Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that explores the big ideas and trends moving money across
Speaker 1: the region. I'm John Lee in Hong Kong.
Speaker 2: And I'm Kai te Dmitriyeva, also in Hong Kong.
Speaker 3: John.
Speaker 2: It's hard to fathom right now, but there was a
Speaker 2: time when the US and China actually got along, when
Speaker 2: trade investment between the two countries was flourishing. Rather than
Speaker 2: the current period we've got tensions and tariffs.
Speaker 1: Our guest today, Weijian Shan, had a front row seat
Speaker 1: during this exciting period. He's the executive chairman of PAG,
Speaker 1: an alternative investment firm focused on the Asia Pacific region
Speaker 1: with fifty five billion dollars in assets under management. He's
Speaker 1: also the author of three books, including one of my
Speaker 1: personal favorites on China, Out of Gobi, My Story of
Speaker 1: China and America. Welcome Weijin Shan to Asia Centric.
Speaker 4: Thank you, and Sean.
Speaker 2: I know you prefer to be called that, even though that.
Speaker 4: Was my last name, my family name. Everybody calls me
Speaker 4: find that last name Sean.
Speaker 2: Good to know Sean. Many people might know you as
Speaker 2: a pioneer of private equity investing in Asia. What they
Speaker 2: might not know is that you were also a professor
Speaker 2: at the Wharton School, and Janet Yellen actually was your
Speaker 2: academic advisor at Berkeley. She also wrote the intro to
Speaker 2: the book that John just mentioned. So before discussing your
Speaker 2: day job and private equity, I wanted to get your
Speaker 2: thoughts on what's happening in China's economy. You know, there's
Speaker 2: been a lot. We just had several rounds of stimulus
Speaker 2: announced by authorities. Still seems like it falls short of
Speaker 2: removing all real estate curbs, which is something you had
Speaker 2: spoken about with US earlier this year. So, given everything
Speaker 2: that's happening, given what officials have announced, is it enough
Speaker 2: do you think to finally jumpstart the economy in China?
Speaker 4: Whether or not the measures taken by the Chinese government
Speaker 4: since I would say September twenty fourth, when they announced
Speaker 4: a major monetary package to stimulate the economy, I think
Speaker 4: it's too early to tell. In two ways. First, we
Speaker 4: don't see or I don't know if it's a full
Speaker 4: package as yet. What they announced on September twenty fourth
Speaker 4: was a package to stimulate the economy, but in monetary
Speaker 4: terms only and that is they cut the interest rates,
Speaker 4: they cut the reserve ratios, and they released liquidity into
Speaker 4: the system. But that's on the monetary side, and I
Speaker 4: think the market was respecting more measures. On the physical side.
Speaker 4: They have made some announcement, but I don't think that's completed.
Speaker 4: Some measures may have to be taken after further internal process,
Speaker 4: for example the approval of the Standing Committee of the
Speaker 4: People's Congress. So I don't think that the other shoe
Speaker 4: has completely dropped. With regard to the market. As we
Speaker 4: have seen, the market has reacted quite positivity. In fact,
Speaker 4: the first announcement took the market by surprise with regard
Speaker 4: to its magnitude. But I think the market is also
Speaker 4: waiting for whatever physical measures then the government is going
Speaker 4: to announce, and whether it's going to be a big
Speaker 4: package or they're going to release small timeages, one step
Speaker 4: at the time. But the stock market has reacted quite positively,
Speaker 4: and if you look at data on the housing market
Speaker 4: in the first two weeks of October, it has been positive.
Speaker 4: And the good question is whether or not this rebound
Speaker 4: will be sustained.
Speaker 2: Do you think it will be well?
Speaker 4: Again, it's too early to tell because more measures hopefully
Speaker 4: will be taken. And I think that in order to
Speaker 4: completely turn around expectations, which is the key, the measures
Speaker 4: will have to be bold. It has to be very big,
Speaker 4: and it has to be consistent and has to be continuous.
Speaker 4: So this is a very early stage, and I don't
Speaker 4: think that we have seen the full impact of the
Speaker 4: measures on the economy. So it's too early to tell.
Speaker 4: And the hope is that the policy makers have made
Speaker 4: decisions to turn around the economy and the market. Now
Speaker 4: they will have to own it, and therefore they will
Speaker 4: have to make sure that the measures are sufficient to
Speaker 4: sustain the recovery, not only in the stock market, in
Speaker 4: the housing market, but also in the confidence in the marketplace.
