Market Updates: China, US and sentiments

China slow down is more evident

From the WSJ

• China's economy slowed sharply in April—from industrial output to bank lending to foreign trade.
• Bank of America's China economist cuts second quarter forecast on Friday to 7.6%, year-over-year, from 8.5%
•  Nomura research. "The economy has now slowed down so much that there will be a consensus to promote growth."

If 2012 is a year of slowdown despite of 40 elections going on around the world, I think Jim Rogers is right that 2013 will be a year that we need to be very concerned. I've seen plenty of this kind of forecast by the strategists that think 2013 will be stronger than 2012. 

I think this is just not possible. It will be difficult for the US to achieve higher than 2% growth and the EU might be still in recession, finally China growth can be below 8%.

The ECRI re-affirms the US will tip into a recession but a mild one

From the ECRI: Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.

Individual investors are not stupid !

From the bespoke. American Association of Individual Investors (AAII) bullishness drop as the S & P 500 goes up. They seem to got it right last year. I think they finally gotten smarter after being screwed by the big boys badly.

Accounting Problems in China Make a Comeback

Chinese companies accounting scandal is back! Big companies are getting hit this time.

Reporting season in Hong Kong is exposing a number of problematic Chinese companies with audit issues.

Hong Kong-listed Ports Design Ltd. said KPMG needed more time to audit its accounts.Three companies halted trading in Hong Kong on Thursday, including Shirble Department Store, which didn’t provide a reason for its suspension. However, the stock has dropped 26.5% since Mar. 21’s close, when the company said it would postpone its full-year results to Mar. 30 from Mar. 22, as its auditor needs more time to finalize its accounts.

Another company, Ausnutria Dairy Corp. Ltd., said in a statement to the stock exchange on Thursday morning it would also delay the publication of its results.

High-end fashion retailer Ports Design Ltd. also said on Thursday it would postpone its annual results report as auditor KPMG needed more time to audit its accounts.

The suspensions come after Daqing Dairy Holdings Ltd. and Boshiwa International Holdings Ltd., a children’s apparel maker, both said earlier this month that Deloitte had resigned as their auditor. Boshiwa shares had fallen 35% before being halted from trading on Mar. 22.

Chinese New Year reflection ..... taboos

It's a long posting but mostly re-prodution of other people's works but with interjection of my thoughts. You may want to make a cup of kopi 'o' or grab a bottle of Tiger or Guinness Stout, before you read on leisurely.

Some superstitious things stick with you so deeply even though you know it's silly. It's funny that all the eight taboos described on this web page http://www.chinaculture.org/gb/en_focus/2005-01/24/content_65330.htm were instilled in us when we were young.

The events that occurred during New Year's Day may impact your life for the rest of the year. Be careful in your actions. Certain precautions are taken to insure that the New Year will be a good one.

1. The entire house should be cleaned before New Year's Day. On New Year's Eve, all brooms, brushes, dusters, dustpans and other cleaning equipment are put away. Sweeping or dusting should not be done on New Year's Day for fear that good fortune will be swept away. After New Year's Day, the floors may be swept. Beginning at the door, the dust and rubbish are swept to the middle of the parlor, then placed in the corners and not taken or thrown out until the fifth day. At no time should the rubbish in the corners be trampled upon.

In sweeping, there is a superstition that if you sweep the dust and dirt out of your house by the front entrance is to sweep away the good fortune of the family; it must always be swept inwards and then carried out, then no harm will follow. All dirt and rubbish must be taken out the back door.

2. Shooting off firecrackers on New Year's Eve is the Chinese way of sending out the old year and welcoming in the new. On the stroke of midnight on New Year's Eve, every door in the house, and even windows, have to be open to allow the old year to go out.

3. Nothing should be lent on New Year's Day, as anyone who does so will be lending all the year. All debts have to be paid by New Year's Eve.

4. Everyone should refrain from using foul language and bad or unlucky words. Negative terms and the word "four", or "si" in Chinese which sounds like the word for death, are not to be uttered. Death and dying are never mentioned and ghost stories are totally taboo.

5. Hair must be cleaned and set prior to the holiday, for to do so during the New Year season would invite financial ruin. On New Year's Day, hair should not be washed because it would mean washing away good luck for the New Year.

6. Care must be taken not to break any dishes or other things on the first day of the year.

7. The use of knives and scissors -- indeed any sharp instrument -- is to be avoided, for these things could augur bad luck in the coming year.

8. Wear brand new clothes -- preferably in red. Children should wear new clothes and new shoes. Red is considered a bright, happy color, sure to bring the wearer a sunny and bright future. It is believed that appearance and attitude during New Year's sets the tone for the rest of the year.

When we were young, we will surely kena wallop if we break any of these taboos. As we get older, it's funny that certain memories of elders are coming back. You miss them. In fact you feel like telling those stories that define who chinese are.

The old folks were thin strand that bond all of us. They were the reason, of no matter how far and difficult, all of us will make efforts to re-group. The empty wooden detached house will filled with smell of joss sticks and laughters. There was the place we learn about risk and money management. We were taught not to peep over our elders' cards or touching their shoulders while they were playing cards. Bad things will happen to us if we do that.

The aunties will exchange stories in the kitchen. They teased each other. Some are more guarded than the other especially the rich unties. I missed the kitchen with a big wok and the smell of burning rubber woods.

The common thread of DNA running through the whole family is money. Everybody talks about money. These folks were not educated, largely because grand pa and grand ma could not send them to school. They all will advise us to study hard so that we all can sit in an office. The life will be less "bitter". You get to enjoy air con and just sign a few papers a day. Those were their simple and naive impressions of a white colar job. Naive they may be, their sense of honesty and willing to sweat will beat anyone of us hands down.

They were willing to take a small job with paper thin profit and work almost 18 hours a day. They don't take a single day off during the year except in Chinese New Year. Many of these values were instilled in our godfathers in this country like Robert Kuok, Lim Goh Thong, Yeoh Tiong Lay, etc........The rise of these godfathers created a lot of economic value for people. But things have changed. That got me thinking what will future holds for our next generation?

There is another unspoken taboo....

Written by Dr Lim Teck Ghee

“What Chinese poor????

Soon after I returned to Malaysia in late 2005, I met with a former president of the country’s major Chinese party in his office. During the discussion which covered a range of issues, I expressed my concern at the failure of the Chinese political leadership to deal effectively with the socio-economic problems and challenges that the community was facing.

I had known the leader since the 1970s but especially in the late 80s and early 1990s when I was a panellist in the 150-member National Economic Consultative Council (NECC) which had been set up by the then Prime Minister, Dr Mahathir Mohamad, to come up with a post-1990 economic policy to replace the New Economic Policy (NEP).

The response of the former president to my concern shocked me. Besides defending his party and his leadership, he declared that the Chinese were very lucky to be able to live in Malaysia. “Where else in the world can you find a simple char koay teow seller become so rich and drive a Mercedes!??? was his rejoinder.

This view that the Chinese have done very well for themselves – and by extension, do not require assistance from the Government – is not uncommon. However, it is a gross generalization and erroneous on several counts. Taken to its logical end and juxtaposed with the fact that many of the country’s richest individuals are Chinese, such a simplistic view has provided the underpinnings for the racially biased public policies pursued in a wide range of sectors and over such a long period of time in the country.

Off the public radar

Let us consider some of these facts and figures of the Chinese poor, disadvantaged and marginalized.

Firstly, many of these Chinese individuals and households do not appear on the government’s listing of poor Malaysians because the Government has used an unrealistically low poverty line income to decide who comprise the poor. Should there be a readjustment of the poverty line to a more realistic figure, it is likely that several hundred thousand Chinese households (as well as a larger number of Bumiputera and Indian households) will fall into the ‘poverty’ category.

Secondly, income distribution within the Chinese community is worsening. In fact the gap between the Chinese poor and well-to-do has increased in the last two decades, for which data is available. According to the Gini coefficient of income inequality, income inequality within the Chinese community has increased from .423 in 1990 to .434 in 1999 and .446 in 2004. Incidentally, this is the same for all the communities, including the Malays.

The worsening income inequality points to an entrenched and worsening poverty problem within the Chinese community that is not discernible if we simply rely on the conventional statistical indicators used by Government.

Excluded from NEP

Why is Chinese poverty so entrenched and intractable? The answer is that, for the most part, the Chinese poor and lower classes have not benefitted from the NEP and other national policies in the way that the Chinese elites or even upper middle class have. Consider the following

1. They have not been targeted by any of the government’s anti-poverty programmes.

2. They have been disadvantaged by lack of mastery of English and Malay.

3. They have educated their children in Chinese schools which have been the victims of unequal treatment. More than a quarter of Chinese school kids drop out before the age of 17 with many coming from the poorer achieving and less endowed Chinese medium schools which we seldom hear or read about.

