Walter Hutchens’ Blog

In the current issue of Business Week a short article describes some of the difficulties confronting non-Chinese universities that try to operate MBA programs in China. I talked with Alison Damast, the journalist who wrote the piece, and am briefly quoted in the article.

Earlier this month another piece on this topic appeared in the Chronicle of Higher Education. Paul Mooney, the Chronicle’s China correspondent, interviewed me for that piece, too. It is longer and describes in detail some of the travails faced by one institution trying to offer an undergraduate program in China, connecting the specific example to some larger themes, as does Damast’s piece.

Both articles suggest that running higher ed programs in China is often much harder than initially imagined by college administrators when they start these programs. I would say that’s a profoundly true and common pattern, based on my study of this area and direct experience with a couple of US universities that have tried to operate programs in China.

Many early entrants are getting thumped on the nose, finding that their China dreams are not unfolding as planned, or at least not being fulfilled as fast as planned. Some institutions are retrenching, scaling back their programs. Others are putting their tail between their legs and just going home, completely withdrawing from China. Others appear to be trying to muddle through.

I think eventually some programs will flourish, too. Clearly China’s economic ascent creates an enormous market for high-level education and training in China, and many non-Chinese institutions do have some comparative advantages with respect to providing certain kinds of the needed training. For example, PRC companies are new at doing outward-bound investment, so a domestic institution’s MBA course on cross-border M&A is likely to be less valuable than one form a country where cross-border M&A has been routine for decades. They same is true for many other areas; institutions in more developed economies have richer experience with many matters that Chinese managers now want to know about. Also, top Western institutions enjoy a kind of global cachet that is not yet matched by any Chinese school; so far no Chinese institutions has the global reputation among students, recruiters and faculty that cause it to be a beehive of activity for the non-China market. Additionally, some PRC students expect their careers in China to be focused on working for wai qi or foreign-invested enterprises, and those students are more likely to have the language skills and cash needed to get a foreign degree delivered in China. They are also more likely to judge a credential from a foreign institution quite valuable, since the employers they expect to work for are themselves foreign institutions. Finally, non-Chinese institutions benefit from having developed their programs in hyper-competitive markets subject to less political constraint and recent historical trauma than Chinese institutions. They have more freedom, resources and experience, even if they sometimes know shockingly little about China itself.

But higher ed institutions need to approach China as successful MNCs have—with patience, a long-term plan, a meaningful commitment of resources, and clear-headed, hard-nosed practicality.

Providing education services in China is in some ways harder than selling carbonated beverages and fried chicken. Language, culture and political differences are substantial obstacles (One could set aside some difficult conversations more easily if you are manufacturing or selling widgets rather than offering education, no?).

Also, I think a lot of schools fail to apply the lessons they teach in their own MBA programs to their China operations (market analysis, feasibility studies, strategic planning, capital budgeting, and an appreciating that lots of things will need to be adapted when your operations cross borders).

One fundamental problem is that the model of flying a professor to China to teach in an educational program there essentially reverses the economic model that has substantially driven China’s economic success—instead of arbitraging the gap between low Chinese wages and high prices in the “developed” world, many of these programs try to reverse that logic and collect tuition in China to cover high-priced non-Chinese labor costs. That’s challenging!

There will likely be some continued shakeout as some early market entrants pay “pioneering costs” and retreat. (They went to teach but will themselves have learned a lot about China and the difficulty of doing international business). Others will gain some degree of first mover advantage as they build up their PRC alumni networks and local reputations and figure out how to operate successfully in China. Still other institutions not yet on the scene will awaken to the potential of China and start dreaming their own China dreams. One hopes they will learn some lessons from the varied record of early market entrants.

Finally, note that the development of foreign degree (and non-degree) higher ed. programs in China is just part of a broader phenomenon—general growth in the cross-border provision of higher education services. For centuries students have been crossing borders to get educated; now universities are doing the border-crossing. This is an interesting facet of globalization, with potentially significant cultural and political repercussions in China and elsewhere. UNESCO and the OECD have jointly sponsored a series of conferences on the topic and issued a document with guidance for how accrediting agencies, nation-states and educational institutions can facilitate growth in this area.

I am now writing a law review article about the surprising and sometimes disturbing details of the PRC regulatory environment that governs non-PRC participation in China’s higher ed. sector. It will be finished later this summer.

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Links:

Business Week story.

Chronicle of Higher Ed. story (sub. req’d.)

UNESCO-OECD paper.

I do not usually react to global disasters here—there are, alas, so many, and usually I have little to offer beyond banal expressions of sympathy, outrage, angst . . .

The tragic earthquake in Sichuan hits close to home, though. I have traveled some in Sichuan, a magnificent province that is larger in population than any European country. It has some of China’s most magnificent scenery. I love the food, the people . . .

The NPR program All Things Considered (one of my main daily news sources) coincidentally had some of its best journalists in Sichuan at the time of the quake. The reports they’ve been filing have made me cry daily.