Speaker 1: You mentioned fiscal policy. Now a lot of pundits are
Speaker 1: waiting for a fiscal berzuokah, so to speak, Why do
Speaker 1: you think the authorities have been so reluctant so far
Speaker 1: to release these measures.
Speaker 4: I think in the past few years the policy makers
Speaker 4: have stuck to the impressive rule that physical deficit should
Speaker 4: now exceed three percent of GDP, and there's no such
Speaker 4: fast rule anywhere in the world. At one time in
Speaker 4: the past, some Western countries thought it's prudent not to
Speaker 4: exceed three percent of GDP. But if you look at
Speaker 4: the United States in twenty twenty and twenty one, deficit
Speaker 4: reached teen point five percent. Currently, I think it's about
Speaker 4: seven percent, So to stick to the three percent rule
Speaker 4: is too potent, too conservative. Another thing I think that
Speaker 4: has prevented them from taking variable measures is that every
Speaker 4: policy has pros and costs, and if you focus on
Speaker 4: the cost, then you don't want to do anything because
Speaker 4: if become reserverse, we're not the cost. For example, China's
Speaker 4: interest rate prevading interest rate at this point is still
Speaker 4: about four percent. Inflation rate is zero point four percent
Speaker 4: CPI last month, so basically it doesn't exist, and in
Speaker 4: fact there's deflationary pressure. But as the fact was raising
Speaker 4: interest rates, and if China cuts interest rates, of course
Speaker 4: that food pressure on the change rate. Cut these interest
Speaker 4: rates just about a month ago, I think they were
Speaker 4: very reluctant to eat on the money to resign right.
Speaker 4: So I think that's probably a reason why no older
Speaker 4: measures have been taken until very recently. But now I
Speaker 4: think the priority has shifted towards making sure that they
Speaker 4: will achieve the growth target of five percent and if
Speaker 4: you do do something bolder, more aggressive, you will not
Speaker 4: be able to do it. And that's why I think
Speaker 4: they are rolling out these measures just to make sure
Speaker 4: that they will achieve the target and to make sure
Speaker 4: that the growth can be sustained as well. It's not
Speaker 4: just for this year and hopefully for a longer term.
Speaker 2: Do you expect, by the way, the China to make
Speaker 2: around five percent growth this year?
Speaker 4: I never had any doubt since the beginning of twenty
Speaker 4: twenty two. If they announced a growth target, they will
Speaker 4: be more or less achieve that target. I don't know
Speaker 4: if they will do it precisely, but around that number
Speaker 4: I have no doubt at all they will be able
Speaker 4: to achieve it. The reason for that is very simple.
Speaker 4: It is because China has more policy space, policy rules
Speaker 4: than any other major economy in the world. I already mentioned.
Speaker 4: On the monetary side, interest rate remains quite high. Last
Speaker 4: year at this time was more than five percent, and
Speaker 4: there's no inflation, so there's a room to ease on
Speaker 4: the monetary side. In fact, if we look at another metric,
Speaker 4: which is the reserve requirement ratio for banks to park
Speaker 4: their departits with a central bank, even with fifty five
Speaker 4: vis points cut on September twenty fourth, the average reserve
Speaker 4: ratio remains seven percent. One percentage drop on the reserve
Speaker 4: ratio would release through treating R and B about three
Speaker 4: hundred billion US donors liquidity into the system, So they
Speaker 4: have a lot of room to stimulate the economy on
Speaker 4: the monetary side. On the physical side, China's central governments
Speaker 4: that as a percentage of GDP is among the lowest
Speaker 4: among major economies in the world. If they want to
Speaker 4: expand on the physical side, they have plenty of room
Speaker 4: to do so, and that's why I'm quite confident they
Speaker 4: will be able to achieve their target if they wish to,
Speaker 4: because they have the tools to do so. In the
Speaker 4: United States, for example, the fat didn't have any policy
Speaker 4: space to ease on the monetary side in the past
Speaker 4: two years because they have to contain inflation, right, so
Speaker 4: they could only tightened. But that's not the situation in
Speaker 4: China today, so there's.
Speaker 2: A lot more policy space that could help with growth.