4. A large number of them live in New Villages or in geographically remote rural areas which have been cut off from the enclave of affluence located in the main cities and in the Klang Valley area.

5. Many come from the agricultural sector and are vegetable gardeners, fruit farmers or fishermen or engage in agricultural services. Unlike their Malay counterpart rural poor, they have had limited access to Felda, Felcra, IADPs and other federal and state schemes that have reduced landlessness and indebtedness and provided access to housing, infrastructure, utilities as well as enhanced incomes substantially. Even worse, they have been denied their legitimate land rights so that many remain squatters or operate on TOLs or short-term leases.

The recent report that the new MCA president, Chua Soi Lek, intends to meet with the Perak Menteri Besar, Dr Zambry Abdul Kadir to discuss matters pertaining to squatters, land premiums and discounts to new villagers and the issue of limited allocations shows how ‘lucky’ the Perak Chinese are to be able to live in the state and the ‘tremendous’ advances they have made after 50 years of Barisan rule.

6. In the discussions on the country’s brain drain and loss of talent, much has been made about the out-migration of Chinese educated and professionals. In fact, if the proper surveys are ever carried out on out-migration from the country (according to the Deputy Foreign Minister in Parliament recently, 304,358 Malaysians migrated to other countries from March 2008 till August 2009 compared with a out-migration figure of 139,696 in 2007), I will not be surprised if just as many less educated poor and lower middle-class Chinese are found to have left the country because of poverty and lack of opportunities for themselves and their children.

Chinese SMEs and other towkays

Much has also been made of the prosperity of the Chinese that comes from their domination of the small and medium enterprises (SMEs) in the country. However, not all SMEs are prosperous or can provide the secure and sustainable livelihood and incomes that others who are ignorant of the real conditions of these enterprises seem to imagine is the case with every SME.

Most Chinese SMEs are family-run businesses that are barely able to scrape a decent living through heavy self-exploitation of family member and extended family labour. Often working in dangerous and appalling conditions, they are ill-equipped to compete in an increasingly competitive and globalized environment.

The reality is that besides continuous harassment from government officials and politicians bent on extracting coffee money and beating them down for non-compliance with various local council rules and regulations, many SMEs are trapped in low productivity operations and lack access to technological know-how, larger markets and R&D capacity.

In the near term as regional and international competition heats up, many SMEs face a bleak future and are likely to go bust.

These small fry ‘towkays’ of micro-SMEs (over 90% of the SMEs in the country belong to this group) and their poorly paid employees, eking out a modest living in the country’s workshops and squatter areas, however, have never been on the government’s radar screen, except perhaps for taxation purposes.

How much (or rather little) budgetary support and other assistance has actually reached the SMEs – directly and not through proxies or parasitic agencies – in the last few Malaysia Plans would be an important question for the government to respond to.

Members of the National Economic Advisory Council (NEAC)will find that there is a whole generation of bad policy planning and implementation that needs to be undone with regard to the SMEs if they are serious about the objective of revitalizing this sector in the 10th Malaysia Plan and the New Economic Model.

No social safety net

There is one more important consideration that is seldom discussed when the issue of Chinese socio-economic well-being is raised. This is that arising from their self employment or work as employees in SMEs and the informal sector, only a small proportion of Chinese households are covered by the social safety net for health, insurance and old age that comes with employment either in the public sector or with formal private sector employment.

This absence of participation in a social safety net will increasingly make itself felt on the future well being of the Chinese as the community ages rapidly and with the loss of traditional safety nets provided by the extended and large nuclear family.

The trend of Chinese vulnerable elderly who are either abandoned in old folk homes or live in miserable conditions on their own is already gaining speed. This trend is unstoppable without major changes taking place within the community and at the macro level where the state is the key player.

Malaysia’s present, future and past

Will the ‘1Malaysia’ concept and New Economic Model remove the blinkers that stand in the way of assistance and resources being provided to the Chinese disadvantaged?

Will the Prime Minister’s promise of raising income levels of all disadvantaged and marginalized groups be kept? Will we see merit-based, transparent and needs-based policies targeting the bottom 40% of the country’s income strata, irrespective of race and region, implemented?

We will have the opportunity to assess if this new vision of development for the country is more political rhetoric or a genuine path-breaking initiative soon.

As for me personally, I am not so sanguine. I was a member of the five- person team that finalized the NECC report which was presented to the government after more than two years of acrimonious debate. The major recommendations of the NECC to dismantle the NEP were never implemented. The NEP remained in force for another 20 years after it was supposed to have ended in 1990.

Will history now repeat itself again?

http://english.cpiasia.net/index.php?option=com_content&view=article&id=1904:chinese-poor-and-lower-class-in-msia-how-well-off-are-they-&catid=141:lim-teck-ghees-contribution&Itemid=93

Catching A Falling Knife, part 2 coming?

This article that I about to feature is about 9,000 words. It's a long story but once you start reading it, it's hard to stop. This is a story of many suspected to be ex-CEO of Fibrechem, an S Chip company or a typical small Chinese company that listed in Singapore Stock Exchange. The confession of this CEO dated sometime in late 2008 or early 2009.

The motive of the confession may not seem to be as innocent as it appears because you never know what is in his heart. In part he could be trying to "redeem" himself and to help the investing public. But there are certainly some elements of black mailing too -- threaten to expose the rich and powerful. Remember this, the Chinese in China are very different from the overseas Chinese, more than once I was cautioned. They are not like majority of Malaysians Chinese, behind Singaporeans Chinese, who are typically "more stupid" than the rest of other overseas Chinese(particularly Taiwanese and Hong Kee). But in this story, some of the law fearing Singaporeans appeared to be equally corrupt.

Regardless of his motives the risks element in his story serves very good reminders.

Why am I highlighting this? I saw many of these Chinese companies listed in KLSE hit new lows last week. The property correction and sharp manufacturing deceleration in China may expose a few skeletons in the closet. Beyond technical rebound, the risks of buy and hold in these counters, you know lar.........

Let me tell you the story. By the time you read this article, it would reached have hundreds of investors, bankers, regulators and journalists. My purpose was to shed some light on the “dark sides” of the business of S-Chips (Chinese companies listed on Singapore Stock Exchange), so as to help prevent more financial losses in the future hurting the ordinary people on the street. From this angle, I wish to redeem myself somewhat………

It all started some 6-7 years ago. My colleagues and I were just a few of the million of entrepreneurs in China struggling to make ends meet at the textile fibre factory that we bought from the government. Some of our older colleagues had laboured for more than 20 years before having the chance to “privatise” the state-owned textile fibre factory in Fujian Province that we have worked for since the day we left school under the Premier Zhu’s “government retreat, private sector advance” scheme, literally at a song. We thought we were going to be very rich very soon. Little we knew that when the local governments of the various counties and villages decided to “retreat”, we end up! with thousands of “privately-owned” textile fibre spinners that competed ever more aggressively. Despite ever rising revenue, margins were disappearing fast……. Sometime, we just wonder why we have worked so hard only to earn next to nothing. Perhaps, our only reward was meant to be “the master of our own destinies”…… But we never really gave up hope…… One day, we shall strike gold…….

1990, the year after the TianAnMen Incident, was really a very difficult year. Many of our clients, the textile manufacturers who were enjoying the initial euphoria of the burgeoning export demand, went belly-up within a short 2 years of economic contraction. However, we pulled through all the vanishing receivables and anguish cashflow-balancing exercises.

By 1993, we were off for the biggest boom ride of our life-time. Our textile fibre business blossomed as China becomes the clothing factory of the world, benefiting not least from the one-off Renminbi devaluation that the Chinese government engineered in 1994. Those were the good old days, where sufficient numbers of our competitors were eliminated by the TianAnMen-induced recession, and the world began to look to China for every piece of garments stretching from the heads to toes.

Money was easy……and we expanded our production capacity as quickly as we could, limited only by the fact that the state-owned banks were not really very keen to lend money to private enterprises like ours, and we just have to borrow from our villagers at some 15% interest rates!!! Nevertheless, we did good business and our leader, the general manager of the factory, could even afford a chaffer-driven Santana. In any case, he was too old to learn new trick, even as simple as driving itself. I was the rising star which had to bide my time, as I was the only person who speaks decent English. I was meant to be the tongue of the company in dealing with the external world. But I am getting impatient. For while the company was booking increasing profits, we never seems to have cash to be distributed as any excess cash generated from the business was never enough to cover the capital expenditure needed to expand the production .

