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David Lowes, Director of Flemings Asia Pacific Investment Banking, addresses the prospects for business in post-Deng China

Few people are as well placed as David Lowes to advise on how to break into Chinese markets. As a Director of Flemings, he has been involved in numerous transactions in that country across a range of industries for multinationals seeking access to the Chinese market. He has also been actively involved in promoting Chinese access to international equity markets. In this wide-ranging interview for World Statesman, he reveals the most valuable lessons he has learnt along the way.

Please could you give a broad perspective on the capital markets in China?

The background is that the capital markets are at a relatively early stage of development, certainly in terms of international investment in China. That is because historically there have been relatively few opportunities to invest. There are 30 H-share companies, either listed or to be listed shortly (H-shares being Hong Kong listed Chinese companies). There are a small but increasing number of Red Chip companies - that is, Chinese assets represented by a Hong Kong registered company listed in Hong Kong, and there are two or three N-share companies which are listed in New York, and the public Chinese companies. Other than that there are B-shares which are traded in Shanghai or Shenzhen, which are for foreign investors. But if you add all of those companies together and you look at the total capitalisation of all the B-shares, H-shares and N-shares, you don't really come to more than US$9 bn in value. To put that in perspective it's less than the UK raised last year for unquoted equity investment, management buyouts and the like.

But the pace is beginning to accelerate, and as the market broadens and deepens you will find the quality of the market will improve because there will be more choice, therefore more ability to spread your risk and therefore more investors becoming involved in it. We believe it will remain internationally an institutional investment market, which is entirely appropriate for a market which is at this stage of development.

Why do you think China has become one of the world's biggest investment magnets?

The open door policy dating back to the late seventies means that, compared with India which has only been at it since 1991, its been addressing the issue of foreign investment for a considerable time. It is now attracting just under $40 bn in direct foreign investment.

"They have the natural concern when people are comig along with open cheque books that they might be having things away to cheaply"

Because of its sheer size it is a market which is too big to ignore. It's regarded erroneously as a market of 1.2 billion consumers, but even if you are more realistic about it and you break it down into a number of discreet markets centred on the major towns and on the special economic zones of the Eastern Seaboard, there are some large concentrations of investment - for example, the Guangdong province has over 100 million people in it (Greater Shanghai has over 20 million). Even when you get down to the eighth or ninth largest city in China you're still talking about a conurbation representing eight or nine million people, as in the case of Dalian up in the North East. So you have got some big concentrations of urban development which are increasing in wealth quite rapidly as GDP has expanded.

The other thing is the macroeconomic success of the Chinese in reducing inflation. Inflation three or four years ago was running at over 24 per cent. That recently came down to eight or nine per cent, and it is forecast to be six or seven per cent this year. So in terms of macroecomomic management there has been a very soft landing given how extended it was two or three years ago.

So the macroecomomic management has been good and you're looking at a market opportunity of some size, albeit not as large as 1.2 billion which is too big to contemplate. There has also been a determination by the Chinese to develop their economy in a careful, sensible way.

What are the key lessons you have learnt from your commitment to and experience in China?

We've been involved in China since the early eighties through our offices initially in Hong Kong, then developing into Shanghai, Shenzhen and Beijing. In Shanghai we're the largest foreign broker by volume of B-shares and we have seats on both the Shanghai and Shenzhen exchanges. We've seen business grow from a low base, gradually.

I would say that the key lesson is that there is an opportunity there, but it is not just a question of picking it off the tree. It needs to be cultivated, it needs patience and time to work. One must always manage one's own, and indeed one's client's expectations of how long it is going to take to achieve overall success.

An understanding of how the Chinese do business is also essential. A flexible approach is also important to accommodate the legitimate concerns of your Chinese counterparts to see their point of view and understand what their difficulties might be, in terms of what their objectives are, what concerns they have about growing a business, what concerns they have about foreign intervention and so forth. So for all those reasons patience and understanding is key.

What sort of suspicions or concerns do they have about foreign intervention?

Well they have the natural concern when people are coming along with open cheque books and huge amounts of enthusiasm that they might be giving away things too cheaply. When we're advising companies on the agendas of foreign companies coming in one has to be aware that both sides are out to make a profit for themselves. So it's an understanding, a meeting of minds. The foreigner will say there are risks here, uncertainties, foreign exchange controls, a lack of convertibility. The Chinese say, look at this huge market and our position in it, look how wonderful it is.

There's also a further cultural issue in that the capitalist ethos, which is ingrained in Westerners doing business, may not be understood. You can't make the assumption that people have the same goals, the same understanding of what they're trying to achieve themselves.

Given China's communist background, are there particular difficulties for Westerners looking to enter the market?

I'm not sure it's the communist background. I think it's Confucianism versus capitalism. There is something of a cultural difference between the two which one has to understand. Some of the Chinese embrace capitalism quite readily - for example if you look at how quickly the agricultural sector started making profits as soon as agricultural business was liberalised and they were allowed to sell outside the regulated markets, they embraced entrepreneurship quite rapidly. But I think there is some reservation among Chinese about responding in a capitalist way, and therefore you have to confront this issue.

For example, take the saying 'It's the early bird that catches the worm', which a capitalist would take as encouragement to get out early and get market share. The Chinese equivalent of that is 'it's the early bird that gets shot'. In that sense they think differently.

"We want a continuation of the stable political environment, which is the balancing act which the Chinese have to achieve"

But there is common ground as well. They want to improve their lives, they want to grow profits. Deng Xiaoping said 'to be rich is glorious'. That's something that has inspired the Chinese in this period of opening up.

He also had the saying: 'White Cat, black cat, whichever catches mice is a good cat.' In other words, capitalism, socialism, as long as it can improve people's lives, it is a good system.

So you're saying communism doesn't really affect the way business is done in modern China?

Well communism is a political element, but it doesn't unduly impinge on the operations of the market. Again Deng Xiaoping used to talk about a socialist market economy - it's much more that sort of element that has a bearing on changing people's behaviour.

If you mean does the state interfere or control then the answer is, yes, there is still a degree of centralisation. But in many ways that is the Government's way of life, and it is more akin to the UK in the seventies. There is this air of pragmatism which very much directs the efforts of the civil service and bureaucrats. We find the level of professionalism in the bureaucracy is very high. They understand business issues very well and they are not in any way obstructive. There is no apparent sentiment going through these organisations that resents foreign investment or involvement.

What are the key strategic issues that potential investors in China need to consider?

Well you need a very clear understanding of the realities of the market and the specific market you are addressing, rather than making the assumptions because of the size of the markets that they are attractive. Be very realistic about the type of market you're addressing.

Understand that the State does have a role to play in the development of business and to ensure that you accommodate that in your plans. Keep the State in its various guises, the provincial government or the city government, informed of what your plans are and make sure that it fits in with their overall plans. Make sure that you identify and manage any conflicts that may even be between State organisations.

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