Speaker 2: How concerned are you though about deflation and the potential
Speaker 2: for sort of a deflationary spiral in China or do
Speaker 2: you think that the policy space kind of addresses that
Speaker 2: as well.
Speaker 4: Yes, I think that again deflation is a result of
Speaker 4: function of monetary policy being too tight, and if you
Speaker 4: loosen on the monetary side, obviously that would help on
Speaker 4: price levels. I think the problem with deflationary pressure in
Speaker 4: China is not so much the result of monetary policy,
Speaker 4: but as a result of over competition almost every major
Speaker 4: industry that you can think of. You know, just look
Speaker 4: at the electric vehicle sector. There are probably one or
Speaker 4: two hundred even makers in China, maybe more than all
Speaker 4: the even makers combined in the world. Right, so the
Speaker 4: competition is cut throat, and they compete of course by
Speaker 4: depression prices, and I think that's a major deflator of
Speaker 4: the economy. But again, you know, if you stimulate the
Speaker 4: economy with monetary policies, you should be able to help
Speaker 4: change the expectations on the price side and therefore hopefully
Speaker 4: raised price levels across the board.
Speaker 2: Do you see that happening anytime in the next year,
Speaker 2: in the next twelve months.
Speaker 4: I think again, if they're consistent with the stiumulus policies,
Speaker 4: both on the monitory side on the physical side, you
Speaker 4: would expect that to happen. Where does that money go, right,
Speaker 4: so it has to have some impact on price levels eventually. Yes.
Speaker 4: And for example, you know, if we look at the
Speaker 4: property market, housing market expectations hopefully are shifting. We don't
Speaker 4: know if has completely shifted. But in the first two
Speaker 4: weeks of October, especially during this national holiday period, you
Speaker 4: have seen prices stabilizing in the property sector, but you
Speaker 4: have seen the sales increasing quite dramatically. So I think
Speaker 4: it takes time. But if the policies don't continue to
Speaker 4: support the signals send out on September twenty fourth with
Speaker 4: a big monetary steamulus package, then things may face all
Speaker 4: out right, So I hope they keep doing that. I mean,
Speaker 4: they can't keep doing that, but it shows a change
Speaker 4: in policy attitude to support the economy. And then once
Speaker 4: they made up their mind to do so, you would
Speaker 4: expect that they have the tools to achieve their goals.
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Speaker 1: you did mention over capacity is an issue and if
Speaker 1: I could digress. Bloomberg News recently interviewed former President Donald
Speaker 1: Trump and he mentioned that is his favorite word in
Speaker 1: the English dictionary. I wanted to get your views. What's
Speaker 1: your views on the impact of tariffs and how can
Speaker 1: it impact China's economic growth trajectory.
Speaker 4: We were talking about whether or not China's stimulus measures
Speaker 4: announced recently would have the desired effect on the market,
Speaker 4: on the property market, on the stock market, and on
Speaker 4: the economy in general. And I just said, it's too
Speaker 4: early to tell because barely a month has passed since
Speaker 4: they made the first announcement, and they may announce new
Speaker 4: measures in the days to come. But when it comes
Speaker 4: to the trade war, we've had a history already because
Speaker 4: trade war started in twenty eighteen during the first trum administra.
Speaker 4: And then that's six years ago, so we have enough
Speaker 4: time to observe whether or not the trade war has
Speaker 4: achieved this intended effect for the United States and for
Speaker 4: its effect on the Chinese trade or the economy. And
Speaker 4: I must say that data tell us it has produced
Speaker 4: no effect on the Chinese economy at all, in the
Speaker 4: sense of denting its esports capability or retarding its economic growth.
Speaker 4: In twenty eighteen, the year before the trade war started,
Speaker 4: or the year in which the trade war started, China's
Speaker 4: total esports represented about thirteen percent of the world's total.
Speaker 4: Today is fifteen percent. Actually, Chinese esports have increased.
Speaker 2: Also diversified more Southeast Asia trade.
Speaker 4: Precisely, China's esports as a percentage of American's total imports
Speaker 4: have decreased. China's total esports have not decreased. An American's
Speaker 4: trade deficit has not narrowed. So the trade war has
Speaker 4: not achieved the objective of reducing deficit for the United States.