In contrast to the hideous reactions of the regime in Burma, Chinese authorities are apparently doing a commendable job in rescue and relief work (maybe our own way-to-go-Brownie should have studied in China before Katrina). For those of us far away it is not clear how much if anything we can do to help, but people on the ABA China section email list have rounded up the following links of places where one can contribute to relief. How sad that this seems to be all one can do, and how sad that, as disasters go, this one, though so unspeakably tragic, apparently will have a much lower death toll than some other recent examples.

Red Cross/China

Oxfam Hong Kong

Mercy Corps

World Vision

Pandas International

The China Securities Regulatory Commission (CSRC) last week released new rules on the “material asset restructuring” of listed companies.

The China Securities Journal reports on the new rules (in Chinese) here.

The CSRC titled the rules 上市公司重大资产重组管理办法 Shang shi gongsi zhongda zichan chongzu guanli banfa (Measures on Material Asset Restructuring by Listed Companies) and 关于规范上市公司重大资产重组若干问题的规定 Guanyu guifan shang shi gongsi zhongda zichan chongzu ruogan wenti de guiding (Regulations on Assorted Issues Related to the Standardization of Material Asset Restructuring by Listed Companies). They also released related disclosure rules.

Earlier this month Beijing’s municipal government published a “guiding opinion” on promoting the development of the financial sector in the city (a Chinese press report about it is here, and one with more background here).

Beijing’s Xicheng District, where “Financial Street” (Jinrong Jie) is located—the area where, inter alia, the China Securities Regulatory Commission is based—earlier promulgated its own local policies on encouraging financial sector firms to locate in Xicheng (available here in Chinese).

It seems inevitable that Beijing, Shanghai and Shenzhen will compete to become China’s financial hub. But this doesn’t have to be a zero sum game, does it? Most US SEC employees are in DC, though they also have a good contingent in NYC where the NYSE, Nasdaq and the big investment banks are based. Meanwhile most options trading flows through the Chicago Mercantile Exchange. China’s financial sector may continue to shake out this way—with regulatory emphasis in Beijing but the exchanges and banks in Shanghai and Shenzhen. China is huge, so they could have more than one financial “center.”

But the China case is different because the exchanges are not really SROs and the financial sector is managed mainly through central-level policy making. Thus government planning, not organic growth through private ordering, seems to be the key venue for competition among cities to become mainland China’s “financial center.” Meanwhile, Hong Kong (and to a lesser extent New York) have some claim on the title “China’s financial center” in terms of raising capital through public offerings.

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Title of Beijing’s new “guiding opinion:” 《北京市人民政府关于促进首都金融产业发展的意见》Beijing shi renmin zhengfu guanyu cujin shoudu jirong chanye fazhan de yijian).

Front page of Saturday’s WSJ: “China Stocks, Once Frothy, Fall by Half In Six Months,” with James Areddy and Craig Karmi reporting (avail here, sub. req’d) .

In my international business classes I often play excerpts from Yum Brands’ quarterly conference calls with financial analysts. They illustrate nicely how something as prototypically American as the parent company of KFC and Pizza Hut is now obsessed with China. Here Reuters reports that the CFO of Papa John’s pizza is in Shanghai announcing plans to open 500 restaurants in China over the next five years.

The article further quotes him as saying greater than 20% of the company’s revenues will come from China this year. That must be wrong—they only have 100 stores in China now out of 3,000 overall. The CFO must have meant their China stores account for > 20% of overseas revenues or something like that, but in any case it shows how China’s, ah, rise offers opportunities as well as threats for US business.

This blog entry from a Chinese teacher offers some thoughtful ideas about how video games, which she calls a category of internet addiction (most gamers in China play online games, not console-based games), differ from conventional education.

Along with the customary points that video games offer immediate feedback and give many incentives for continued play through their structure of levels, opportunities to earn virtual money and ways to gain additional “powers,” she also points out that electronic games 1) allow unlimited attempts to pass a given level and 2) don’t stigmatize players for failure—”dying” doesn’t imprint on anyone’s mind (since the game has no mind) that a player is a weak performer, thereby prejudicing judgment of the player’s efforts on subsequent attempts.

Good points for teachers to remember.

The Times notes that Silicon Valley is also in a bit of a slump, with the lack of M&A or IPO exits causing VCs to be more parsimonious about funding new ventures.

An LA Times blogger posts here on recent declines in China’s stock markets, noting:

The Shanghai index rocketed from 1,000 in mid-2005 to cross 6,000 in October, drawing in millions of investors and speculators along the way.

But prices fell sharply in November amid a global stock sell-off fueled by worries over the U.S. credit crunch. Despite a rally in early January the market was never able to regain its previous momentum.

And since mid-January selling has beget more selling: The Shanghai market has fallen in 11 of the last 12 weeks

In Wednesday trading the Bank of China shares listed in Hong Kong briefly sank below their issuance price for the first time. Citic Bank’s A shares have also depreciated substantially in recent months (about 40%). PRC press coverage here notes the sub-prime write downs in the US have erased lots of value from US financial stocks as well.