We just owned an ever-growing production business. Unfortunately, good profit margins never last in China. Good demand quickly attracted new entrants into the business as the barrier of entry is relatively low. At the same time, some of the so called “obsolete capacities” came back from the grave and soon, we found ourselves struggling to churn our profit. It was like working for free again……lots of revenues but just no profit!!!

By the middle of 1990’s, we were doing great business selling to our customers in different areas of the coastal areas. In 1995, we suddenly found ourselves having to deal with fast rising cost pressure. However, the market was buoyant enough for us to raise our product prices to pass on the cost increase to our customers. Then, we realized that we must move ahead in term of technology and product offering. Like everyone else around us, we took advantage of the tax concession offered by the government to the so-called joint venture companies. We recycled our “cash” to Hong Kong, set up a “foreign company”, which in turn pumped back the cash to Fujian in the form of a joint venture entity, using the cash to purchase some second-hand German equipment to produce the chemical fibre! s needed in all kinds of fabrics and artificial leathers.

However, luck did not really favour us, at least thus far. Soon, we were told that our economy was experiencing very high inflation rates and soon, the then Premier Zhu Rongji stepped a hard brake on the economy, cutting the bank credit to many state-owned enterprises which were producing things that no consumers wanted. While as private enterprise we did not enjoy the benefit of bank credit, its sudden massive contraction hurt us as bad as the state-owned enterprises who received such reckless loans. We were entangled like the other enterprises in what we called the “triangular debt” problem, where everyone owes the next person money and there was just no money at the source for anyone to get paid…….!!! The situation last for quite sometime as we lived from hands to mouths, sometimes having to send out local thugs to chase for receivable payments from cash-strapped clients. Then again, what else can we do? We had so much or our friends’ and relatives’ money with us investing in all these machinery now that the only road for us is to struggle forwards……turning back would have made us the “outcast” of the village……. By the time the rest of the Asian economies cracked in 1997 amidst the so called Asian Financial Crisis, we were already becoming numb to bad news. I remembered there were days that I wished I had not joined the textile industry, or any industry at all……for making money out of making something is so darn difficult……. I thought I might have just wasted my youth. Somehow, we managed to pull through as a group. The general manager of the factory, who is now getting seriously old, made his sacrifice along the way by selling his Santana in order to keep more mouths fed. We all had no where else to turn to but to continue pushing hard to sell our new product, the chemical fibres.

Finally, by year 2000, the economy began to recover. Our hard work and persistence were also beginning to get paid off handsomely as China had become the centre of all textile, shoe and furniture manufacturing in the world, and all these products required some forms of chemical fibres. We were beginning to rake in cash beginning 2002!

Then my life-changing incident took place. One fine day in late 2002, I was introduced over the dinner table to one Singapore “Deal-maker” who was to become one of the richest men in his country in the next 5 years. Mr D was still a “relatively” poor deal-maker at that time. Just like many so called “deal-makers” running around China at that time, they hope to make small fees introducing companies to capital, or vice versa. Mr D claimed that he had successfully engineered a number of private equity transactions in China, helping companies with so called “mezzanine” financing to prepare the companies to be listed in stock exc! hanges outside of China. He was fully aware of the psychology of Chinese entrepreneurs and their deep dissatisfaction with the bias of the Chinese government in allowing only state-owned enterprises to list on the local stock exchanges. To us, having a listing status in China is like having acquired the right to print money. One just has to cook up a nice investment story and he could get Chinese investors to subscribe to the right issues of a listed company at any price. It was so much more an elegant way to make some money, rather than to have to toil for a few cents selling chemical fibres……. Mr D went further to claim that he had taken some of the invested companies public in both Hong Kong and Singapore Stock Exchanges and given his investors had made some money, he always have a group of ready-investors willing to back all his “stock picks”. He went on to ask quite a number of detailed questions on the operating conditions of our companies over the dinner, jotted them down carefully on a small note book along the way. Later on, we adjourned up-stair the restaurant for a KTV session. I must admit that I remembered clearly Mr D was a good Chinese song singer, having sung some hot-off-the-chart songs that I heard my niece hummed sometime shortly before the incident. His smooth handling of the KTV girls, which he asked for two concurrently, also showed that he had been around………

The next time I met Mr D was three months later, quite unexpectedly as I had thought he could have decided to give our company a miss given our relative small size. He requested for a factory visit which, after having consulted our old general manager, I accompanied throughout. As usual, no serious business until after dinner and getting slight tipsy after a few drinks forced down by the KTV girls in the evening. I must admit that Mr D is a seasoned operator. He was quick to recognise that I was an impatient young man to take over the operation from my older colleagues. Throughout the entire evening, he was trying to convince me to move the gear one notch faster to accept some private investors into the company, beyond which he was confident to help us to get the company listed in one of the foreign stock exchanges, where everyone will be able to cash out their profit if they so ! chose. I pretended to be sceptical while deep in my heart, I need no convincing as I have known many Fujian entrepreneurs shot to fame and riches, 2 of them by turning large tracts of collective land into vegetable farms and the other bending float glasses he bought from state-owned factories into auto wind-screens and sell them to car manufacturers. I never doubted that one can make a lot of money from car wind-screen, but I could have never imagined striking it rich planting vegetable…….!!!

Mr D and myself both agreed later that we need to convince the other older colleagues of mine to approve such a scheme, and over time, move them aside to allow someone young and dynamic person like myself to be the face of the firm to cater to the likings of the investors, who were mostly English speaking. In the meantime, my task was to convince the existing shareholders to allow a group of Mr D’s friends into the shareholding first, while paying Mr D a “structuring and introduction” fee along the way. The easy part was, as Mr D coached me on how to present to the rest of the shareholders, his fees will not be in “cash” but rather in equivalent value of “shares”. He said that was to assure everyone that he could only make money should he be able to engineer an eventual listing of the company on a stock exchange, after another year of lock-up period for promoter shares aft! er listing. All interests would be aligned, as he put it.

Mr D was indeed an experienced operator. He had anticipated all the concerns of the “older” colleagues of mine, who feared that this was another one of those “leather-bag-company” deal-makers that was trying to make money out of no commitment. So he got through the first “hurdle of trust” after my carefully orchestrated presentation to the “board” of the company.

However, there was still one important issue we could not resolve amongst the board members. The finance manager correctly pointed out that the company indeed, did not need substantial amount of cash at this moment as we were not expanding aggressively anymore. The market place for our products was relatively stable right now with demand and supply growing organically. We will not be able to drive higher sales without sacrificing our margins by cutting prices. In short, we can only grow organically at around 10% ! per annum, which was probably not the most exciting story for the investors. In fact, the board members did not see the need for new capital. However, the idea of getting listed did appeal to them. They too had many friend who had become “paper millionaire” after the companies got listed. They too were looking for the big-pay-off day. So I was tasked to come up with a solution. In other words, there was a “green-light”! I did not expect my luck! Almost immediately after the board meeting, I called Mr D to tell him the outcome, as well as the issues raised. Again, I thought he must have expected the outcomes. As he explained calmly over the phone, the first round investors (which he called angels) will not put in a lot of money so that they would not dilute the existing shareholders very much. These angels are the “connected persons” that will come in with their own money (through Mr D’s personal vehicle) that will help cement the way for some of the well known direct-investment funds to step in at a slightly later stage, which would provide the company with the credibility, other than funding, to convince the stock exchanges to allow the company’s listing, and the subsequent active participation of other institutional investors during the IPO. Mr D went on to explain that the process of getting a Chinese company list! ed was in fact, an art. There were not many people like him that could have the trust of many influential people to conceal their names behind his vehicle to invest in a company, not unless they have been working on other cases together before and having developed deep working relationship. These angels will see the company through the process from getting “restructured” to “listed”, rendering their helps in one way or another through exerting subtle influences on counter-parties, bankers, regulators and other investors. Mr D’s vehicle will participate in the shareholding of the company first, where they will invest up to 5% at book value. In other words, they demand for very cheap entry. Mr D will only take his fees later after having brought in the money from direct investment funds, in larger quantum, in the form of shares of the company at book value before the entry of new capital. He wanted 2% worth of the amount of money he would bring in from the funds in such shares. Subsequently, he went on to explain that this was the modus operandi these days as he could introduce us to the senior executives of the companies who had done business with him for further due diligence on his reputation. In particular, he emphasized that my colleagues should not be worried at all given the fact that it was going to be his and his friends’ money that will be in their hands, rather than the other way round. My older colleagues did find some solace in this argument later on.