Speaker 4: It has not achieved the objective of reducing a sports
Speaker 4: for China. So what has it achieved. It has made
Speaker 4: the worlding called me much less efficient. You're talking about
Speaker 4: moving from the most efficient producer to second best. Right.
Speaker 4: It has made American cornmy less efficient. It has contributed
Speaker 4: to inflation. So if that's the history, if that's the
Speaker 4: track record, you can imagine that more terriffs is not
Speaker 4: going to achieve any further results than what we have
Speaker 4: seen already. Those are just fashion numbers, right, and anybody
Speaker 4: can check.
Speaker 2: Do you think it'll get harder though? You know, we
Speaker 2: have a candidate, Donald Trump who's proposing sixty percent tariffs.
Speaker 2: Would that change the math?
Speaker 4: It will get harder, But I would say that that's
Speaker 4: not going to be very good for the United States,
Speaker 4: for sur prices are going to go up because consumers
Speaker 4: hate the terriffs. And if America does not buy from
Speaker 4: China because it's too expensive, then will buy from other
Speaker 4: countries where costs may be higher. I read an article
Speaker 4: by Boomberg on trailers sold in the United States. You know,
Speaker 4: now trade is very much done by big containers across
Speaker 4: the ocean, and then once they land somewhere, then you
Speaker 4: will have to use trailers to take all these containers
Speaker 4: to different places. This article, which is quite lengthy but
Speaker 4: very interesting, basically told a story of a Chinese Soe
Speaker 4: state owned company being a dominant supplier of trailers in
Speaker 4: the US market before the Biden administration imposed a two
Speaker 4: hundred and twenty percent tariff on all the trailers imported
Speaker 4: from China. So this company set up a production facility
Speaker 4: in the United States and continue to sell to the
Speaker 4: US market and then this Chinese company filed a lawsuit
Speaker 4: against this American competitor for importing components from China without
Speaker 4: being the twenty percent terrors.
Speaker 2: I believe that was Shawn don In. That was a
Speaker 2: Shawn don In special exactly.
Speaker 4: Then this American company got into serious trouble. So these
Speaker 4: two companies are both in trouble now, and the sales
Speaker 4: in the United States almost collapsed as a result of
Speaker 4: these terraffs, which we're supposed to protect the US market
Speaker 4: and US producers ended up not protecting anyone right. And
Speaker 4: I also think that a major vulnerability in the Chinese
Speaker 4: economy its dependent on esports on foreign markets. I think
Speaker 4: it's a good thing for China not to rely so
Speaker 4: heavily on a sport markets on foreign markets. Especially today,
Speaker 4: protectionism miss on the rise and many countries are wary
Speaker 4: about Chinese products flooding into their markets. At the same time,
Speaker 4: domestic demand is insufficient. So I think that China needs
Speaker 4: to shift its growth model, and I've been talking about
Speaker 4: this in the past ten years, away from investments and
Speaker 4: esports in the direction private consumption, which represents only about
Speaker 4: forty percent of Chinese GDP.
Speaker 2: Compared to something like seventy seventy five in the US.
Speaker 4: Sixty eight percent private consumption for the United States. Right,
Speaker 4: so China needs to shift its growth model in order
Speaker 4: to sustain is economic growth. There's another thing, you know.
Speaker 4: The biggest advantage the Chinese economy has more than any
Speaker 4: other major economy by a big margin, is the savings rate.
Speaker 4: That gives its a huge advantage because savings rate, in
Speaker 4: terms of macroeconomics is roughly equal to investment rate. So
Speaker 4: the reason that has been able to grow so rapidly
Speaker 4: in the past few decades, it's because it has such
Speaker 4: a high savings rate that it's fixed asse investments have
Speaker 4: been representing about forty five percent of GDP year after year.
Speaker 4: But what's China doing right now with that high savings rate.
Speaker 4: It exports it to the United States. Have you noticed
Speaker 4: that it has three trillion dollars of foreign change reserves.
Speaker 4: Not long ago, it was the largest owner of treasure
Speaker 4: bills to assumee about trillion dollars. Now I think they
Speaker 4: have trimernated it down to about eight hundred or more
Speaker 4: than eight hundred bill US dollars. Still we're in a
Speaker 4: large amount. So the esports savings to the United States
Speaker 4: helping America to be able to grow its economy, and
Speaker 4: America doesn't appreciate it. Right, So if the external environment
Speaker 4: the theories, then China will have to focus on investing
Speaker 4: that money in the domestic market again, shifting away from
Speaker 4: investments and esports to private consumption. I think in the
Speaker 4: long run that's what China should do.
