Welcome to the LEHMAN, LEE & XU Law Firm’s “China Capital Markets Lawyers Alert” news letter, June 4, 2013 edition. 

In this edition of our news letter we first bring you up to date on how Chinese investors may be taking a closer look at taking the plunge into foreign stock market investments, and how the world’s stock markets view that possibility; especially on Wall Street. 

After we examine Chinese investors and Wall Street, we shift our focus to look at where and in what other ways Chinese investors are seeking to put their excess capital to work for them.  More precisely, Chinese investors, not usually being known as people who will by a “pig in a poke”, have just made a major investment in pork.  What this might mean to the palates of those who love Spam® is as yet unknown.  What it will mean to pork consumers in the U.S., China and elsewhere is anyone’s guess at this point in time.  

The above topics are both discussed below.  Please stay tuned as always for future editions. 

Best Regards,
Lex Smith
Foreign Legal Consultant

Lehman, Lee & Xu - China Capital Markets in the news

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In the News

Will the China Investor Snap Up US Stocks? Maybe Not

Signals Beijing is preparing to unleash the buying power of Chinese individual investors on overseas markets may have some stock brokers salivating at the prospect the new money can add another leg to Wall Street's record-breaking rally.

But reality may be different. Chinese investors so far have shown little enthusiasm for owning foreign stocks under limited investment schemes available in China and are more likely to channel their money into real estate.

The central bank said in January that planning for the trial of a domestic individual investor program would be a top priority this year and other statements, including from senior officials this month, supported allowing more freedom for money to flow out of the country.

That has raised expectations that a wave of fresh funds may be about to head into global markets.

"This may unleash a significant and growing amount of investment capital held by Chinese individuals into global markets including global stock markets," George Askew, U.S.-based equities analyst with Stifel Nicolaus & Co. wrote in a research note distributed to clients.

Chinese savers had more than 44 trillion yuan ($7 trillion) in personal deposits in Chinese banks in April, central bank figures show. If they invest 10 percent of their savings in foreign stocks - a conservative measure of portfolio diversification - they would spend some $724 billion in offshore bourses.

Although overseas stock markets - in particular those in the United States - have strongly outperformed Chinese indexes, mainland investors have been reluctant to own shares in foreign companies and analysts say regulatory tweaks alone are unlikely to change this attitude.

Scarred for Life

China's Qualified Domestic Institutional Investors (QDII) program, which offers mutual funds in overseas assets for sale to Chinese retail investors, has largely flopped.
Despite Chinese passion for foreign real estate, as rising prices from Vancouver to Singapore and London illustrate, regulators cannot seem to give QDII quotas away.

The regulator, the State Administration of Foreign Exchange (SAFE), currently allows up to $44.7 billion in Chinese money to be invested under the QDII scheme. But less than a quarter of that amount has been taken up, data from Chinese fund analysis firm Z-Ben Advisors shows.

And the situation appears to be worsening. Even as the Standard & Poor's 500 index has set new records this year on Wall Street, assets under management in the QDII were shrinking.

Earlier this year, two Chinese overseas investment funds, targeting U.S. home builders and Japanese equities, respectively, failed to raise enough money for inception.

"We were aggressively promoting the funds, but people were just not interested," said Shawn Liu, Shanghai-based managing director of one of the funds, AZ Investment Management.

Even QDII exchange-traded funds (ETFs) that passively track familiar indexes in Hong Kong have seen subscriptions fall.

An ETF tracking the Hong Kong's benchmark index, the Hang Seng, run by E-Fund Management, attracted 1.6 billion yuan when it started in 2012 only to see that shrink to 198 million by March 31, data on the company's website shows.

China Asset Management Company's QDII ETF that tracks the Hang Seng China Enterprises Index, or Chinese companies listed in Hong Kong, saw funds of 3.59 billion yuan at inception in August 2012 deflate to 304.2 million yuan by the end of March, the firm's website shows.

QDII was originally aimed at channeling part of China's massive savings abroad to help reduce inflationary pressure at home and serve as a test bed for the opening of China's capital account.
Launched during China's equity bull run in 2006, the program attracted huge interest initially. But the global financial crisis dealt a severe blow to QDII investors -- some lost as much as 70 percent -- prompting the government to suspend the scheme until 2010.

While the U.S. stock market has consistently outperformed mainland indexes since then, the losses scarred many investors.