As for the use of money, Mr D simply pointed out that we will have 6 month to a year to come up with a new plan on spending the proceed of investment, in the form of new technology and new products. “Aren’t you guys always looking for money to upgrade production machinery to produce new stuff for the market? It the same bunch of the customers anyway……”, so he quipped. So the decision process took a few months, where in between, Mr D sent in some accountants and lawyer to conduct some checks on our operation and accounts. We had nothing to hide then as we had no reason to fake anything. Everything was ours…….then. Subsequently, the “angels” came in, followed by, indeed, a number of reputable direct investment funds a few months down the line. We got a whopping US$20mn to put up a new plant to produce a new type of artificial fibre, the machinery of which was to be imported from Germany. The new product was in fact, attractive to a lot of customers. However, none of them were going to buy a lot of it at the beginning as they were not sure their customers were going to like the new types of yarns made of this new fibres. Business was not as brisk as Mr D had! hoped for…….

On the other hands, Mr D seemed quite keen that we could move forward in our listing process. He began to educate us the process and requirement of the stock exchanges for listing. We paid visit to Hong Kong and Singapore, talking to bankers and exchange officials, attending seminars, as organised by Mr D. We were all psyched up to be a rich millionaire once the company is listed. However, there was just this little problem…..our new products were not accepted by the market as fast as we had wished for. Most of our customers operate under very tight cash flow situation. They only have working capital to provide for the acquisition of raw materials to produce the yarns ordered by their customers. No one was going to spend a lot of money buying our new fibres, prod! uce large quantity of products to purvey them in trade shows, despite they all fed back with good comment on the potential of the new fibres. Very quickly, Mr D came up with an idea. In order to boost our sales numbers fast, he will raise another US$20mn of money from all the direct investment funds in the name of working capital need. As he explained, they often did the same tricks with those companies they listed before. They will raise new capital to produce the new products to sell to customers, encouraging them to help push the new products by offering them more favourable and longer payment terms. With the increased sales and profitability number, he could get the company to list very quickly to get more money to help push for more sales……. He claimed he had done it many times before and it had always worked out. The economy was recovering quickly in 2003, nothing was to going to go terribly wrong. When I asked whether that would be considered “artificially inflating sales number”, he laughed and quipped, with the capital markets on your side, you can engineer self-fulfilling prophesies!” Of course, this article cannot be complete, at this juncture, without citing Mr D’s favourite quotable quote. “Water enough money into any company, even a fake one could become real some day.” He believed so much in this that I thought one day, this could cause his downfall. So we went ahead, sold the new shares at higher valuation to another bunch of investors Mr D arranged. He took another round of commission in the form of shares. We were beginning to admire Mr D. Money flows through his hands like water and he did it so effortlessly.

We were no less impressed by his connection to some of the richest and most influential people, particularly in Singapore. You see, he was viewed as a successful Singapore entrepreneur made good in the vast land of the North. Through diligence and perseverance, he carved a niche for himself identifying promising Chinese companies to groom for listing on the Singapore Stock Exchange which was losing out in race to Hong Kong Stock Exchange as the Chinese! state-owned enterprises were encouraged to list in Hong Kong. Mr D was their hero, directing promising private Chinese enterprises to list in Singapore and along the way, enriching many “angels” and local investment banks in Singapore. I chanced upon many of these angels as well.

There were occasions Mr D would have called me to help arrange for some transport and accommodation in Xiamen for groups for “secret” visitors. They are usually small groups of 4-8 people. I would generally put them in comfortable Buick mini vans, receiving them from the airports, ferrying them to golf courses, restaurants and night clubs. They would usually visit one of two factories invested by Mr D. From my impression, these were the angels behind Mr D, which for obvious reasons, he had to please. There were bankers, lawyers, other deal makers, stock brokers, fund managers and people that do not have a job, simply because they were so rich already. Occasionally, there were ex-CEOs or Chairmen of large government controlled enterprises in Singapore. Once, I even met a supposedly ex-member of parliament in Singapore.

It was obvious to me that Mr D entertained them in separate groups at separate times, taking pains in ensuring that some of them were not aware of the involvement of the others, for some reasons. I was always invited to all these golf and night entertainment events for a simple reason: I speak English and Mr D wanted to be seen as having someone like me to watch over his investment in this part of the world and helped him to tap into different kinds of local relationship. The other Chinese entrepreneurs may not be comfortable in dealing with the whole bunch of English speaking Singaporeans.

One common trait of all these trips was that all these guys from Singapore seemed to love the night clubs in China. The daily programme always ended in some night clubs, where these guys would party till the wee hours, every night they were there. Mr D would sometime, when he was half drunk, tell me that he had again “nailed” some key relationship and one of the travellers in the group would soon be in his “Club”. He would whispered that someone in the group was the senior partner of an investment fund, or someone in another group was connected to the so-and-so in Singapore, or someone was closely associated with the chiefs of some Singapore banks, or someone had “influence” over the listing approval process of the stock exchange, and some would just be some new investors that he was trying to woo to invest in his pre-IPO projects or the shares in the companies that he sponsored the IPOs.

When I asked why they were all so tireless in their nocturnal activities, Mr D laughed, “This is what I call pent-up demand. You know these people cannot even come 100-meter close to any KTV in Singapore because of their social status. The opening up of China is probably the best thing that happened to all these Singaporean men, for they can at least release their “valves” once in a while…….. Do you know how boring Singapore is? I have a permanent KTV room booked up in one of most posh KTV in Singapore, costing me half a mill ion Dollar at the minimum every year. Guess what, the only important guests I have using that rooms are from China!” Watching Mr D in action, I finally understood the true meaning of “club”. He had managed to combine the “social club of friends” and KTV clubs so well that I thought every successful Chinese businessman should learn. And in so many ways, the “club” in Singapore is really not that different from the “club” in China…….. So finally, we got our act together to attempt a listing towards the end of 2003, after much of the financial twisting and engineering to make our company look like a well-funded high-tech textile fibre company on the verge of experiencing explosive sales take-off. In truth, we produced a lot of the new fibre products and literally give them to our customer to produce new fabric for marketing purposes, with the promise that we will not collect money until their products are sold. Nevertheless, we book these as receivables.

To the dismay of Mr D, my older colleagues had insisted on listing the company on the Hong Kong Stock Exchange, rather than the Singapore one, where Mr D has greater control on the process. They felt that the company would probably be accorded higher valuation in Hong Kong. Besides, they were not comfortable with Mr D’s influence in Singapore fearing the ultimate loss of the control of their company. Mr D went along grudgingly, helping to smooth the way to facilitate the IPO. We got a small investment bank to underwrite the IPO. The big ones were really not interested in this small piece of business. We went on to file the application to list to Hong Kong Stock Exchange, who was equally high-handed as Hong Kong was flushed with quality large size state-owned enterprises queuing up to list there. Being relatively uninterested in small size listing and more experienced in evaluating the quality of smaller Chinese private enterprises, they were quick to notice the sudden expansion of account receivables on our accounting statements. They followed up with a number of questions with the clear purpose of delaying our listing, probably to see how these receivables will behave given longer period of time. In short, there would be no quick IPO for us.

Mr D was quick to use this delay to his advantage. He hinted to everyone on the company board was that one of the reason for the stock exchange delay was due to the lack of a convincing younger manager helming the company, and that our senior colleague was already too old to project a “dynamic” image to the Exchange and the investors subsequently. He wanted me to be promoted to the CEO position while our existing GM to become the Chairman of the board. With his insistence, my appointment was pushed through the board, which made one of my older colleagues very angry as he was supposed to be the next-in-line in seniority. But heck, he should have spent some time learning English! Mr D, being truly worried about the age of the receivables on our book that would become increasingly dubious as days go by, pushed us to shoot for a Singapore listing where he feel, with his broad relationship will help a smooth IPO. This time round, my older colleagues obliged grudgingly. So we quickly filed an application to list in Singapore. It proceeded relatively smoothly and we went through an initial hearing very quickly. The market was in relatively stable conditions and we felt we could get the IPO proceeds quickly at the turn of the year. With lot of money, like Mr D’s famous words, a fake company can become real……. To be fair, ours was not really a fake company. We were just doing what the Chinese proverb describes: Accelerating the growth of the seedling by pulling it up a little everyday…… To our surprise, we got a letter very soon from the stock exchange questioning us the reason for the failure to disclose to them we had applied to the Hong Kong Stock Exchange earlier. They asked whether we had been rejected previously and on what ground we had been rejected. Just as we wonder how they found out so quickly since one could safely assume due to competitive relationship, these exchanges should not be talking to each other on micro matters like this, Mr D came storming in over-night. “Someone wrote a poison letter to the stock exchange”, so he explained. “Someone who knows the situation very well and who is not very happy with the whole thing”, he concluded. We were fortunate, he went on to exclaim, as he felt that given the Hong Kong Stock Exchange never really rejected our application, he could still salvage the situation using his relationship and influence. While there was no hard evidence, we nevertheless took the precaution of asking for the early retirement of the senior colleague who was passed over for the post of CEO as we suspected him to be the whistle-blower. We made sure he was well compensated in monetary terms as we thought that would sooth his anger, with promises to allocate more of the shares to him so that he would share our desire to see a successful IPO. Then we went on to reply to the stock exchange disclaiming the fact that we were previously rejected, citing our need to access capital markets fast as ours business was expanding rapidly. Hong Kong was just going to be too long a wait for us.