Late last year China’s CITIC Securities announced a cross-investment arrangement with Bear Stearns. According to the reported terms, Citic would have paid USD 1 billion to get 6% of Bear Stearns’ stock. Now that Bear Stearns is, ah, no longer, Citic says the deal is off.

Interestingly, no money had apparently changed hands yet, and according to this Reuters report there was not, despite the wide publicity the deal received, a written agreement so requiring. Surely there was an MOU at least, and any more developed recitation of the deal’s terms would probably allow Citic to walk away in the event of a “material adverse change,” but in any case Citic must be glad it kept its money in its own hands. Many Bear Stearns shareholders have seen their shares fall in value from $160 about a year ago to, well, just $2 as valued in the weekend sale to JPMorgan Chase (and less than $6 at today’s close, presumably on speculation the deal will not go through as struck).

Some nice shots of the just-concluded Chinese National People’s Congress are collected here. The NPC plenary meetings are, to a large measure, all about images, but Reuters’ collection for 2008 has some striking shots, not just the usual snaps of delegates dutifully feigning interest in the scripted pronouncements or filing in to the Great Hall of the People wearing traditional garb to indicate mutli-ethnic representation and unity.

One of the photos shows Xi Jinping whom many now expect to be Hu Jintao’s successor in 2012.

Because I’ve closely followed the development of foreign-sponsored higher ed. programs in China, I find especially interesting this NPR report on opposition to the development of engineering programs in Saudi Arabia sponsored by California Polytechnic State University, San Luis Obispo.

The initial cohort of the program will be male only. Obviously, that would not be an acceptable policy for Cal Poly at home. But the institution will get almost $6 million dollars for its involvement in the deal, and the university administrator interviewed for the report argues that being in Saudi Arabia, even when conditions are not ideal (my characterization would be repugnant), is the best way to encourage change in Saudi Arabia. Critics both inside and outside the university dismiss this rationale, saying that Cal Poly shouldn’t sell out its values and could best contribute to change in Saudi Arabia in other ways (say by having more Saudi students come to the US and experience co-education and pluralism first hand).

These debates mirror the long-standing debates about economic engagement with China. As James Mann argues in his polemic The China Fantasy, from Nixon to now engadement with China has often been justified on the grounds that such engadement will eventually, somehow help China evolve from a Leninist political state into a more liberal regime. After 30 years, Mann argues, this is a patently empty argument; China continues to oppress dissent, censor free speech, suppress civil society, preclude judicial independence and allow only one political party to exercise power. Mann says politicians, business people, academics and policy analysts have, in effect, been wrong (and, he suggests, intentionally misled the public).

I don’t see any conspiracy to mislead the public by some aligned cabal of panda huggers, but it is clear China’s ruling party remains committed to keeping its grip on power and not becoming a liberal democracy. China has changed a lot in the last 30 years, but there has, indeed, been no political revolution. The regime still does a lot of nasty things, as chronicled last week by the US State Department’s annual human rights report, the depressing news out of Tibet and other readily-available compilations of horrors. Still, I think Mann understates the degree to which liberty has expanded in China over recent decades. It is a particular world view that makes political liberty alone the measure of freedom in a country. Of course I wish my friends in China could meaningfully vote, form associations without government approval, trust that judges are free of political interference (and corruption), worship in accord with their conscience and publish and read whatever they’d like. But I also know from villages to urban centers, hundreds of millions of people in China believe their liberty has expanded dramatically during the reform era.

Previously, the dan wei could be in charge of one’s entire career including not only job assignments but also where one lived, when one could marry, whether one could get medical care, travel abroad, send one’s children to school and so forth. Ration coupons for basic staples were tied to one’s dan wei and hukou, making internal migration nearly impossible. Now there are markets for labor, housing and other things that break up that kind of concentration of power. As someone quipped, for most people, the Party has been replaced by the party. Masses of PRC citizens have much more control over the lives than they did before economic reforms began. Thus, even while I hope for more liberalization in China, I also recognize that millions of Chinese citizens are living at a relative apogee of freedom (not just compared to the nadir of the Cultural Revolution as Mann argues, but even in a broader sweep of Chinese history). I think this underscores that economic liberty is part of freedom and should be considered a human right. China has, at least on this front, made remarkable progress. Moreover, while “social stability” is often invoked to cover political suppression in China, I think American adventures in Iraq have made it clear enough that voting and free speech alone do not provide the full package of conditions desirable for human life. Security and stability are also required for civil society to flourish. China, in other words has a point at some level: stability matters.

Thus, while the CCP’s political intransigence is indeed repugnant, ignoring the expansion of freedom in China over recent decades is just as delusional as thinking that the PRC is about to flower into a liberal democracy. The question is how can foreign powers best encourage continued liberalization in China. To me it seems clear continued, sometimes critical engagement is the most promising and realistic approach.