Speaker 2: I guess how do you spur that to happen?
Speaker 4: Though?
Speaker 2: That's sort of the trillion dollar question.
Speaker 4: Yes, yes, you can't because again I've been talking about
Speaker 4: this for probably more than a decade, and it's very
Speaker 4: difficult to change it. Because if the esport market is
Speaker 4: so good, now, why don't esport during the COVID years
Speaker 4: as you remember in twenty twenty and twenty twenty one,
Speaker 4: and China was exporting everything to all over the world
Speaker 4: and esports went up very substantially during that period of time.
Speaker 4: So I don't think left to their own devices, they
Speaker 4: would be able to make the shift. Because you can't
Speaker 4: control all theate owned companies. You can't just tell them
Speaker 4: not to sell to esport markets, but to sell to
Speaker 4: the domestic market or somehow to help with domestic consumption.
Speaker 4: You can't do it. You know, it's like what Adam
Speaker 4: Smith said, everybody is for himself and there's no visible
Speaker 4: hand directing all these parties. Unless the esport market somehow
Speaker 4: becomes more difficult, and that is a trail war. That's
Speaker 4: why I don't think that trade war is necessarily bad
Speaker 4: thing for China for the long term, and many people
Speaker 4: don't realize that. And I think that they will have
Speaker 4: to be forced to focus on domestic market if the
Speaker 4: conditions of foreign markets become very bad, are too expensive.
Speaker 4: You know, think about it. If the Biden administration has
Speaker 4: raised terrors on Chinese eees to what one hundred percent
Speaker 4: or more, I don't know, if it has fast Congress,
Speaker 4: but you know that makes it very difficult for them
Speaker 4: to ask for to the US market.
Speaker 1: Then what do they do?
Speaker 4: They will have to focus on the domestic market.
Speaker 1: Sean, We've talked about a lot of things like the
Speaker 1: geopolitical risks, the threat of tariffs, over capacity in certain industries,
Speaker 1: and I think you mentioned evs, but then you also
Speaker 1: said the potential growth of the China consumer sector. Now,
Speaker 1: you run one of the largest alternative investment managers, and
Speaker 1: some of your investments are in China. How do all
Speaker 1: these views you know, coalesce into investing in China right now?
Speaker 4: Well, first of all, PAG my firm is Asia focused
Speaker 4: investment firm, and China is one of our own markets. Yep,
Speaker 4: it's not even the biggest one in the splitting your point,
Speaker 4: because China probably represents about thirty or less of our
Speaker 4: investment portfolio. We're very active in Japan, in Australia, in India,
Speaker 4: in Southeast Asia in addition to China. In Asia, the
Speaker 4: total GDP of Asia Pacific, by our calculation is about
Speaker 4: thirty three treating US donors. China is eighteen treating, so
Speaker 4: it's more than a half. So as a rational investor,
Speaker 4: you know China has to be part of it. EU
Speaker 4: is about seventeen treating dollars in GDP, so China is
Speaker 4: bigger than EU. And China is a single market, whereas
Speaker 4: EU has single currency, but twenty seven countries, different laws,
Speaker 4: different languages, different culture, very fragmented as Southeast Asia. So
Speaker 4: China is part of Asia and China is important for US.
Speaker 4: I think that different types of investors who look at
Speaker 4: Asian markets very differently. For example, if you are a
Speaker 4: venture campal firm, then the most interesting place is China.
Speaker 4: Why would you say that, because on June the twelfth
Speaker 4: of this year, the Economists ran a cover page article
Speaker 4: calling China a technology and scientific silverpower. Today. In August,
Speaker 4: Australian Strategical Policy Institute published what they call twenty year
Speaker 4: Leading Technology Track Study. They follow sixty four leading technologies
Speaker 4: in the world since two thousand and three. In two
Speaker 4: thousand and three, of the sixty four leading technologies in
Speaker 4: the world, and they measure by the biggest impact that
Speaker 4: your research output would have in the literature and so forth.
Speaker 4: In two thousand and three, of the sixty four leading technologies,
Speaker 4: how many do you think America was leading twenty years ago?