On the other hand, Mr D worked his network and “club of friends” to sooth the nerves of the exchange officials, who were working hard to promote Singapore as the “second board for China” The launch of “second board of China in Shenzhen” hit a snag when the National Peoples’ Congress decided that the Chinese investment public was still too unsophisticated to handle investing in non-State-controlled enterprises that even the Chinese government may not be able to police effectively. So after 3 month, we were informed that we manage to secure the final hearing. Mr D and some young lawyers and accountants spent a few days preparing me to handle the questions “correctly”. I saw the signs of satisfaction on the faces of the officials during the hearing. One of them even went on to comment on the fluency of my English…… Mr D was right again. My Chairman could have fumbled and rumbled on just like any other Chinese CEO during such occasions. They were just the hardworking mulls that built the foundation of the Chinese’s manufacturing might. I belong to the generation that would take the company to soar higher as we understand and speak the language of high-finance, in English! The battle to IPO was hard won. We got listed in 2004 and to our pleasant surprise, some of our customers came back to pay down the receivables and asked for more of our new chemical fibres. By now, China has become the “factory of the World” that churned out all kinds of consumer and industrial products so cheaply that the Americans and the Europeans were so addicted to. The stock markets and physical property markets in the world were becoming buoyant and everyone was beginning to feel wealthy and began to spend more. Our new fibre products found more commercial uses and we bought more machines using the IPO proceeds to produce more products to cater to the booming demand.

Again Mr D was right. Pour more cash into the business and you will get a real company………just like the pig-farmers l! isted on the stock exchange…….as he put it. Sensing potential to make a lot of money out of the good performance of the company and the buoyant market conditions, Mr D descended into town one day and asked me out for a dinner. As usual, we headed to his favourite KTV after dinner. After a few drinks, he leaned over and whispered to me, “Hey, this is your chance to grow really big very fast. The IPO proceed was not enough to fund your growth. Now that we are listed, we can place more shares out to raise more money to accelerate the business expansion to capture more customers before the competitors in China could replicate our capabilities, which always happen in every industry and business in China.” I was reluctant to agree to help sell the idea to my old! er colleagues as their shares were still in lock-up period and I imagined they would hate to see any dilution of their interests further at this juncture. Mr D went on, “I really needed your help as I need to get the shares placed out to some of those who helped us through the difficult times just not too long ago. We need to let them make some money as we are entering a bull market soon. In any case, the issuance of more new shares will give us more power to cement your position as the number one man in your company as we all support you rather than your older colleagues.” As usual, we kind of half forced the issue through the board with my older colleagues grudgingly approved some kind of convertible issue to assuage their fear that the new institutional investor would not be able to sell before they were allowed to.

In Mr D’s effort to consolidate his hold of the board further, a new director from the institutional investor group was appointed to the board. I had known him earlier as one of those that visited our plant before the IPO, when Mr D was just beginning to restructure the company shareholding where this new director was once introduced to me as an “angel” investor. Apparently, they were good friends that “make money together”. By 2005, the Chinese economy had entered into another “boom era” and our business was literally flying, just like any other businesses in China. Profit margins were good while sales expanded quickly, and our share prices rose more than 3 to 4 times from the IPO price. Many of older colleagues sold their shares and retired happily into the sunset in 2006, only to regret to see the shares they sold almost doubled again in 2007. Being the new helmsman, I could not easily sell my shares as it would have been construed as management not having confidence in the business. By then, Mr D had become one of the richest men in Singapore. Leveraging on his experience and the capital he accumulated from earlier successful IPOs he conducted, where in some case he made more than 50 times his capital, he exploited his new reputation as the “preferred deal-maker in Singapore” to the maximum. His “club” became increasingly larger as many people with money and “influence” joined the “club” to participate in this unprecedented “Chinese feast”. He doled out hot IPO share allocation through investment banks to repay old favour and to cultivate new relationship. Success begets success and money begets money. It all seemed so easy and so natural. Everyone got what they wanted. The Chinese companies got their money to expand their business (which at a later stage, no one is really sure which company really had any business to start with), the entrepreneurs were handsomely rewarded for the risks they undertook, the deal makers got their fees, the angels made their killings, the bankers collected their fees and dished out new loans, the lawyers and accountants recruited more young graduates to cope with the record work volume, the stock exchange got their “new mandate as the second board of the Chinese companies”, the investors got their hot-and-sizzling China concept stocks and above all, the rich and the influential members of the “invisible clubs” were all happily enriching their own pockets……

The reason why Mr D was successful, I realised, was that he always try to help the people who helped him in one way or another to become richer. Despite the fact that I could not sell my shares, I got the help of one of his banker friends to obtain some financing by securing my stake in the company to join in the biggest “Chinese feast in Singapore”. Just like all the Chinese entrepreneurs Mr D helped, I became one of his “angel investors”, taking stakes in promising new companies through his vehicles, got allocated hot IPO shares and reaped substantial gains within short span of time. I too, was becoming not only asset, but also cash rich. I took advantage of the Singapore immigration rule and got myself a per! manent resident by purchasing a property in Singapore. I wanted my son to study in the English school in Singapore and grow up as part of the establishment there. In any case, I would be able to help him join the “club” and he will be taken care of the rest of his life.

As for Mr D, he was purchasing properties in the form of “tracts of land” as he moved to diversify his assets from stock holdings to land holdings, with a sight to become a serious property developer. The Singapore property market was getting sizzling hot by the middle of 2007 and it seemed nothing could go wrong, particularly when 2 casinos were being constructed in an otherwise very conservative society. For myself, Mr D was going to be my role model. I went on to fund entrepreneurs and Chinese companies directly, hoping one day to bring these companies to someone like Mr D, and make more than the Singaporean deal-maker, at least equal…….. Oh, I forgot to mention that the Chinese local stock market went through the roof as well. To take advantage of this, I needed no advice from Mr D. My friends in the local banks helped me secure the capital easily just like what they did for thousands of state-owned enterprise officials. They took the company’s cash as “invisible lien” to lend money to the managers of these companies to punt in the stock markets. The profits of such stock market speculation go directly into the pocket of the managers.

However, only in hindsight after the stock market collapse at the end of 2007 that it became obvious a lot of Chinese companies’ cash in the bank vanished into thin-air alongside the stock market bubbles. Our worlds began to unravel at the end of the third quarter of 2007. By then, the Sub-prime Crisis, as we knew it now, had hit the U.S. economy. We were still busy feasting in the spoilt of the capital market excesses, unaware of the impacts of such a crisis that originated from the housing bubbles in a country so far away. We were blind-sighted by the ease of making money from stock markets and at the peak of the markets in the middle of 2007, we all felt like the “masters of the universe”.

The first sign of trouble amongst the Singapore listed Chinese companies appeared when the share price of a Chinese steel company got sold off aggressively. In good times amidst a vibrant economy, this company presented to the investing community a story of their ability to turn in good profit margins by buying hot-rolled steel coils, coating them in zinc and sell them to car and consumer durable makers. One analyst, whom everyone ignored when the stock prices were rocketing, did question its business model as firstly, such production method is highly inefficient as most modern steel mills produce zinc-coated plates in one continuous process, and secondly, the investing world also knew that the prices of hot-rolled coils became excessively expensive as there was a preponderance of such downstream ! processing plants who got squeezed by the few integrated steel giants who have the capability to smelt iron-ore. Then there was the rumour of the company being privatised by a foreign steel giant seeking easy entry into the China market and its stock prices shot up before the trading of this steel company was suspended one day.

