Walter Hutchens’ Blog

The U.S. is making efforts to keep large numbers of Chinese and other foreign students coming to the U.S. for graduate education, according to a report from Anthony Kune in Beijing that aired today on the radio show Morning Edition, a popular program in the U.S. produced by National Public Radio (NPR).

NPR’s website captions it thusly:

U.S. Eases Visa Process to Encourage Chinese Students

Morning Edition, November 23, 2006 · For decades, foreign countries have sent their brightest young students to the U.S. for an education. But visa restrictions following the Sept. 11 attacks caused those numbers to decline, beginning in 2003. The U.S. government and American universities are working to bring foreign students back, and the efforts appear to be working.

The segment is mainly about Chinese and other foreign students coming to the U.S., but Kune also mentions that “Maryland University,” Fordham University and other institutions have opened more than 150 educational programs in China.

Peggy Bloomenthal, executive vice president of the non-profit Institute for International Education, opines in the segment that establishing programs in China makes sense because there are vast numbers of Chinese students who won’t come to the U.S. but who “are interested in U.S-style education.”

That’s true, but Kune segues into Bloomenthal’s comments by noting that the cost of going to the US for education is prohibitive for most Chinese and “in response” US institutions are establishing programs in China. It’s true that the cost of going to the U.S. is an obstacle for many Chinese students, but costs actually remain a huge problem when US institutions operate in China.

For instance, our executive MBA costs about US$ 40,000 in China. That’s less than half what we charge in the U.S., and certainly there are many Chinese who can now afford it. However, it remains an eye-popping sum in China. In general, it’s very tough to collect tuition dollars in a low-wage country like China to support educational programs whose costs are substantially affected by US faculty salaries. It is, as I have opined on my website devoted to this topic, precisely the reverse of the typical Asian export model. China has been very successful using low cost labor to produce products for sale in high-wage countries, but how viable will it be to reverse this model and “sell” in China educational products produced with high-cost foreign labor?

There are a couple of obvious alternatives to flying in expensive faculty and trying to bear those costs through RMB tuition payments. One is to seek third-party subsidies. Foundations or governments may wish to support the expansion of foreign educational programs in China. There was certainly a rich tradition of this prior to the establishment of the People’s Republic.

Another alternative is to hire highly-qualified local faculty. There are many hai gui or “returnees,” scholars who have obtained advanced degrees abroad then returned to China. Hiring them may be a more viable approach in terms of costs, and such faculty will be well-positioned to make course content more relevant to Chinese students. However, this approach also carries some risks. Already students getting foreign degrees through programs in China miss out on the full experience of living abroad for that program. They get less chance for immersion in an English-speaking environment and foreign cultural world. If the environment outside and inside of the classroom is “localized,” one wonders how much value the “foreign” credential confers. When foreign programs localize their faculties, there may be some risk that the educational product delivered in China will not be “US-style education” (or European-style, or whatever).

I realize that many Chinese students coming to the U.S. fail to take maximum advantage of living abroad (clinging, outside of class, to Chinese-speaking circles), and I further realize that many professors teaching in US-based programs are in fact Chinese. Thus in some cases the distinction between a U.S. degree obtained in the U.S. and a U.S. degree obtained in China may be slight. But in general, I think one challenge for foreign educational programs in China will be to balance foreign market costs with local Chinese economic realities while maintaining programs that, beyond using a foreign institution’s name, provide an educational experience that is meaningfully distinctive from local, probably less expensive alternatives.

My site Chinese Education Law now has discussion fora (I set them up a couple of days ago), so if anyone is interested in these matters, feel free to post comments there. The NPR audio is available here.

More and more non-Chinese educational institutions are establishing programs in China, or at least exploring the possibility of doing so.

I’ve been teaching in and helping with the administration of such a program for the last couple of years. It’s been great fun but also quite challenging, in both predictable and unexpected ways.

I just re-vamped the web site where I keep links to the principal laws and regulations governing this sector.

While I don’t think many people (even many of those involved in these deals!) delve into the details of the regulations, lots of people are getting interested in the growing amount of foreign participation in China’s educational sector. The Beijing bureau chief of Business Week recently contacted me for a piece he’s writing about Chinese-foreign MBA programs. There are already a lot of joint venture MBA programs, and that’s just one strain of the activity.

This story from the Chronicle of Higher Education (subscription reqd.) suggests the broad scope of what’s unfolding. Paul Mooney, now with the South China Morning Post, wrote it back in February.