More specifically, with respect to foreign participation in higher education in China, I have not yet seen much commentary that focuses on the political or human rights aspects of such engagement. Most of the commentary has been about whether foreign universities can expect to succeed in China, not about whether they should even be trying to do so. Of course, China does not impose gender discrimination of the type Cal Poly encountered in Saudi Arabia. But undeniably China does in some cases abuse human rights. Undeniably China limits freedom in ways most “free world” citizens find repugnant. Thus, I would expect, sooner or later, to see criticism of foreign-sponsored higher education programs in China. Should a US university offer an undergraduate degree, MBA or graduate degree in law in a country where academic freedom does not, strictly speaking, exist? (Today various US universities do offer all those degrees in China). Perhaps another line of attack could come from economic nationalists. They might query whether it is in the interest of the people of a US state to expend tax dollars or other resources training competitors overseas, particularly when China has such an enormous trade surplus with the US (and, according to some, “manipulates” its currency for trade advantages).

There may be good retorts to these arguments, but the point is that, sooner or later, the debate over the appropriateness of foreign participation in China’s higher education sector will flare up, just as it has with respect to this program in Saudi Arabia.

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Addendum: I found some good comments on the Cal Poly program here, and the LA Times covered the controversy here.

What a life he led.

. . . When I was in junior high school I pulled a stack of National Review magazines out of the discard bin at my school’s library. I had no idea what they were but took them home and read them. I became a WFB devotee, watching Firing Line on PBS on Friday nights, reading his books and columns, even affecting at times some of his odd mannerisms, accent and stylistic traits (in retrospect, ill-advised for kid going to a public junior high school in Alabama!).

My politics have swung over the years from the far right to the far left and now settled somewhere in the middle (socially liberal, economically conservative), but even if I no longer subscribe to the National Review I owe some kind of deb to WFB, Jr. His wit, generosity of spirit, love of language and tremendous élan helped lift my eyes beyond the school where I first found those magazines.

He wrote so many warm obits; I hope others now rise to the occasion.

NY Times version here, with slideshow here.

ChinesePod, which I’ve been recommending to language students for a long time, is discussed in this NY Times article about how technology is changing the study of foreign language.

The article also mentions LiveMocha, a site for language learning.

The New York Times here reports on overseas expansion by U.S. universities. Having worked in China-based programs for the University of Maryland, I continue to be interested in this phenomenon.

Operating abroad can be a very positive thing for US higher ed institutions. The desire to earn additional revenues drives a lot of this expansion, but it can be good in other ways, too.

There is a missionary aspect—the opportunity to educate students beyond a US campus, spreading certain values or knowledge. That aligns with institutional goals. More narrowly, some of the graduates will be employed by US multinationals. Others will become enthusiastic, generous alumni.

Beyond that, faculty will not only teach but also learn in these programs. Teaching a room full of non-US students and simply traveling to new locations can expand intellectual horizons, often leading scholars and researchers in new directions.

The administrators trying to run these programs are also going to learn a lot. They will to have to cope with issues like foreign exchange, overseas employment laws and cross-cultural marketing that can broaden their appreciation for the complexity of the world (and will surely frustrate many of them as they encounter things that their institutions’ US-based procedures are ill-equipped to handle).

On the other hand, there are some risks and tradeoffs. It isn’t clear how secure academic freedom will be in some of the areas where expansion is going on. A number of US business schools (and a few law schools) are already operating or considering operating degree programs in mainland China, still a Leninist state. As a practical matter, there may be little interference, but the rules simply do not formally grant to these programs a level of freedom that would be acceptable in the US. The Middle East locations featured in the Times article are not bastions of classical liberalism, either.

Beyond the political risks, institutions could harm their brands. The article notes some institutions are not sending to these foreign outposts the same faculty they use in the US. If different faculty are employed, admissions standards are relaxed (or at least, per force, the student mix is changed), and the literal context is not the same (so that students don’t experience the home campus with its English-saturated environment, library resources and so forth), the experience students get may not be as valuable, even if the institution is generating revenues and capturing other benefits.

The Claymore/AlphaShares China Small Cap Index ETF launched Wednesday. It trades under the clever symbol HAO (good). The sponsor has information about the fund here.

Richard Shaw has written a very good guide to China-themed funds available to foreign investors, published on the Seeking Alpha site. He covers the FXI, GXC and CAF.

The site also had a recent article about the premiums A-share buyers are paying relative to buyers of H-shares (for the same firms—ones that have been listed both in Hong Kong and on mainland exchange).

Barron’s reports that a US research firm has cast a skeptical eye on some corporate governance issues concerning recent Chinese listings in the US. One of the stocks mentioned is Giant Interactive, an online gaming company I blogged about at the time of its IPO last year.

Actually, what is most striking to me is that these companies chose to list in the US at all, subjecting themselves to our disclosure laws and the threat of shareholder lawsuits, rather than steering clear of US exchanges as so many foreign issuers have in this post-SOX world. Most of the largest IPOs out of China recently have been Hong Kong listings without a US tranche, unlike some of the earlier waves of PRC companies accessing foreign capital markets. As the Barron’s piece notes, the outfit offering this critique got its information from the public filings of these firms.

Shareholder governance is important, but did investors buy these stocks because they expected it would be good? Or because they thought China’s growth prospects made the risks acceptable?