Rumour had it that it had been reporting fake profits, an official report of which the investing community is still awaiting after a few months. It was so obvious an insider job to cash out their position to the retail investors and apparently, the company management was not contactable anymore! By the second half of 2008, I believed many Chinese company CEOs were having tough times struggling to keep their business afloat amidst the most serious and swift crisis in memory as the credit situations around the world got frozen up. Worst, many of us were facing more serious issues in our personal finances. All our investments in stock and property markets were plunging in values amidst the so-called sub-prime crisis. Worse, we could not sell our stocks and properties as the transaction volume of these investments just vanished quickly together with the confidence of the investors globally.

While we busy feasted in the spoilt of the capital market excesses over the last 2 years, we did not realise that we were piling on quite a fair bit of leverages as we secured our investments for more bank loans to attempt to reap more profits, when it all seemed so easy. We never thought we could have any problem of repaying any of our borrowing as we were sitting on a lot of gains on our investment holdings. There was only one easy way out for all the Chinese company CEOs and that was to dip into the honey jugs. We all understood the importance of having our closest allies to be the finance managers of our companies so that any small “problems” could always be ironed out. In this case, I just “borrowed” some cash from the company accounts to fill some of the “margin calls” from the banks outside of China, which financed my “investments” in the stocks listed on Singapore Stock Exchange, as these foreign banks were ruthless in coming to seize the underlying security when the “margin calls” were not met. In some cases, I just pledged more of my personal assets to the foreign banks. I was becoming very stressed by all these happening and was not sleeping well.

Mr D was not having a good time either. He too was suffering from exactly the same problems as we were just emulating his investment styles and leveraging activities. I heard of incidents where he turned to some of other more cash-rich companies that he invested in to “borrow” some cash to bridge through some “margin calls”. He sold down quite a fair bit of his investment holdings to some “friendly hands” in a series of stock placements. At this moment, the goodwill and friendship he built over the years came to his rescue in these moments of “illiquidity” as the market transaction volume just dried up almost completely. However, the market prices of the stock holdings we used to secure our financing continued to drop by the days. Some of our friends and fellow “angels” were selling their holdings……..and may just be in the same kinds of troubles as well. No one trus! ted each others at moments like these. Those that were selling their investments would not pre-warn their “fellow investors” as everyone would rush to sell at the same time! It was a time where everyone was for himself! My anguish did not escape the attention of the “director” on our board that Mr D posted in earlier. He flew over one day and was visibly concerned about the situation of my finances and of course, more importantly, that of the company. He sensed troubles as he knew that I too, had quite a fair bit of personal investments that were vanishing into the thin air in values.

By now, at the end of 2008, I was becoming desperate. Our company was going into the “audit season” and obviously, there was a large cash deficit that we would not be able to explain to the auditor. In the past, we could have just “arranged” for some cash to be credited into the bank account for a brief period to satisfy the auditors’ check. However, there was no such “temporary cash” to be found at any price as the sub-prime crisis had now developed into a full blown credit-crisis around the world. China was not spared in the process. With no where to turn to and the audit dateline closing in, I took the risks to “brief” the director of the true situation and asked for his help. I was surprised that he was not shocked by my confession. He had probably guessed it! In any case, the director asked me to remain calm while he would consult Mr D to seek some kinds of new financing to help bridge this difficult period. He asked that everything remained confidential as the last thing we wanted the world to know was the “missing cash” in the company accounts. H told me that quite a number of the S-chip CEOs were on the same boat and some of the “funds” that used to backed their IPOs have been able to extend some credit directly to them ease the pressure from the foreign banks, secured by again, stock holdings of the CEOs. Little did he know that my assets had almost been entirely secured by all kinds of creditors already!

Then the irreparable damage struck. I had borrowed some money from the local Chinese banks to punt in the local stock markets. The arrangement was such that I had to return such cash to the Chinese banks at the end of the year because they too, were subjected to annual audit. I had carefully maintained sufficient cash in our company accounts, which served as the “collateral to the conscience” of my friends in the Chinese banks. As I began to use them to fund the “margin calls” of the foreign banks and the amounts got further depleted by operation losses of the company amidst the worst economic crisis the world was now facing, my “friends” in the local Chinese banks were not going to take a chance on their own fate. They were definitely not “friends in need”. They simply deduct the amount I owed personally from our company accounts two days before their auditors came in, w! hich was of course, a few days before our company auditors came in. The rest was history……………….

The auditor, which was an international firm, was not going to take a chance with their reputation. They formally informed our board of directors in early 2009. In other words, they were warning the board that the financial statements they were going to publish would be “disastrous” and could cause a serious enquiry by the regulators. I think some insiders proceeded to sell some of their shares before any official announcements were made but most of us were warned not to do anything with our holdings as that would be considered “insider trading”. Of course, all my older colleagues and company directors hated me as a consequence. I was asked to absent myself from all their meetings as they attempted to come up with a solution before the mandated result announcement date stipulated by the Stock Exchange. I was very scared. I had no one to turn to as even Mr D had stopped answering my phone calls. Everyone was trying to distance himself from me and it became obvious that I was going to be the “scapegoat”.

To protect myself, I seek the advice of some lawyers in China who in turn, consulted their friends in Singapore. To my relief, I was advised that should I be found guilty in the Singapore courts for misappropriating company assets, there was no established bilateral treaty as yet for Singapore court to extradite me from China. The China Securities Regulatory Commission, the securities regulator in China, had never once recognised their responsibility to regulate the S-chip companies listed in Singapore. In fact, the Hong Kong Stock Exchange had faced similar issues for decades in their attempt to regulate the P-chips, which were Chinese private enterprises listed on Hong Kong Stock Exchange, to no avail. In other words, as long as I refrained from stepping my feet on Singapore soil, nothing could be done to me. In any case, I thought given the hatred I faced from all my older colleagues and friends in the hometown, I should be taking some long overdue holidays. I relocate my family to a Chinese seaside town.

Although I was now an ordinary citizen, I was glad that my wife kept quite a far bit of the money I gave her along the way and that should be enough to last us a life time, at least in China. Through internet, I came to know that the company finally disclosed the incident to the Stock Exchange and the stock was suspended. They appointed an investigator but I was no where to be found. So it would be interesting on how the story could turn out post the investigation report. In fact, a number of S-chips suffered from the same problems and were suspended from trading soon after us. Inevitably, there were cases of over-stated revenues, fathom receivables, missing cash, over-leveraged financial positions of the founding entrepreneur who mortgaged away their own stocks, as well as outright manipulation of stock prices. In many cases, I suspected the irregularities had begun right from the very beginning, before the companies were even listed. Many were not real companies at the first place. My friends in the know told me that a few more had been discovered as suffering from “missing cash” and jokingly commented that the Exchange had to arrange for a smooth sequence of announcements just like the way they schedule result announcements of listed companies. With all these irregularities exposed and more promised to appear, the stock prices of all S-chips have literally collapsed. All my friends and their “club members” must have suffered tremendous losses. Some dealmakers and their syndicate members apparently were facing margin calls on daily basis and some even declared themselves bankrupt. It must have been a very trying period for everyone. However, I did not seem to have much sympathy to all these people. I witnessed how some of them became filthily rich in a short span of time without having to work hard, while other enjoyed a good ride in fortune just because they (or their friends or relatives) were in position of influence.

I was the only one that would be made a “scapegoat” and had to live a life of “exile”, while these guys could still just lick their wounds secretively and continued on with their life. I do not sym! pathize those institutional investors who lost their money as if they did, they were simply either incompetent or someone had benefited personally along the way in having committed their funds’ money in such investments. Curiously, I wonder who will speak on behalf of all the many ordinary people in Singapore who came to believe the investment potential of these S-chip companies after all the beautiful “packaging” the dealmakers and entrepreneurs wrapped around them, and went on to invest their life savings in the S-chips, only to find out one day that all these were worthless! So when dust finally settles one day, we shall all look back and evaluate what had gone wrong and who are to be blamed. I am sure all fingers will be pointing at the Chinese entrepreneurs such as myself, who are usually labelled as “greedy and unscrupulous”.