A few weeks ago I got an invitation to be on a panel that will discuss what we might call educational entrepreneurialism in China. One of the panelists is from an institution in the heartland of the U.S. that is running fairly large scale distance education programs in China. Another panelists is a weed scientist (!) from Michigan State—there’s a U.S. program in weed science in China.

I’m thinking about adding a wiki or some other tool to my site on PRC education law, something that could work as a public scratch pad as I write an article about this area. I’d appreciate hearing from anyone with experience trying something similar.

Bloomberg froths that Goldman Sachs’ ICBC stake is the best investment in the firm’s history, turning a $4 billion profit in six months.

Hyperbole, since 1) the shares are subject to a 3-year lockup 2) transfer even after the lockup expires will require PRC government approval and 3) the stake probably won’t be sold even once the lockup expires. But certainly it’s an attention-getting way to say that Goldman paid much less for its ICBC stake than the current market price of an equivalent number of publicly traded shares.

Other foreign strategic investors have also done well with their pre-IPO investments in PRC banks, according to the story (which ran in the IHT):

Bank of America earned more than $1 billion from an investment in China Construction Bank and Royal Bank of Scotland Group showed a $1 billion profit from Bank of China during the past one-and-a- half years.

Again, there is a material difference between “earned” in the sense of realized a bankable profit and “showed a [notional] profit.” That difference is being collapsed here.

Another way to spin it would be to say that thanks, in part, to the assurance provided by having foreign strategic investors involved, China’s communist party recently managed to raise nearly $40 billion dollars on international capital markets selling minority positions in government-controlled banks that two years ago analysts judged insolvent by international metrics.

I do hope China has set its financial system on the right path and that investors in it consequently benefit, even get the 暴利 (baoli, or outrageous profits) Bloomberg prematurely celebrates.

Certainly an enormous amount of effort has been put into reforming China’s financial system. I’ve previously expressed my sentiments about whether the listed banks are good investments over the mid to longer term, but, truthfully, I hope I’m wrong to be skeptical. Even though I’d be inclined to short sell shares in these banks, I’m “all in” in terms of how my life is invested in China’s rise, so yes I’d like to be proven too glum in my outlook.

The Bloomberg article careens over a few related but distinguishable topics concerning foreign financial firms and China:

1. deals where foreign firms invested in Chinese banks pre-IPO
2. underwriting work to help mainland China clients list overseas and
3. efforts to operate within the PRC mainland, as joint venture “securities companies” (providing either investment banking or brokerage services).

An additional important area, not mentioned in the article, is the direct participation by foreign banks in China’s domestic commercial banking sector, something to be broadly allowed after the end of this year, in accordance with the terms of China’s WTO accession.

One common theme is that in China all these areas substantially depend on government approvals and relations. This “special characteristic” of the PRC economy colors how all these things get done.

Blogged with Flock

The HK Standard surveys what’s ahead. China Everybright and CITIC Bank are set to follow the pattern of bailiout plus IPO.

Blogged with Flock

Mainland China’s stock markets have probably offered the highest returns of any stock market in the world this year. One would expect that to make the PRC’s markets a magnet for global capital. However the PRC’s stock markets are sealed off behind the Great Currency Wall of China. The PRC’s currency controls mean there are restrictions on capital flows into and out of China.

Currency controls prevent Warren Buffet and other foreign investors from simply ordering their US brokers (or a broker in Beijing) to buy mainland shares for them. Foreign investors are not permitted to freely buy shares in any of the 1,400+ companies that have issued A-shares in Shanghai or Shenzhen (A-shares are the RMB-denominated shares traded in Shanghai and Shenzhen). Likewise, PRC investors cannot freely buy shares in, say, Microsoft (or even in Chinese firms that have listed abroad, such as the Bank of China!).

There are however a few holes that have been intentionally drilled in the PRC’s Great Currency Wall. These include the Qualified Foreign Institutional Investor (QFII) scheme that lets some foreign capital into China’s stock markets and the Qualified Domestic Institutional Investor (QDII) system that lets some PRC capital flow into investments abroad.

As the names suggest, the QFII and QDII systems are for institutional investors, not individuals. You have to be a large financial entity to get QFII status; the system excludes individual participation. Or did until a few days ago.

Now the Morgan Stanley China A Share Fund is listed on the New York Stock Exchange, and its shares can be bought freely by individual foreign investors (or institutions without QFII status).