Bloomberg reports here that Apple has failed to get China Mobile—mainland China’s largest mobile phone network service provider, by far—to sign up for a deal like the one Apple struck with AT&T—a deal whereby 1) Apple gives a carrier exclusive rights to sell the iPhone for a period of time in a given country 2) in exchange for a cut of the revenues the carrier earns from customers using those iPhones.

I own a few shares of both Apple and China Mobile, so it would be good for my personal finances if Steve Jobs were to announce in his Macworld keynote (schedule for this Tuesday) that CHL and AAPL have reached a deal. But that ain’t happening.

Some reactions:
Read more »

Giant Interactive, a Chinese online gaming company that had its IPO earlier this month, will report its first quarterly results post-IPO in a conference call tomorrow (also available here).

A Reuters preview of the numbers is here. Some highlights:

Net revenue for the third quarter of 2007 was RMB405.2 million (US$54.1 million), an increase of 164.2% over the third quarter of 2006 and 9.5% over the second quarter of 2007.

Gross profit for the third quarter of 2007 was RMB359.8million (US$48.0million), an increase of 152.8% over the third quarter of 2006 and 8.5% over the second quarter of 2007. Gross profit margin for the third quarter of 2007 was 88.8%.

Astounding year-to-year growth (modest growth month-to-month). Also, great profit margins. So far GA has created rather than licensed games (some firms pay the World of Warcraft creators or Korean game companies heavy licensing fees, then localize the game for China), so GA has enjoyed tremendous margins.

GA listed in a tough climate. US markets have been in general decline. These results are coming out on a day when the Dow is down more than 200 points.

Plus, besides this general market risk, people fear the Chinese bubble is near a popping point, and that kind of analysis may not discriminate between A-shares, H-shares, PetroChina and Giant Interactive. I keep hearing Jim Cramer tell people on his CNBC show to stay away from Chinese stocks except Bidu and “China Tel.” It’s hard to imagine he really means to recommend the land-line carrier, not China Mobile (and even if he does mean China Tel, he’s clearly not terribly well informed about distinctions among Chinese issuers and so is saying avoid the “sector” rather than specific companies).

Third, I think many investors in the US just don’t “get” online gaming. To the extent most people my age and older think about gaming at all, we think of our kids playing Microsoft’s XBox, Sony’s PlayStation 3 or Nintendo’s Wii (or the PSP and DS handsets). But the console market is less important than the online market in China. Chinese gamers can go to internet cafes (which are very nice now) and play for a few kuai, whereas buying a console is big capital outlay even if they use pirated games, which they will, which means those console businesses are less promising in China, too.

GA’s CEO Shi Yuzhu is the guy behind Nao Bai Jin (脑白金), a medicinal/nutritional supplement advertised so ubiquitously in China that anybody who’s lived in China in recent years knows the jingle. Shi wears track suits and may not look like an insurance company exec, but I think he’s a major plus factor for GA.

I’m still bullish (and long) GA. I previously wrote about the company here.

Came across this jewel on an investment site:

I’m also partial to the iShares Taiwan Index Fund (EWT). After all, the Republic of China known as Taiwan has the stability of a long-standing, nimble Democracy for 50+ years. And still, it scores emerging market-like growth, particularly in the tech space.

Um, impressive economic growth yes, 50+ years of democracy no. Taiwan was a Leninist state until recently. They were “our” Leninists unlike the mainland communists, but they were Leninists nonetheless. The government controlled the press, suppressed dissent and didn’t have free elections. Martial law was in force from 1948-1987. The first opposition candidate elected president came into office in 2000.

Taiwan does now have a vibrant democracy (with occasional slugfests in the legislative yuan), and they have some great companies that should benefit from continued growth in China and the tech sector globally. But the prospects of those firms have nothing to do with 50+ years of democracy in Taiwan.

On a different site, I found someone bullish (like me) on Giant Interactive (GA) because, inter alia:

Giant Interactive raked in the largest amount of money of any IPO this year (over $86 million)

That’s the kind of typo I’m prone to. Actually, they raised about USD 800 million in their IPO. The official report is here. The typo aside, I agree with much of the commentator’s analysis, though after-hours trading in GA (post earnings release) is making both of us look bad right now.

Here Business Week rounds up some of the China-listed companies that have reached dizzying valuations. Here Barron’s echoes the theme and provides some analysis of the causes of these sky-high valuations. They mention the inability of Chinese citizens to invest abroad and the small percentage of shares available for public trading in many PRC listcos.

I would add to that list 1) China’s excessive savings 2) China’s lack of alternative ways to invest (and thereby allocate risks and capital more diversely and efficiently), 3) investors’ belief in some implicit government backing of these firms or the markets generally, 4) not clearly irrational exuberance that many of these firms have vast potential and will continue to grow rapidly and 5) yes, a herd effect as people see the returns and want some of that for themselves—a classic bubble.