There is a ring of truth to that accusation and I admit I am guilty. But how about those dealmakers, who taught us how to cook the books? How about those angels, who hid their identities behind some dealmakers and exerted influences to assist them to succeed in their schemes? How about those institutional investors who trifled with the money entrusted to them? How about those intermediaries and professionals who were not vigilant enough to protect the interest of the investing public? I would like to end with a comparison. The Ming Dynasty collapsed only after the General (Wu San Gui) they sent to defend the border against the Manchurians opened the gate voluntarily to allow the Manchurian’s army to come into the Great Wall. General Wu did that probably out of a promise to be made a king later on and be endowed tremendous amount of riches by the Manchurians. Of course, the historians would like to add that he also needed the help of the Manchurians to defeat another general that had taken his favourite concubine. In short, the thieves and robbers are only usually allowed in by the insiders……….

If you have read the story till this part, I am sure you are either a victim or someone who is deeply interested in the development of the S-chips going forward. Please help to forward this email to any many such interested parties as possible. We need to put an end to all these irregularities lest more ordinary people on the street suffer unnecessary losses. In the process, you will help me to partially clear my name…… For I am not the only one to be blamed……………..

Note: 1. Not everything is true in this story that I have just presented in order to protect some friends that still remain friends. In particular, the story before 1995 was inserted in only to give you a perspective of the difficulties that most Chinese entrepreneurs went through, and how they eventually all came to resent the ease and ruthless manner in which people like Mr D made great fortunes leveraging off their hard work.

2. At the same time, I sincerely hope that the investigation report that was pending in the case of my company comes out being at least “fair” to me. Otherwise, the more “real truths” will follow in subsequent emails……… hahahaha, the power of internet……..

Additional reporting: Goh Eng Yeow on Straits Times

http://www.martinlee.sg/confession-of-an-s-chip-ceo/

http://singapore-ipos.blogspot.com/2009/04/confessions-of-s-chip-ceo.html

Doing business in China ....... I

I have been posting a series of my thoughts on topics of China for a while. I have been pressured to grow our presence there because growth else where muted. Does that means China is immune from the on-going in the Europe? If the world is slowing down, how can you grow? The answer is the cake may be getting smaller however the opportunity is still there. Everyone, I mean literally everyone, flags from the US, Taiwan, Japan, South East Asia countries like Singapore, Malaysia, Thailand, etc are flying on the companies poles. The reduced cake is still larger than anywhere in the world. So, it's a question of how can you win market share in a slower growth environment.

Doing business in China can be difficult. Having raised in a conservative Chinese background helps but is still difficult. One of the difficult concepts for a westerner to understand is guanxi. At the surface, it sounds like something like a brotherhood bond. It may sound so noble and thinking of these people are so nice but at the business level, it's much deeper than that. A lot of people understand guanxi means reciprocal, giving face, not offending them, pleasing them but ultimately means money or help them to rise up in power.

The Chinese government is portraying an image that they are fighting very hard on corruptions. Yes, I believe they are but the followers may not. They have been inventing creative ways. I was told that people who buy Maotai usually won't drink it, and people who drink Maotai usually don't have to buy it. Maotai is like gold. It's a currency, they can resell it and turn Maotai into cash.

I thought it was a joke, when I goggled this, this is what I found.

This year so far we have seen eight rises in the price of Maotai. The potent Chinese liquor now costs four times what it did five years ago.

According to the overjoyed manufacturers and the press, the rocketing price, fueled by a booming demand experienced by no other commodity in the world, is just another manifestation of China's booming economy. But surveys show that only 10 of every 100 smokers of Zhonghua brand cigarettes buy the cigarettes they smoke, and only 1 in 100 drinkers of Maotai pay for their own drinks.

Liquor culture is an essential part of traditional Chinese civilization. In Chinese, the expression for government "review and approval" sounds very similar to "cigarettes and liquor", and in reality approval often requires the giving of cigarettes and liquor.

In other words, by bribing officials with cigarettes and liquor, one can avoid troublesome bureaucratic formalities and obtain approvals and permits with ease and speed. The popular Chinese sayings "no cigarettes and liquor, no approval or permit", and "buyers of Maotai don't drink it, drinkers of Maotai don't buy it", lay bare the hidden rules for dealing with government officials.

Nowadays an increasing number of officials puff only on Zhonghua and nip nothing but Maotai. It's not uncommon for officials at municipal and county levels to keep a store of cartons of Maotai at home, which, one cannot fail to figure out, are gifts from people who have approached them for help. As to how much Maotai they have consumed on public money, we will never know.

It's said that every year the mayors of many mid-sized cities assign their most trusted subordinates to travel to the Maotai distillery to source precious liquor, as it is an indispensible drink at banquets staged for important guests. The task is glorious but arduous, as it is neither easy to secure the amount required, nor to ascertain that every bottle is genuine. For this task, funds are not an issue at all. With their best efforts, some manage to secure 2 tons or 4000 bottles for their cities, but that is far from enough. On average, a typical municipal government holds 5-10 banquets every day of the year, and at each such banquet, 3-5 bottles of Maotai are drunk.

Since liberation, Maotai has been the designated liquor for state banquets. But in line with China's reform and opening up, it has also become the liquor of choice at banquets organized by provinces, cities, counties, towns and even villages. For officials to treat their guests, toady to the higher-ups, favor their subordinates and socialize, Maotai is absolutely indispensible.

It is common office gossip that a lack of capacity for liquor is equivalent to a lack of capacity for work. Therefore, in order to demonstrate their capacity, some officials drill themselves to acquire the capacity to pour two bottles of 53 percent alcohol Maotai down their throats at one sitting without getting drunk. Some of them become so addicted that they don't feel themselves if, for some reason, they don't get their daily fix.

The leading group of a city usually comprises 10 people including the party secretary, the mayor and vice mayors. For them, 4000 bottles are far from enough. As a result, the number one man usually assigns an aide to manage the precious store of Maotai and ensure that his demands take precedence over those of the other leaders.

At a Party meeting the number one man might extend some words of consolation to his subordinates: "Comrades, it's not that I set out to abuse my position to monopolize the Maotai. It's just that the supply is too low. Consider the annual supply of 25000 tons a year, equivalent to just half a billion bottles. How can that meet the rising demand from all over China. And our buyers are below par. Once again they have failed to lay their hands on enough."

Our army officers have a special fondness for Maotai liquor, reflected in the oft-told tale of former premier Zhou Enlai engaging in a drinking contest with General Xu Shiyou.

For a civilian, to be able to drink a whole bottle (or half a liter) of Maotai at dinner is something to boast about. But many army officers are not satisfied with drinking only one bottle, which cannot fully demonstrate their heroic mettle. Also, they disdain to drink in the same manner as civilian officials. Consequently, Maotai liquor has begun to appear in liter bottles, produced specially for the enjoyment of our army officers. As to what proportion of our military expenditure is actually spent on drinking Maotai，nobody has the guts to try to find out, as it is undoubtedly a military secret.

People may say that I am out of date to regard the consumption of Maotai as the epitome of corruption in today's China. Though high, the price of Maotai has not yet gone above 1,000 yuan a bottle, and even the strongest drinker can drink no more than two bottles during one meal. Now, we have entered the age of ice liquor, of which high-end brands can cost 1,500 yuan a bottle. A person with a good capacity for drink can consume 8-10 bottles during one meal.

Friends, don't be shocked by this, as the era of consumption of Lafite is approaching. This well-known wine is made in France, and costs about 20,000 yuan a bottle. A capable drinker can drain 3-5 bottles at one sitting！

It sounds absolutely inscrutable. But the point is who the buyers of these liquors are. If they are owners of private enterprises, it does not matter too much, as all that is lost is some state assets to which we ordinary people have no access at all. However, if they are government officials or army officers, the tax payers of China can do nothing but lament, as what is wasted is their hard-earned tax money.

Mr. Chunyu Jinzhang, president of a well-known stationary company in China, has been working as an amateur teacher of English for over 30 years and was the first man in China to promote the Queen's English.

http://www.china.org.cn/opinion/2010-11/03/content_21266688_2.htm

China watch update

On this trip to China, people I met just like the weather -- bitter cold. They turned cautious.

Airports I went pretty much like my two months ago visit, almost empty on my way in and some life on my way out. Some still do a little bit of year end travelling but the way they dressed -- these are people who can afford to throw money at any economic conditions.

Housing was still a big topic. Stock market was still a huge topic. But not in bullish tones. These people did not think they are in the bargain level. Chinese are unique when come to anchoring, they don't anchor at the top but they anchor at the previous bottoms. If everyone waits for a bottom, it is has some way, some time, to go.

Copies of China Daily delivered to my rooms daily without fail. One headline had my attention.



http://www.chinadaily.com.cn/china/2011-12/16/content_14273617.htm

BEIJING - Foreign direct investment (FDI) fell almost 10 percent last month from a year earlier, the first drop in 28 months, as Vice-Premier Li Keqiang called for a boost to domestic consumption on Thursday.