This is the first publicly traded fund in the US focused on China’s A-share markets. It provides an indirect, mediated way for people to participate in China’s booming domestic share markets.

The fund works because Morgan Stanley holds QFII status in China. They buy A-shares as a QFII, and investors can trade shares in the fund.

SAFE gave Morgan Stanley a USD 200 million quota as a QFII. This closed-end fund raised more than that quota; the overage, after fees, will be invested in stocks listed in Hong Kong or on the mainland’s B-share markets (B-shares are listed on mainland exchanges but denominated in foreign currency and freely open to foreign investors—the B share market was the first hole in the Currency Wall, but only 120+ firms have issued B-shares compared to the 1,400+ that have issued A-shares).

I’m sure Morgan Stanley could have raised a billion dollars if they’d had that large a quota from SAFE.

Xinhua reports on the fund’s debut here in Chinese and here in English. Their article quotes Morgan Stanley’s
CEO saying the firm hopes to secure a license to fully operate as a securities company within China.

The fund’s prospectus is here. The risk factors section is here. An explanation of how this fund differs from a mutual fund is here. The Fund’s NYSE symbol is CAF.

Blogged with Flock

China Construction Bank, the Bank of China and now ICBC have successfully listed in Hong Kong (and in ICBC’s case, also in Shanghai).

The shares of each bank are trading above the issuance price. For those that got in early, grabbing shares in mainland China’s listed banks has so far been a great move.

Is this a sign that China has successfully restructured its financial sector, deftly steering around what many regarded as a critical weak spot in its transformation? Or is this irrational exuberance? Will these banks perform well over time?

On the one hand, China has done a lot to restructure these banks. They’ve made them into companies and given them boards with outside directors, including representatives of foreign strategic investors (leading global financial institutions); pumped billions of new capital into them; taken billions of bad loans off their books; installed new computer control systems; and now subjected them to the discipline of the listing process and consequently future monitoring by overseas analysts, regulators and investors. More generally, these banks are huge players in one of the world’s biggest, most stable and fastest growing economies. There’s a lot to like here.

On the other hand, there are reasons to be cautious about the longer term. There are at least two clusters of underlying concerns:

1) Will the overhaul of the banks “take?” Will the new controls work? In essence, will the trappings of privatization be just that?

2) Will the formal separation of the government from these enterprises sufficiently matter? The banks now have independent legal personality—zheng qi fen kai, a well-worn slogan—but the PRC government remains the overlord of these banks. Will the government act like a controlling shareholder seeking to maximize the value of its shares (with interests thereby aligned with other shareholders) or will it act like a government with broader policy, political or personal agendas (which might not be aligned with those of shareholders)? In particular, will the Party that controls the government that controls the banks do things that are good for public shareholders? The Party may be communist in name only, but it is Leninist (authoritarian) to its core—it aims for stability and development (good for business) but it also intends to maintain its monopoly on political power (often in ways people from liberal democracies find repulsive) and thus is subject to the opacity, distortions and factionalism typical of Leninist parties (these are issues in all political systems, but China’s may have less capacity to deal with them because it lacks a truly free press, elections, independent courts and strong civil society). China wouldn’t be better off with a democracy like the one my country has “given” Iraq, but even if you don’t favor a destabilizing regime change in China (and I certainly don’t), it is a fact that China’s current political arrangements have costs as well as benefits. Specifically, for instance, Huijin, the entity that owns most of the shares in these listed banks on behalf of the PRC government, holds shares in all these listed banks. Thus it might not seek to unleash the competitive forces that discipline foreign banks. Would you get Citibank vs Chase or Morgan Stanley vs Goldman Sachs if a single entity owned all of them? It seems that the creative destruction of markets is in dynamic tension with the imperatives for political monopoly and stability that drive the CCP. Too much instability in China will be bad for investors; but too much control could be, too.

These concerns are highlighted by comments and analysis in this good FT article reprinted in The Australian. It notes:

It was only two years ago that bad loans at ICBC represented 21 percent of the portfolio. Only gigantic re-capitalizations and loan write-offs by the state have enabled the large banks to become solvent.

. . . Investors are betting that banks’ internal risk management culture and systems have, overnight, become sophisticated enough to stop poor lending or downright fraud.

In the words of Hong Kong governance activist David Webb, China has taken out the bad loans but has it taken out the bad lenders?

. . .