In fact, QDII fund managers say the recovery of foreign markets has only increased redemptions, as investors who refused to sell at a loss earlier take advantage of the overseas bull run to cash out.

Analysts say other challenges need to be addressed in order to restore confidence among Chinese retail investors.

For one thing, exchange rate risk is an issue. The yuan has gained 1.77 percent this year against the dollar, setting consecutive record highs on a weekly basis since April.

"The Chinese know there's a lot of pressure for the renminbi to appreciate. Investing overseas you're going to be battling that wind," said Olivier d'Assier, managing director for Asia Pacific at Axioma, which recently signed an agreement to help create indexes for the China Securities Index Co. Ltd, which runs the CSI series of indexes tracking Chinese A-shares.

But the biggest problem is widespread suspicion of stocks as an asset class.

Chinese equities have not produced the historical returns one would expect from an economy that until recently grew at double-digit rates every year for three decades.

At the same time, Chinese investors have found places to put their money, specifically high-yielding wealth management products in China and in property, which are perceived to be less risky than stocks.

However, if the central bank's trial program does allow individuals to invest directly, instead of having to rely on mutual funds, it will address one major reason for QDII's unpopularity, namely the reputation of the domestic mutual fund industry.

"I don't trust Chinese fund managers," said Fu Shuaiwei, a 47-year-old investor, who lost money on QDII investments and now only puts money into domestic capital markets.

If China does open the gate for domestic individuals to invest overseas directly, Fu said he will manage his own portfolio. But he's still cautious.

"I would test the water with less than one tenth of my money," he said. "I won't bet big because I don't understand overseas markets well enough."


China's entrepreneurs expand global presence

The force behind China's biggest takeover of an American company is a 71-year-old meat-packing entrepreneur dubbed "China's Chief Butcher" by the press who built an empire on his country's voracious appetite for pork.

The $4.7 billion bid for Smithfield Foods by Wan Long, chairman of Shuanghui International, is another big step up for Chinese entrepreneurs who are emerging from the shadow of state-owned corporate giants and expanding on the global stage.

Under pressure to keep economic growth strong, the new government of President Xi Jinping has promised a bigger role and lighter regulatory burden to entrepreneurs who generate China's jobs and wealth. Still, it is unclear how far the ruling Communist Party is willing to go in making crucial changes including curbing the dominance of state industry.

"If these Chinese entrepreneurs who are highly capable are allowed to get on and do what they do best, we're going to see a lot more deals like this," said Charles Maynard, senior managing director of Business Development Asia, which advises companies on acquisitions. "Despite lots of hurdles, they are increasingly able to think globally and act globally."

Another private investor, Fosun International, bought a stake last year in Club Med and says it will team up with insurer AXA to acquire the rest of the French resort operator. Last year, a private firm set the current record for the biggest Chinese takeover of an American company when Wanda Group bought the AMC cinema chain for $2.6 billion.

China's private companies follow a different path from Western buyers pursuing acquisitions.

Cash-rich but inexperienced, they shop for brands, technology and skills to speed their development. Unlike Western buyers, which might lay off employees, Chinese companies keep them and sometimes hire more. Sweden's Volvo Cars expanded its workforce after it was acquired in 2010 by Chinese automaker Geely Holding Group.

"We were especially attracted to Smithfield for its strong management team, leading brands and vertically integrated model," said Shuanghui's Wan in the statement announcing this week's bid.

The purchase was endorsed by Smithfield's board but still require approval from shareholders and U.S. regulators.

Reflecting the sensitivity of Chinese acquisitions at a time of American complaints about computer hacking and market access, the companies said they would submit the proposed deal for a U.S. government national security review.

The announcement comes as President Barack Obama and China's Xi prepare to meet for the first time, overshadowed by mounting American frustration about a wave of cyber intrusions traced to China and possibly its military that targets government and commercial secrets. Obama is expected to press Xi to crack down on cybercrime.

The Chinese acquisition of a major food producer "is a bit concerning," said U.S. Sen. Chuck Grassley in a statement. He said regulators should look at what role the communist Beijing government plays in Shuanghui and whether the acquisition might affect national security.

Some, however, warn against linking the deal to strains in the U.S.-China relationship.

