EqualOcean organized the WIM2022 event in New York City from July 29 to July 30, 2022. The following is the transcript for the Fireside Chat of China Globalization. Chris Marquis, Melanie Wong, and Bob Guterma are three guest speakers on this panel.
On July 29, 2022, during the WIM2022 Day 1 event, Chris Marquis, Melanie Wong, and Bob Guterma participated in our Fireside Chat of China Globalization, and shared their thoughts and insights during the panel. The following is the transcript of this panel.
Chris: In our panel today, in many ways, we will build on what Craig Allen was talking about, as far as investment flows, policy, and others. We are going to dig down a little bit to the more micro level and think about how those are affecting businesses and investments specifically. To discuss these issues, we have a lustrous panel of Melanie Wong, who is a former managing director of Asian Foreign Exchange markets at BNY Mellon. We also have Bob Guterma, who is the COO and Chief Product Officer at SupChina, which Alex also mentioned is going under a rebrand to the China Project. And as I mentioned, our focus will be on policy as well, but again how it is actually affecting much more specific business and investment choices. It goes without saying that Craig Allen emphasized very clearly that we are in this period of tension. If you look in the media, you see all kinds of details, although I really liked his analogy of this interstellar economy, who have come down to see. It sounds like in the media that things are very tense. There is still a lot of positive economic activity going on. And in our discussion today, we will dive into that in more detail, and maybe uncover some of the challenges and tensions as well.
Chris: My first question for our panelists is going to Bob, who runs SupChina which will soon become the China Project. SupChina, for those of you who don’t know, is one of the most valuable sources of information on China. We are here in this policy investments panel. It is deep in those topics, but also around cultures, society, and some interesting takes you can’t get anywhere else. So Bob, what I would love to hear about in addition to your work at SupChina, including a bit more of an introduction to yourself for when you did more in PE, VC, and consulting industry in China for many years. And as part of that in your recent role in the media, can you reflect a little bit as well on some of these recent tensions, particularly in tech industry innovations? And how even though the interstellar economists say things are looking great? There are various crackdowns and hard-like environments for some in the industry. I want to hear your perspective on that.
Bob: I would be happy to tell you about it. First of all, thank you to EqualOcean for putting this event on and having us all here today. As Chris said, it is great to be somewhere in person and to see people in person – it feels exotic almost. A couple of years ago, we took this for granted. Now it feels risky, to break the law in some way. Therefore, it is great to be here. Just to give a little background on myself, I would not talk about it too much, just because Chris asked. I spent almost 9 years living in Shanghai. During that time, I worked at a London-based management consulting firm, called Control Risks, and I led a team of people based in Shanghai doing due diligence on investment targets for our JV partners for western companies that were entering China or private equity funds who were buying companies in China. After that, I worked for a China-based information services company called Catfish & Partners. It is an expert network similar to GLG in New York, which you may be familiar with. I did that for two years in Shanghai. Then they sent me to Berlin and New York to help open their overseas operations. After that, I ran my own consulting firm for a few years doing private equity and M&A consulting. Then I joined SupChina in 2019. So that is a little bit about my background. I guess I’ve been doing this a long time. I have seen how things have changed in this time. When I was in China from 2005 to 2013, that was similar to the golden era of the Chinese opening. From the 1970s until now, that was the peak. Our editor in Chief at SupChina/The China Project, Jerry Goldcorp, ran his own independent media company in Beijing. I mean think about that: a foreigner running an independent media company in Beijing with almost no censorship. That is impossible now. Private equity funds and fortune 100 companies were doing JD partnerships and M&A deals at huge proportions every day and every week. There was no end in sight to the depth of the partnership that could be formed between the US and China and China and the world. Obviously, things were very different these days. How to think about it? The original headline for this panel was “headlines vs reality.” I think that gets at the same idea that our last speaker Craig got at when he talked about the interstellar visitor. If someone came without all the baggage, all the expectations, fear, and desire that most humans bring to an issue, and just looked at the math, the objective facts, it probably wouldn’t look as bad as it feels when you just think about it based on the information you read in the newspaper. The facts are in most ways still pretty good. The eye has taken a huge nosedive. That is not good. A lot of other things are at an all-time high. Capital flows across borders are still very strong, and trade is at an all-time high no matter what Trump's objectives were with the terrorist and the trade war. They did not know it. I mean trade might be reasonable at an all-time high. If you talk to any businessperson that I have met from any country or any non-nationally famous politician, any state-level politician, or