Speaker 1: Would it be like fifty of those sixty.
Speaker 4: Four sixty sixty of the sixty four sixty America is
Speaker 4: leading by twenty twenty three, how many do you think
Speaker 4: America I'm.
Speaker 2: Still going to strike out a guess and say that
Speaker 2: it's maybe half that.
Speaker 4: Actually eleven percent of sixty four and that is seven,
Speaker 4: So fell drastically seven of the sixty four. What about
Speaker 4: the rest China now needs? In fifty seven of the
Speaker 4: sixty four, eighty nine percent of the leading technologies in
Speaker 4: the world. So if you're venture capital firm, you would
Speaker 4: invest in the United States, no question about it. Now,
Speaker 4: high impact research doesn't necessarily translate into high technology products.
Speaker 4: You know, I have to caution you in this regard,
Speaker 4: but it's a good measure of what is to come. Right. So,
Speaker 4: if you're a VC firm, there are only two places
Speaker 4: I think you need to invest when it's the United States,
Speaker 4: which is still leading in applications in high technology, and
Speaker 4: the other is China. There are basically no other and
Speaker 4: we are not a VC firm, so we don't invest
Speaker 4: in startup companies and all that. If you're growth company
Speaker 4: that is growth investor, which were not, then you can
Speaker 4: find growth opportunities in China, in Southeast Asia, any India,
Speaker 4: not so much in Japan because there's hardly any growth Japan.
Speaker 4: But if you're a buy on firm, you would invest
Speaker 4: in large markets where you would see very large scale businesses,
Speaker 4: and that would be China, Japan, Australia and India. We're
Speaker 4: a buy on firm, so we're most active in those
Speaker 4: forem markets in Asia, but when it comes to China,
Speaker 4: our strategy is to focus on leading businesses which cater
Speaker 4: to private consumption I just mentioned, I think the future
Speaker 4: is private consumption. Right, the country will have to shift
Speaker 4: this growth model away from investments, away from a sports
Speaker 4: into private consumption. Even though as a percentage of GDP
Speaker 4: you will see that the Chinese number is still very small.
Speaker 4: That is, private consumption represents about forty percent of Chinese GDP.
Speaker 4: But in abtrual numbers, you know, China has been increasing
Speaker 4: very fast and we think that's where in the future is.
Speaker 4: I have to emphasize that you need to invest in
Speaker 4: leading businesses, not just everybody, because it's cut through the
Speaker 4: competition over there. So you have to invest in businesses
Speaker 4: which have very high entry barrier and competitive advantage which
Speaker 4: cater to private consumption. And we have been sticking to
Speaker 4: that policy for the past twenty years.
Speaker 1: So on the flip side, would you avoid some of
Speaker 1: these over capacity exporters like EVS technology job.
Speaker 4: You have used the term overcapacity several times, if you
Speaker 4: know this, I never used that term because it's never intentioned.
Speaker 4: It's just that the market is so competitive. Whenever there's
Speaker 4: something new, everybody wants to do it. You know what,
Speaker 4: as I mentioned, China's advantage is it has highs the
Speaker 4: savings rate in the world, so there's a capital to
Speaker 4: do it. So sometimes Western countries is talk about China's
Speaker 4: overcapacity as if that's a strategy somehow, so.
Speaker 1: We should maybe change into over competition.
Speaker 2: Or exactly several iterations of this word.
Speaker 4: But you know, the truth matter is that whenever there's
Speaker 4: something new, many firms would swamp into it, whether it's
Speaker 4: solar panels, beads in battery or ev or anything. You know,
Speaker 4: China is very quick to jump on new things. And yes,
Speaker 4: those sectors may be very hot, but how many of
Speaker 4: them are making a profit. And for us, we have
Speaker 4: to make a profit and very high returns our investors
Speaker 4: is sept twenty percent plus i RR that is internal
Speaker 4: rate of return. So it would be very difficult for
Speaker 4: us to make this kind of return investing in what
Speaker 4: is considered to be hot industries where combination is too
Speaker 4: ferocious for you to make your margins.
Speaker 2: It sounds like you're already like even during the pandemic,
Speaker 2: and even now, it seems like that private consumption side,
Speaker 2: at least with the companies you're exposed to. Are you
Speaker 2: still seeing that kind of consumption? Are you still seeing
Speaker 2: the returns that you would expect or is this more
Speaker 2: of a patience kind of thing.
