

These political developments, which China’s neighbors and the U.S. at times find quite threatening, are supported by rapid maturation of the Chinese capital markets. The world’s largest bank is the Industrial & Commercial Bank of China and is a major financier around the world. Chinese finance authorities have carefully managed a deleveraging campaign of the countries’ major lending institutions. There was $100 billion of securitizations in 1H18 in China, which was an increase of 44% since 1H17. The government has instituted several other policies to ensure that there is adequate trade credit, particularly for exporters in the face of trade hostilities. While there, Chinese Premier Li Keqiang assured a global audience at the World Economic Forum of China’s embrace of pro-business policies.

Interestingly, China has become meaningfully less dependent on the rest of the world. According to China’s National Bureau of Statistics, manufacturing exports have been essentially flat for the past four years. As a percent of GDP, exports were 35% in 2006 and are now only 18% of GDP, suggesting that leadership is “Making China Great Again.”

The success of transitioning the Chinese economy is in part due to the deep commitment to developing a local technology economy. While in Shanghai, the city government announced the formation of a 100 billion yuan ($14.6 billion) venture fund. This announcement was made at the World Artificial Intelligence Conference, one of the largest AI gatherings all year. Over the course of my short visit there were a handful of notable venture financings including:

  • Meituan Dianping, a leading internet lifestyle-services platform, raised $4.6 billion in an IPO at a $60 billion valuation
  • Lianjin, a leading real estate brokerage firm, raised $2 billion from TenCent and Warburg
  • 111, an online Shanghai-based pharmacy, raised $99 million in an IPO
  • And on and on and on these financings keep coming – to such an extent that they stop being newsworthy

There are approximately 90 million Chinese retail investors. It is estimated that foreign investors own between 3.5% – 5.0% of all Chinese debt and equity securities. Recently, leading equity indices rebalanced their underlying share weightings which is increasing international funds flow into the country. For example, the MSCI Emerging Markets Index doubled its weighting to yuan-denominated shares. This adjustment alone is projected to bring an additional $22 billion of inflows.

Ironically, though, there may be subtle signs of investor fatigue. There were “only” 3,111 new private equity funds raised in China in 1H18 (just wrap your head around that number), which was a decrease of 60% from the same period in 2017, according to Jingdata, a start-up database. According to Zero2IPO, the level of private equity investments dropped by nearly 11% in 1H18, while the amount invested in early stage companies plunged 53% in the same period. Zero2IPO goes on to report that the amount of capital raised by venture firms dropped by 44% in 1H18. Only 49% of all IPO filings were approved by regulators in 1H18 versus 79% in 1H17. Many Chinese VCs are bemoaning the onset of a deep freeze in early stage financing market. It certainly feels like the environment is cooling – not at all what it was actually like in late September.

China Weather

There were also a few fascinating healthcare announcements which underscored both the rapid convergence of the clinical sector in China with advanced analytics, as well as the ability to compete with global healthcare technology companies. According to the National Health and Planning Commission, the rate of birth defects is 5.6% (as of 2012) which obviously has a myriad of associated costs and societal issues. In response, the National Development and Reform Commission for its 13th Five-Year Plan covering 2016-2020 set a host of ambitious goals. At a cost of one billion yuan ($145 million), this organization has set out to provide non-invasive prenatal tests for 50% of all newborns. Additionally, there was the creation of a national gene bank which will provide researchers and clinicians datasets to better diagnose and treat inherited diseases. A prominent company called Berry Genomics (Illumina’s China partner) announced that it already has a one-million-person gene pool. The first of its kind drug-coated stent, the Firehawk developed by Shanghai-based MicroPort Scientific, was cleared for clinical trial use in Europe.

China Plan

Undoubtedly, this is a complicated time and a complicated part of the world (maybe it is always complicated everywhere?). As I settled into seat 34C on my flight home, as exhausted as I was, it was nearly impossible to sleep recalling all that I had seen while there. Actually, that is not true – I had run out of sleeping pills.


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6 responses to “Collison Course: Observations from Shanghai…

  1. Dan Gebremedhin

    Nice post!!!!

    Dan Gebremedhin MD, MBA
    Flare Capital Partners | 200 Newbury Street, 4thFloor | Boston, MA 02116
    Office: (617) 607-5057 | Mobile: (617) 686-3820 | Fax: (857) 233-5078
    email: | Linkedin | Twitter

  2. Mark Zhang

    Your posts are always worth the read.



  3. Sean Kearney

    Thanks for the post, Michael. It’s fascinating to be witness to the technological advances having traveled to China as a health venture investor several times this past year. In the genetic testing landscape – NIPT dominates test applications in China whereas it is only a fraction of those performed in the U.S. It will be exciting to see how the field of genomics in China evolves with the support of the central government, the massive data pool and growing prevalence of other diseases.

  4. It is certainly interesting seeing MCGA vs MAGA play out – both in rhetoric and in practice. While Xi is getting some heat back in China for the feud’s impact on the stock market, there appears to be little in the way of slowing the aggressive push of the Belt and Road Initiative, which definitely feels like Ghengis Khan coming back to life… Having been on the operating side of a US medtech expanding market in China, I have seen firsthand the impact on the ground being extremely tough, from the tariffs to the distributors to the rising dominance of domestic competitors. Long road ahead – Emperor Xi is just getting started!

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