"This is just not the kind of deal that would or should rankle the U.S. government," said James Zimmerman, a lawyer in Beijing for the firm Sheppard Mullen and a former chairman of the American Chamber of Commerce in China, in an email.
"The U.S. government would do more harm than good if they use this transaction to leverage out of China better behavior on unrelated issues," said Zimmerman. "Promoting free trade and open investment only comes from setting an example."

Despite their role in driving growth, private companies like Shuanghui still are second-class corporate citizens behind state companies that benefit from monopolies and low-cost access to bank loans, land and energy.

The World Bank and other advisers have warned that model requires drastic change if China's growth is to stay strong. They say more industries have to be opened to private and possibly foreign competitors.

A statement by the Cabinet's planning agency on May 24 promised such change. But it consisted mostly of repeating previous pledges and gave no details of possible reforms. Those are likely to provoke fierce opposition from party factions that depend on state industry to supply money and jobs to reward their supporters.

Entrepreneurs' expansion abroad comes as China's explosive double-digit economic growth that powered their rise slows.

The slowdown is largely self-imposed as Chinese leaders try to nurture more self-sustaining growth based on domestic consumption instead of exports and investment. But consumer spending growth is slow. That has forced Beijing to prop up China's rebound from its deepest downturn since the 2008 global crisis with spending on building subways and other public works, which pumps still more money into state industry.

Growth of the world's second-largest economy is forecast at 7 to 8 percent over the next decade _ far above the low single digits expected from the United States and Europe but China's weakest performance since the `90s.

"They know this economy may have rough days ahead, so why not take their capital and diversify around the world?" said Jim McGregor, chairman for Greater China at consulting firm APCO.

State-owned oil and mining companies still account for China's biggest deals abroad, including multibillion-dollar investments in Australia, Africa and Latin American. In 2007, China's sovereign wealth fund bought a 9.9 percent stake in Morgan Stanley for $5.6 billion.

But smaller private companies are expanding in a wider array of industries including technology, manufacturing, food processing and real estate.

Bright Foods acquired a majority stake last year in Weetabix, which makes Alpen muesli. Hanergy Group, a builder of hydroelectric dams, bought two makers of solar panels _ MiaSole in California and Germany's Solibro.

Shuanghui's Wan, a former soldier, started his rise in 1985 when coworkers elected him manager of a slaughterhouse in his hometown of Luohe in central China.

The economy was in the early stages of then-supreme leader Deng Xiaoping's reforms. The ruling party had begun allowing privately owned restaurants and other small businesses. Rolling back its "iron rice bowl" policies of jobs for life and nationwide wage standards, Beijing was starting to let companies pay employees for the first time based on their productivity.

According to Caixin, China's leading business magazine, Wan turned around his struggling slaughterhouse with such radical innovations for the time as operating three shifts around the clock, every day of the year. It said that in the first year the business swung to a profit of 5 million yuan (about $1.7 million at that time).

The company grew rapidly while undergoing repeated restructurings. It split into two competing companies at one point before reuniting. In 2006, its managers bought out the remaining state stake using money from investors including Goldman Sachs and Singapore state investment company Temasek Holdings Ltd.

Today, the company is controlled through Shuanghui International Holdings Ltd. in Hong Kong, of which Wan is chairman. The operating unit on the mainland, Shuanghui Investment and Development Co., says it is China's biggest meat processor, with annual sales in excess of 50 billion yuan ($8 billion) and more than 60,000 employees.

China consumes more than half the world's pork. That makes the tie-up with Shuanghui a possible boost to Smithfield by giving the American producer a readymade distribution network for its Armour, John Morrell and other brands as Chinese buy more processed and packaged meat.

Shuanghui's reputation was battered in 2011 when state television revealed its pork contained clenbuterol, a banned chemical that makes pork leaner but can be harmful to humans.

The company apologized and promised to improve quality _ a process that might benefit from an infusion of know-how from Smithfield.

"Pork in China is a vegetable. It's everywhere," said McGregor. "Good for China, trying to up its game on best practices."


Edward Lehman雷曼法学博士
Managing Director 董事长

LEHMAN, LEE & XU China Lawyers
Founder of LehmanBrown International Accountants

Lehman, Lee & Xu is a top-tier Chinese law firm specializing in corporate, commercial, intellectual property, and labor and employment matters. For further information on any issue discussed in this edition of China Capital Markets In The News or for all other enquiries, please e-mail us at mail@lehmanlaw.com or visit our website at www.lehmanlaw.com.

© Lehman, Lee & Xu 2013.
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