local politician, China included, there is not one person that would say they do not want better relations with the other country. Or they do not hope for a day where they can go to the other country and do maybe some businesses, find a deal, and see what is going on. And yet, we have gotten this situation where the leadership in both countries, the national leadership, and the individual leaders are obviously not talking that way. So, what does that mean for investors? I do not have a one-liner like “things are going to get better” or “things are going to get worse.” I cannot think that way about this problem because it is just too complex and unknown for us. The pandemic did not exist a few years ago. All these supply chain stuff, inflations, all these things were like completely fictional a couple of years ago. Inflation was permanently defeated according to most people a couple of years ago. Central banks had figured out how to never have that problem. And here we are. I do not know if things are going to get better or worse. However, I do know, that as an investor or business decision maker, you need to operate assuming maximum uncertainty at all times. Nonetheless, between the supply chain, the inflations, the Russia situation which is having huge effects on energy, workforce distribution displacement, and working from home, all the things came from the pandemic. You need to assume maximum uncertainty. And that could mean huge opportunities coming our way if things get better between the United States and China. You should think about that too, but mainly you need to focus on the downside, not because things are that bad. I think it is because we are coming out of the 20-year stretch of time where you did not have to worry about the downside. We are coming out of the stretch of time where you can say“yeah I will bring my whole supply chain to China, why would not I? It is faster, more innovative, and cheaper than almost any other country in the world. My logistics costs are actually less because all the components are made near each other in China. I have to ship it to America or Europe, but it is less shipping overall as usual if I source these things from a lot of different places.” We are coming out of the period of time where this type of thinking - put all my eggs in one basket - made sense. We had 20 years without worry, including the great financial crisis of 2008. Now we are entering a period of time where there is not one thing that is probably going to be the same a year from now, as it is today. And that means that we have to shift our thinking more toward the downside for our projection. It is not because the worst is going to happen necessarily. It is because we are not used to thinking that way anymore.
Chris: Thanks for those thoughtful comments. This idea of protecting the downside, given the environment today is important. One of the things I was heartened by was what you said and my experience as well as the lower-level ones. People want the relationship with politicians and business leaders to work. They are optimistic. Many companies I talk to businesses in the United States have their supply chain in southeastern China or vice versa. All are being pretty positive, particularly inherent to where the national media is. My feeling, which Bob emphasized as well, is that we need to get a situation where we are warming up and be able to interact face to face. The reason is that the longer that we are not in that situation, the more likely some of these downside issues break in.
Chris: I want to talk a little bit more about international trade. However, before we dive into that in more detail, we want to start with the fundamentals, which Melanie is the professional in it. Melanie, your longstanding focus is around foreign exchange - lots of years from being a trader, managing foreign exchange departments, and leading financial institutions. So first, let us get a little bit at your background, and introduce yourself as Bob did. You could maybe talk a little bit about what has been reported in the media about depreciation, how we see the trans-currency, and your thoughts about it.
Melanie: I started my career trading foreign exchange for about ten years and basically G10 currencies. Then I was back in New York. A few years after trading, they asked me to go to Asia to start a client business as well as to manage the four trading desks over there. So we traded with Hong Kong, Taiwan, Tokyo, and Korea. It was a bit of a challenge, but as Bob said, it was a really good time in 2007. There are so many things to get Asian businesses going. And we were a bit behind. The bank was a bit behind. So I went there. That was when QV and QD started to pick up. It was after Hong Kong and China were able to settle trade in Hong Kong. So even though CNY was regulated, you could still do transactions in Hong Kong. But the year 2009 is when the real internationalization in Hong Kong came about. It is called CNH. The H stands for Hong Kong. For us at that time, even though it was a post-financial crisis, it was quite interesting between the QD and QV. The rest of the trading world felt that they were able to access what was going on in mainland China. For those of you not familiar with CNY and CNH, I will give you a two-minute briefing on the differences. The PBOC sets a fixed rate every day at approximately 9 a.m. And out of that rate, I think it could trade about 2% for all the trades to settle around it. Then it closes and resets at 3. CNH is actually a 24-hour currency pair. The difference is that the rest of the world can trade for it. Now, because they do set a fixing, PBOC would not be wise to try and manipulate the CNH. The reason is that on the next day, the PBOC will come in and set the rate, and then you will have to cover. So