I was bearish on China’s stock markets long before the current bull market began (suggesting I’d better stick with teaching rather than day trading), but in reacting to this “China stocks are a bubble” meme, it’s important to distinguish among markets. Chinese stocks are traded both inside and outside of mainland China. Domestically-listed Chinese companies (meaning those listed in Shenzhen and Shanghai) do seem excessively valued. But foreign investors, as a rule, cannot directly buy shares in mainland-listed companies anyway (except through the narrow qualified foreign institutional investor or QFII scheme and some of its derivatives). However, many Chinese companies are listed outside the mainland, often in Hong Kong or the U.S. (and sometimes both). Prices of shares in many of those companies have increased dramatically, too, but still they are often below the utterly frightening levels of the mainland-listed firms. Seeing that a mainland-listed Chinese stock is overvalued doesn’t mean that a US-listed Chinese stock is, too. The Great Currency Wall of China keeps these markets separate. For example, a bubble in the share prices for Chinese companies listed outside of China can’t arise because investors have limited investment choices (yes, limited China concept choices, but their investment choices are not limited to China concepts—a US investor can buy Google or Bidu, whereas a Shanghai investor cannot buy Shenhua or Peabody with equal ease).

Second, not all mainland Chinese companies listed abroad are priced with obvious irrational exuberance. The Barron’s piece compares Exxon to PetroChina and the coal companies Peabody and Shenhua. It suggests in both cases that the Chinese firm is comparatively overpriced. The point may be compelling for some Chinese companies listed abroad but not true for others. For instance, China Mobile—with its 300+ million customers, prospects for many more, and forthcoming new stream (tsunami?) of revenue once 3G services finally roll out—may be quite a different story. Even at its current price, I think China Mobile compares favorably to Verizon and AT&T whose prospects seem much less enchanting.

In other words, when the bubble pops on mainland China’s domestic exchanges, the deflation that will likely follow in the prices of US-listed Chinese stocks, particularly those with solid value propositions like China Mobile and CTrip, may constitute a buying opportunity (full disclosure, I own a little CTrip and China Mobile, but also some AT&T . . . and I sold my Bidu for a small profit but more than a hundred dollars per share below its current price, so this analysis may be worth the nothing you’re paying for it).

This promotional piece rounds up Chinese nicknames for some NBA players. The person writing the chart clearly doesn’t know Chinese—some of the explanations aren’t spot on (failing to note how some of the nicknames have both meaning and sound dimensions) and there are multiple errors in the romanization, but it’s a neat read.

Yesterday the Chinese online gaming company Giant Interactive listed on the New York Stock Exchange. It will trade under the ticker symbol GA.

GA’s online game Zheng Tu (translated as ZT Online) is extremely popular in China. Sometimes more than a million people are simultaneously online playing it.

GA competes with Shanda, Netcom and Perfect World, all of which are also listed in the US. Perfect World just listed in July, and already its shares have appreciated 65%.

It’s interesting that GA listed on the NYSE rather than Nasdaq which is more typical for high-tech companies. Also, it’s interesting that they listed in America at all. Many PRC IPOs, including the recent jumbo ones like Bank of China, have listed only in Hong Kong, avoiding the US exchanges entirely. Conventional wisdom has been that Sarbanes Oxley has deterred many foreign issuers from listing in the U.S. In contrast, GA’s colorful founder Shi Yuzhu said he wants to show that his company (and he still owns most of it) can comply with the world’s most rigorous listing standards.

There are scores of Chinese companies listed on the NYSE and Nasdaq. Most of these stocks have been top performers this year. In fact the exchange traded Chinese index fund that trades under the ticker symbol FXI has risen more than 120% in the last 12 months. Here’s what the 6-month chart alone looks like:

GA didn’t have a dramatic first day pop. It debuted on a day when the market was generally down, and I imagine lots of investors don’t yet understand the 1) online game businesses generally and 2) status of GA’s Zheng Tu in particular. To the extent some investors think of gaming at all, they may just understand the console business—that an XBox, PlayStation 3 or Nintendo Wii generates sales for the console maker, game writer and the retailer who sells both the game machine and the software that makes it worthwhile.

For most of us older folks online gaming is just not within our sphere of experience. I grew up in the Atari age, with the graphically-starved Pong for goodness sake, so I can see the problem of recognizing the potential here, particularly when investors don’t have children who play these games and the model of online gaming itself is less familiar (outside of the World of Warcraft subculture).

However, in China online gaming is compelling for several reasons. For one, it takes less capital to go play a game in an internet cafe for a few hours than to buy an expensive console. That’s a big advantage in a developing economy. China’s internet cafes are now often quite posh and inviting. They are filled with fast computers, big widescreen LCD monitors and customers wearing headphones so they don’t disturb other patrons as they engage in combat. Plus there are just massive numbers of existing and potential customers in China.

This opportunity to sell lots of game access is happening 1) in China 2) in Chinese and 3) online, all of which helps explain why some investors just don’t get it yet.

By contrast, lots of US investors do understand that 1) China is big, 2) growing fast, 3) search is important, so they have bid up Bidu’s shares dramatically in recent months.