Amid the "grim and complicated" global outlook, China needs to strengthen market capacity and growth by encouraging private investment, increasing investment in affordable housing projects and accelerating urbanization, Li said.

This update is rather short. I'm badly lagging behind many of my duties. Just done shopping for coming school re-open. The school uniforms are getting very expensive. I don't think I will do more shopping for coming Christmas and New Year despite of many offers have been dangled in front of me. Just don't feel like throwing money on stuffs I don't need. I just hope for a quiet and restful holidays. I also hope to spend some time to think about 2012 -- it's certainly not a year of Four Horsemen calling like in the movie but I certainly expect to see more volatility ahead.

Watch China

I've been watching the A Share Index for months. It was hitting a new low yesterday. That made me nervous. I was undecided whether to use a dramatic phrase like the last bolt on the world’s engine growth is about to give way. This is our last hope. If this last engine is giving up hope, our hope for some global economic growth will be dashed. Growth will gravitate to center. Pretty close to zero.

I will be out of town for a few days on a business trip, to China.

China Updates

I was not sure whether my bearishness will change the way I see China for the next 2 years. I'm trying to avoid biasness as much as I can. When I arrived in Shanghai, the check out from the immigration counter was fast, unusually fast in fact. When I departed from Shanghai the last Friday, the check out was even faster. It was so fast that I felt eerie. I used to get a nice copy of Financial Times or Wall Street Journal on the planes but that was missing, budget cut I supposed. The planes were not full. These are very telling signs.

There is no doubt that the Chinese economy is slowing down. Q3 '11 GDP slowed to 9.1% and many expect it to slow down further to 8.5% next year.



The Chinese government understands credit is a double-edges sword. It can build an economy but it can also annihilate an economy. The chart below shows the dramatic increase of China's credit as a % of GDP since 2008. Even though the Chinese leadership has hinted they will fine tune their monetary policy to assist small and medium businesses after their outcry of credit crunch -- a few bosses abandoned their homes, businesses, committed suicides, borrowed from loan sharks, visiting pawn shops, etc. But I think it is unlikely that they will loosen its grip across the board.



The credit tightening effect was not only felt by SMEs but now spreads to property market. The property prices have finally fell dramatically and the new homes demand fell off the cliff. Chinadaily reported that new houses demand in Beijing fell 46% year over year. They slashed prices by 20-30% in response to mounting pressure to push out inventory. Read more here http://www.chinadaily.com.cn/bizchina/2011-11/05/content_14043826.htm

A dramatic price drop has a huge impact to new buyers. They will wait for the prices to come down even more, reinforces the downward spiral. Retail demand reduction is one thing but the other problem is many of the SMEs companies have ventured into properties will see their portfolio decline substantially. I hope the cold will not turn into pneumonia. The Chinese government had done a stress test indicating the Chinese banks can withstand property price decline up to 40%. I can buy into that but there will be a few scars here and there.

There has been a lot of talk that the Chinese local governments have been overburdened with debts. As of end of 2010, the local government debts stood at 10.7 trillions yuan or almost 30% of GDP. If it gets closer to 50%, I think the game will be over and they are over-extending themselves --not much room to expand their infrastructure projects.

When it rains, it pours. The problems just do not seem to stop. There will be another fresh problem will show up at the door. The EU. China is doing a substantial business with them and in fact this is their number 1 export destination. With PMI flashing below 50 across EU, I think contraction is a done deal. What does this means to China?

I'm not trying to depress you till a point to reach out a few Panadols or Prozac. What I'm saying this slowing is more problematic than 2008/2009. The dry gun powder inventory is dwindling down fast. I believe they will act a lot more rationally and will not turn on the money printing press to continue to over-extend themselves. They should allow the cleansing process to clean up the toxic from their economy so that they can emerge stronger after this crisis.

Some notes taken while traveling to China

Traveled to China this week. Some hot topics.

House price appears to have stopped rising in major cities. In fact the developers are cutting prices. Some says the hot money begins to flow into some smaller cities but in my opinion, driving up prices in smaller cities is not going to be sustainable. Plus the government continues to battle this threat as they know this is key to their security. Will the bubble pop, may be. Will China go down with it? May be not. First, unlike the previous US debacles, these folks are not drawing their home equity to fund spending. These guys may just hold and suffer till it rebound. Secondly, most of these guys paid high substantial of their second or third houses with upfront cash. Lastly, these guys are funding it with their equivalent of our EPF saving to pay their house. It is very tough to prick this bubble. The concern that most have is when the bubble pops, many predict there will be high NPL on Chinese banks BS but I think I would rather worried of the bank loans to businesses and government projects rather than to retail investors.

The GDP number released this week brought about many relief sighs, it is a sign that China is heading towards soft landing. I think the Chinese leadership deserves applauds……I still think this is going to be the best managed economy in the world.

My assignment landed me in a smaller city of China. Surprisingly, many tourist spots full of local tourists during week days. They are taking time off and spending time with family. Good for them. I think the criticism of Chinese are not spending enough is not very fair. These folks will spend just like most people around the world. These folks are struggling with high food price and high property prices. Yeah, pork price gone through the roof again(higher than previous all time high). Unless their salaries continue to catch up, it is still a tough challenge for these folks to achieve good quality of life. While Malaysia is screaming and complaining about middle income trap, I think the Chinese is going to run before they learn to walk. Their government is forcing low value added industries to perish by keep raising the minimum wage. I think very soon, these guys will go outside China to set up a lot heavy polluting industries.

The cities I travelled such as Shanghai, Suzhou, Tianjin, Beijing, etc are full of trees. I think they spend tones of money trying to green the cities. I think the Chinese truly believes in sustainable development. While it is easy to criticize this may appear to be shallow by judging them from the outside. If you want to look something more solid, I think they have invested a lot in green technologies compared to many emerging economies. They are tapping a lot of energy from sun, wind, hydro etc. They are not only investing in technologies but they also make effort to conserve energy. Everywhere you go, you can see they are controlling their air condition temperature. It’s a bit uncomfortable for me at first when they maintain the temperature around 23 deg but I get used to it after a while.

Again, don’t get me wrong that China will have a straight smooth path, they will meet with set back but I think these folks are very tough people and capable of bouncing back very fast, especially with the huge reserves that they accumulated. Again some will start to worry what will happen to their reserves in USD, well, that is a topic for another day.

Let’s pretend that I am uncle Jim Rogers for a while. I’m not selling my Chinese shares. When Chinese market goes down, I will buy more.

Time to re-look into China

China in my opinion will surely head for a slow down but it will not crash. It's going to be a soft landing. The purchasing manager index is emitting weakness. It has slowed noticeably and I will not be surprise when it dips below 50(signaling contractions).



The other issue with China is power shortage. This is going to get more serious during summer when people blasting their air conditioners. Electricity rationing for industrial sector is already underway. One of the culprits is not allowing market-based pricing. Power companies simply do not have incentives to produce more electricity to meet with growing demand. The drought is also impacting the output, especially power plants that relying on hydro power.

The rapid fire power of monetary tightening by China Central Bank begin to bite. Home sales value in major cities has declined 20% m-o-m in April. The pre-crisis interest rate was 7.47 and now is at 6.31%. Many expect another 0.5% hike in 2011. This and together with other measures, I believe the property market will surely get a lot of pressures.

All in all, I would think their GDP will be around 9%. At this controlled pace of growth, I would think China will have a more sustainable growth. I would think commodities prices ought to stay corrected for a while and that will provide some breathing space for producers and consumers. More gentle CPI number will bode well with equities markets.

China People's Congress Take Away

A few priorities that the Chinese leaders will be driving:

1. Reduce income gap between rich and poor. The strategy will be implemented by imposing higher minimum wage and tax the rich.

http://www.chinadaily.com.cn/business/2011-03/05/content_12121070.htm

2. Declare war against inflation.

Target 4%. Release strategic inventory to boost supply and implement price control

http://www.chinadaily.com.cn/business/2011-03/05/content_12121431.htm

3. Fight housing bubble

Flood the market with supply

http://www.chinadaily.com.cn/business/2011-03/05/content_12120160.htm

4. Target 7% GDP growth from 2011 - 2015

http://www.chinadaily.com.cn/business/2011-03/05/content_12121759.htm

Comments
They seem to be serious to address the problems rather than denying problems. I still think this one of the best managed economies in the world.

Will need to keep an watchful eye on the commodities.