While the banks have indeed been listed, the state retains about 80 per cent of the stock in each company. Will the state be a passive or active investor?

The Government wants banks to cool lending to prevent over-investment. But what if the banks have a commercial desire to create shareholder value by expanding lending?

The article also notes that criminal malfeasance, i.e., looting, has been a problem in China’s banks.

All this will lead some to think that the people who have made paper windfalls by buying into PRC banks early can best realize those profits by also selling early. At the very least, it will be prudent to hedge and diversify (as the early institutional investors no doubt have).

Incidentally, I don’t read The Australian every day. I found this piece through Google Alerts, a free service that culls stories based on search terms and emails them to me. I often find—and have noticed other bloggers sometimes find—interesting items this way, frequently from sources like English papers in India that I’d otherwise overlook. Google’s net isn’t cast wide enough to be one’s only clipping service (they don’t harvest stuff from some key sources), but it’s a helpful tool to have in the mix.

Blogged with Flock

One thing that makes living in China comfortable for me is that I can stream radio over the internet. I listen to NPR shows all the time (and local shows from DC’s WAMU). My Sunday ritual is to listen to C-SPAN Radio. They replay the US political talk shows (stripped of commercials!), including:

• NBC’s Meet the Press
• ABC’s This Week
• Fox News Sunday
• CNN’s Late Edition
• CBS’s Face The Nation

Between this stuff and the wealth of podcasts now available, I have a rich audio diet.

Listening is such a good way to feed one’s head. I love to read, but I can’t do that well while multi-tasking, whereas audio plays in the background as I get other stuff done. Viva Internet audio!

The other day I mentioned that I think the threat of private securities litigation is vital for inducing compliance with the disclosure rules that apply to listed companies.

When people are sitting around a conference table deciding “do we disclose this or not?” there are many reasons not to disclose a piece of bad news.

Bad news can make shares harder to sell in an IPO or depress share prices (a problem that continues after the IPO, of course ). Executives own shares and options; they want a high share price. Bankers want to move product and earn fees; they don’t need bad news mucking up their pitches to institutional investors.

The lawyers sitting in the room will advise that disclosure offers insurance—that full disclosure deters SEC actions, criminal prosecution and shareholder litigation (or at least diminishes the chances of losing such litigation).

The odds of administrative or criminal enforcement may seem small and the upside of non-disclosure big, so often it is the fear of shareholder litigation that may tip the balance in favor of disclosure.

When share prices fall, it is shareholders that lose money, but if you own only a few shares in a company, it isn’t economically rational to pay a lawyer to sue to try to recover your losses. Enter the plaintiff’s bar, a group of aggressive, entrepreneurial lawyers who love to file class actions when a stock’s price goes down. They take cases on a contingency basis and can agglomerate lots of small claims (along with big ones) into massive class actions. Confronted with the prospect of staggering judgments (or, at best, long and expensive litigation), when sued companies often settle, admitting no wrong doing but making “nuisance” suits go away. The shareholders may get some money back, and the lawyers get paid. A lot.

Congress has sometimes stepped in to make it harder for lawyers to sue listed companies (particularly in the 1995 Private Securities Litigation Reform Act), but private shareholder litigation remains a big business in America.

If there is a face that personifies the threat of shareholder litigation, it is the face William Lerach, a fiery lawyer with Don King like hair. He has gotten very rich bringing private shareholder suits.

But now his former firm, Milberg Weiss, is reportedly imploding. And federal prosecutors have him in their sights.
This Fortune story details the saga.

Blogged with Flock

I love MindManager. I use it to plan and brainstorm, organize lectures (and sometimes as a PowerPoint replacement, to help deliver them) and keep up with notes on complex topics.

I have even created a few web pages using MindManager (eg, here and here).

One reason I was comfortable buying a Mac recently after years of using PCs is that I knew a Mac version of MindManager exists. I bought a copy as soon as I got my Mac, and until tonight it worked beautifully—all the maps I created on a PC opened perfectly on my Mac, and using MindManager on a Mac feels if anything even more intuitive than using it on a PC.

Tonight however I discovered an unfortunate difference between the Mac and PC versions of MindManager. I wanted to tweak one of the web pages I created with the software but discovered, alas, the “Export as Web Page” feature doesn’t exist in the Mac version! Arrrghhhh!

I confirmed with MindManager that I’m not just overlooking the command.

Hope they rectify this in a new version. Soon!

Blogged with Flock