I am a Bidu skeptic for various reasons. Leninist political controls and the “national champion” state-planning model don’t strike me as particularly compatible with the Internet ethos over the long term. I’m not aware of anything innovative Bidu has done (quite unlike Google), and finally I don’t understand why Bidu is spending any money in Japan when their own potential market is so vast. But even if I’m eveutally right, I may be wrong for a long time—many people may continue to make lots of money investing Bidu shares for the foreseeable future. Plus, I may just be flat wrong; Bidu may eventually be the Google of what will one day be the world’s largest and most lucrative internet market, and they may not need to innovate but rather can simply prosper using a copy-to-China model under the umbrella of some kind of government beneficence.

In any event, I am bullish on GA. Given 1) their success so far in China and 2) that they now have about 800 million dollars to spend on further development and acquisitions, I expect GA’s stock to appreciate over time.

I picked up a few shares yesterday; we’ll see if the hypothesis proves right.

Giant’s name in Chinese is 巨人网罗, romanized as Juren wangluo.

Apple has reported great results for their quarter ending this September (Q4 in their FY).

Even in a post-Reg FD world, some journalists get the quarterly results before the call. Today’s call began after 2 pm PST (after 5 pm EST, more than an hour after the Nasdaq’s normal trading day closed), but the Wall Street Journal story on Apple’s quarter was posted about 15 minutes before the call began.

I own a few shares of Apple, so I’m delighted with these results.

I expect Apple’s strong results to continue. Barring some general economic meltdown, there should be more upside because, inter alia, 1) They’ll have strong holiday sales, especially of the new lineup of iPods. 2) We’ll see continued ramp up in iPhone sales as they begin selling iPhones in Germany and the UK next month, with roll out in Asia and other European countries still ahead. 3) A new version of the Mac OS will be released this Friday, which will drive some incremental revenue, plus 4) Macs are gaining share (reversing a long-time trend of dwindling market share for Macs), partly as a spillover or halo effect from the popularity of iPods and iPhones.

Besides selling more Macs, iPods and iPhones as those devices currently exist (along with lots of music downloads), I imagine we’ll eventually see a larger iPhone-like mobile device, something like the Nokia N800 or what Microsoft may have originally imagined Origami (UMPCs) as being. If so, I know I’ll want one of those.

On the other hand, certainly there is potential downside—there could be an unforeseen product recall, a new competitive product, loss of market share in online music sales (to the new Amazon initiative, or more loss of contracts with the music companies whose content populates the iTunes Music Store), leftover problems from the options backdating mess or even a virulent Apple-specific virus. Most of the upside may already be priced in, too.

But it seems less probable to me that these risks will materialize than the upside factors will. I’m staying long.

The market seems to agree; the shares are trading above $187 from the close of $174. Some of that noise may die down by tomorrow, but the $200 targets some analysts have put on the stock don’t seem at all far fetched.

Today in my international business class I played an excerpt from the Yum Brands (YUM) conference call for the third quarter, held just last week. (Yum’s corporate website; Google Finance info; Yahoo Finance info).

The first part of the call is dominated by discussion of China, the brightest spot in Yum’s operations. Yum’s CEO said he imagines having 20,000 restaurants in China one day, which he asserted seems entirely reasonable given that McDonald’s Corp. has 14,000 outlets serving a US population of only 300 million (compared with China’s 1.3 billion).

Yum grew by more than 20% in China for the quarter, compared to essentially flat growth in the U.S.

After listening to this CEO in Louisville, Kentucky brag about how his company was buoyed by its China results, the class compared the US and Chinese websites for KFC. We noted how the Chinese website has a much more youthful and sports-focused theme.

The class didn’t have any students who read Chinese, so I gave them a little guided tour of the website, pointing out how the name of the featured 3-on-3 basketball tournament creates a nice English-Chinese rhyme (between 3-on-3 and Ken-de-ji or Kentucky in Mandarin). I also pointed out how the website featured a booklet celebrating KFC’s 20 years in China.

The US website, though carrying a nice banner about a corporate effort to fight global hunger, looked much flatter than the Chinese site and emphasized, if anything, cheap prices more than youthful vigor.

On the call the CEO noted that besides KFC and Pizza Hut, Yum is developing some chains in China that don’t yet exist in the US, including a sit-down restaurant called Tea Time which they say might be able to challenge Starbucks in China. They are also testing a different quick-service chain in Shanghai now.

I think hearing about how Yum’s China operations are the company’s best current and future growth story and noting some contrasts in the marketing messages between the two websites helped drive home some lessons about the challenges (and opportunities!) of striking the right balance between global standardization and localization. The website contrasts also helped underscore the difference between corporate strategies of competing on price vs. other kinds of distinctiveness.

Bloomberg’s coverage of Yum’s earnings report is available here.

It’s always bothered me that I spent three years and more than $100,000 on a legal education (which included a required full academic year of studying contracts) yet saw my first contract only after I graduated, passed the bar and was sent to a room filled with boxes of contracts and told to “look for anything unusual.”

Reeling from that experience, I’ve always made an effort to distribute at least one sample contract to my business law students and teach them some basic things about typical contract structure.