those are one of the downsides of having still regulated currency on shore. But for the rest of the world, it would give access to mainland China with the CNH. And when I was there, there was actually a lot more interaction between Hong Kong and mainland China. The Chinese banks had the ability to arbitrage, because they could do both and take the CNH and convert it to CNY. The rates are not exactly the same. I think the fixing rate for a dollar CNY on shore was about 6.745. But the dollar is also what China still trades all day today. So the dollar is stronger, which is 6.7577. Before we get into a little bit more, I want to say it is not that policy that is driving a strong economy and weaker appreciation. I think it is also a market sentiment of China driving the dollar index. I think it was at an all-time high in Q1 this year. I think it started in January 2022, even though it is comprised of six major currencies other than the Chinese yuan. It is still a good indication of where the rest of the world sees the dollar. I want to compare to dollar/yen, which has moved 24 big numbers. It started around 115 and went up to almost 140. That was unprecedented. However, because of the interest rate differentials, I think for a lot of the outside markets - markets had nothing to do with policy, even though the DOJ said that “we are not going to raise rates” and everyone else in the world said they would - to have that type of movement is not fundamentally correct. Therefore, the market moving back. I think the dollar China, is the short version of the Chinese yuan. With dollar China, you cannot do that as much, because you decide to sell Chinese yuan tomorrow, PBOC comes in and they set that rate back and essentially you are screwed. The above are some of the differences. In terms of opening up a market that is really big, there was so much excitement back then when I was in Hong Kong. It was a great experience to see all that. Everyone was trying to be involved in how to get business into China. It was so opposite of the general sense of it now.
Chris: With Bob talking about policy and Melanie talking about this foreign exchange situation, I would like to talk a little more about cross-border investment flows. There is a lot of discussion about this. Companies are changing their listings is one way to sort of think about. Alibaba recently doing a primary listing in Hong Kong. There are a lot of tensions with the delisting of Chinese companies in the United States. I would like to hear your take on this in particular. I know Chinese companies coming into the United States. They have this weak variable interest entity structure. Can you provide some perspectives on cross-border or going public situations?
Bob: I would be happy to give you an armchair assessment of these things. I am, by no means, a legal expert or capital markets expert. However, I do grasp the concepts at play and certainly the flows and optimism, or lack thereof that people have choices these days. I am talking to a room full of people that must be following this stuff at least a little bit. Or you would not be here. Capitalism first emerged in China because foreigners wanted to sell their vegetables at a higher price than they were allowed to sell them at the time. Therefore, they started opening up black markets for vegetables to charge more money. It was basically working around for Chinese technology and internet companies to raise money from overseas investors when they officially were not allowed to. Foreign companies were not allowed to own things in certain sectors in China. At the same time, they were not able to raise money in China because the VIEs emerged around the 2000s listing on NYSE or NASDAQ. They were not able to raise money in China because there was not much risk capital and startup capital available in China at the time. So who is going to fund these risky loss-making ventures in China? American investors were happy to do that. At the same time, they were not allowed to. VIEs were set up. How does a VIE work? The founders of companies in China, the CEO, chairman, or whoever else is a major decision maker. Major decision makers go to the Cayman Islands or the British Virgin Islands, or somewhere like that. They register a company there. Then that company IPOs in America. That company has a contract with a Chinese operating company. The real company, where all the action is, and the Chinese company in the contract says that we promise to give you all our profits and decisions making control basically kind of as if shareholders of your company were the decision makers of our company in China. It is an awesome workaround. There is a piece of paper that jumps the gap and makes it all work. The problem is that that piece of paper is in the British Virgin Islands, and it works as long as everybody is getting along. Things go plus or minus 40% of is planned, which is a big range. If you get out of that range, which is in really terrible situations, would it work? Because you would sue them in New York. And it would get to the British Virgin Islands. You may win a victory there legally. Then you get on a plane to China. You take this piece of paper that says that I got a court in BVI that says whatever. Or I get all the profits that were not given to me. Or I think there was a fraud, and we get to do the investigation. And any Chinese jurisdiction would say that I do not know what that is. That is not a thing here. It is not legal nor is it really illegal. It is just not a thing. If you pushed on it, you might not get anything. If you really pushed on it, you would probably then get told that actually they change their mind. It is an illegal thing because you are trying to work around our rules. Therefore, you are even worse off than you started basically.