Of course I don’t need to prepare my students—mostly undergraduate business majors—to do legal due diligence, but I think showing them at least a few sections of a sample contract accomplishes several useful things. It’s extremely helpful for them to learn how lawyers can add value to corporate transactions by providing terms that help assure risks are thoughtfully allocated and information asymmetries between buyers and sellers are reduced. It’s also good for them to understand how reps. and warranties, covenants and indemnification provisions function in a typical M&A deal. At the very least, I want them to know what is meant by “due diligence.”

In previous years I’ve used the table of contents and a sample provision or two from the ABA’s Model Stock Purchase Agreement, but today I tried something different.

Earlier this semester I had talked with the students about the Viacom v. YouTube/Google litigation, using this current (and thus far unresolved) case as a way to illustrate some basic principles of court procedures (in particular, the necessity of a court having both personal and subject matter jurisdiction and how a complaint plus the defendant’s answer constitute the pleadings that kick off litigation). More recently the case helped me underscore the significance of some IP rules.

Because virtually all the students use Google every day and most of them have watched YouTube videos on occasion, I think it’s been a vivid series of examples. Today I used another Google example to begin our discussion of contract law.

I gave each student a copy of the contract for Google’s acquisition of YouTube.

I showed them how I found it through the SEC’s EDGAR service

To set the stage, I explained what an information asymmetry is (for example, I know what’s on the test but they don’t). I explained how problems of information asymmetry are inherent in many types of business transactions including M&A deals and the public trading of securities (because insiders know more about a company than outsiders and that information is important for valuation).

I then talked about how (1) mandatory disclosure for public companies, (2) due diligence investigations by business people (and their accountants and lawyers) and (3) the terms of a stock purchase agreement are all ways to overcome these information asymmetries.

I then began to walk them through the Google-YouTube contract, explaining how the reps. and warranties section creates disclosure duties (”we’ve paid all our taxes and have no litigation except as disclosed on the attached schedule”).

Next time we’ll look at the indemnification provisions that add force to the reps. and warranties.

Recently I stumbled across the Law Talk Podcast. The most recent episode has a fantastic discussion between Nathan Oman, assistant professor at William & Mary’s law school, and Doug Berman, professor at the law school of Ohio State. They talk about how technology is influencing legal scholarship. They discuss how blogs, podcasts and services like SSRN interact with the traditional dead-tree (though now usually electronically accessed) modes of legal scholarship.

Berman has a very well-known blog on federal sentencing law. It has been cited by the US Supreme Court and been extremely useful to practitioners and members of the judiciary during recent periods of sentencing law upheaval. Drawing upon that experience, Berman also writes the blog Law School Innovation.

It was nice to hear two people living “inside” the current legal scholarship system talking about how its conventions are at least at the margins being affected by technological change.

I find the conventions of traditional legal scholarship—that one will write a 100+ page article, festooned with perhaps a thousand footnotes, which will then wait months for publication after being turned over to student editors, and will finally be read in its entirety by virtually no one—deadening. It’s just not the kind of stuff I am eager to read or write. (Alas, this hasn’t been a great stimulus to my academic career! Recently my enthusiasm even for blogging has lagged, too. That hasn’t been ideal, either. But I’m now employed at a teaching institution, so the prevailing modes of legal scholarship are, at least for now, largely immaterial to my own career).

The Law Talk podcast is available through Apple’s iTunes Music Store and here.

Interesting article from Christianity Today on the phenomenon of lapsed blogs.

Just installed the newest release of WordPress, version 2.3. Did it through Dreamhost’s “One-Click Installs” feature. It was painless, an all appears to be in order.

I will, though, have to rename the folder that includes the “defalut” theme for the new installation, then create a folder named “default” into which I’ll install a copy of the Skimmed Milk minimalist them that I like, to work around the problem mentioned in my last post about WP mysteriously reverting to the default theme on occasion.

I’ve written almost nothing on this blog for a long time, but I haven’t intended to take it down. The reason it has sometimes disappeared lately relates to a technical issue with WordPress, the blogging software I use. Some time ago I noticed that WordPress would mysteriously revert the to the default theme, undoing my selection for “presentation” to a minimalist theme called White as Milk. In trying to fix this, I 1) updated the theme to a newer version 2) tried removing the default theme and 3) when none of that worked, installed a variation on the theme called Skimmed Milk. Alas, that also didn’t work. In fact, because I’d removed the default theme folder, the blog would just disappear whenever WordPress would try to revert to to the default theme.

A new version of WordPress will be a released in a few days. That may or may not resolve the problem.

Tonight, with the blog again MIA, I searched for a solution and found that, though the issued isn’t flagged as resolved, there is a clever workaround—just install the theme you want in a folder named “default.” Duh!

Maybe now this blog, however neglected, won’t disappear from the face of the earth.

Jiang Yanyong—the heroic Chinese doctor who reported China’s SARS cover-up in 2003 (probably saving untold lives) and later called for reexamination of the PRC “verdict” on the protests that lead to violent suppression on J