Speaker 4: Oh? Absolutely. I typically don't talk about what we do publicly.
Speaker 4: We have an obligation to tell our investors.
Speaker 3: What we write, but you feel comfortable sharing, right, But
Speaker 3: in private aguity, we're not consumer prolat company ourselves, so
Speaker 3: we don't need to promote our brand. But you know,
Speaker 3: there are a few deals I can use as examples
Speaker 3: because they are quite public already. Recently, we and our
Speaker 3: co investors took over control of the largest shopping mall
Speaker 3: manager in the world, and that is in China. Now
Speaker 3: we renamed it as new Land Commercial Management. We manage
Speaker 3: five hundred or so shopping malls throughout the country, second
Speaker 3: largest in the world. It's called Signon Properties in the
Speaker 3: United States, which manages probably less than half of the
Speaker 3: floor space than we do. We put in more than
Speaker 3: eight billion US dollars. That's a very big number. But
Speaker 3: this company makes about more than one billion dollars of
Speaker 3: net profit every year in twenty twenty one, twenty two,
Speaker 3: twenty twenty three, and we expect it to make this
Speaker 3: amount of money this.
Speaker 4: Year as well. We're talking about net profit without any debt.
Speaker 4: This company has know that until recently, when we take
Speaker 4: over control of this company, we had occupancy rate of
Speaker 4: nineteen nine percent in twenty twenty two. Remember that a
Speaker 4: COVID year right O rate of our malls averaged ninety
Speaker 4: eight point seven percent last year. This year is actually
Speaker 4: a little less, but it is still more than ninety
Speaker 4: eight percent. It's a dating company in the world in
Speaker 4: managing shopping malls. And what do shopping malls do? They
Speaker 4: sell to consumers, But you can make very good profit
Speaker 4: at of a business like this. On December thirtieth, twenty
Speaker 4: twenty two, we coos transaction of about five hundred million
Speaker 4: dollars into a company called IgE, which I would describe
Speaker 4: as Netflix of China, the largest video streaming company in
Speaker 4: the country. It's very profitable business just by what they do.
Speaker 4: A few years back, we invested very small amount of money.
Speaker 4: You know, I just mentioned two big deals. We invested
Speaker 4: about one hundred and thirty million dollars in the company
Speaker 4: called China Music Corporation and eventually we merged it with
Speaker 4: c Q Music of ten cent and then in one
Speaker 4: public in the United States, we acted it from an
Speaker 4: investment our one hundred and thirty million dollars turned it
Speaker 4: into two point six million dollars. So great. Yes, not
Speaker 4: every not every deal that we have done is less successful,
Speaker 4: is possible, But what are in Coumbon among those three deals?
Speaker 4: They all have to do with private consumption.
Speaker 1: So you like private consumption in China. But you also
Speaker 1: mentioned is Japan the biggest dum country where you invest
Speaker 1: right now and one of the biggest, one of the
Speaker 1: biggest okay, So what's that strategy?
Speaker 4: Yes, family is very different Japan. For the past three decades,
Speaker 4: there has been hardly any growth, right, So how do
Speaker 4: you make money as private equity investor in Japan if
Speaker 4: you don't play the stock market? Japan since about ten
Speaker 4: years ago started to change. Used to be the case
Speaker 4: if you're an activist investor in the stock market, you
Speaker 4: will be considered hostile. But since the Zombi administration, that
Speaker 4: attitude policy attitude completely changed because they wanted to improve
Speaker 4: the efficiencies of large Japanese firms. So Japanese firms started
Speaker 4: to restructure to carve out none core businesses to improve
Speaker 4: their efficiency and therefore creating a market for private equity
Speaker 4: buy on the firms. Then you ask question if there's
Speaker 4: hardly any growth. How do you make your returns of
Speaker 4: twenty thirty percent? The answer is unlike anywhere else in Asia,
Speaker 4: Japan has a very easy monetary policy. Just a few
Speaker 4: months ago, the benchmark interest rate was still negative ten
Speaker 4: basis points. Now it's zero percent. That's already a RaSE
Speaker 4: to zero percent. So it's like the game in the
Speaker 4: buyout market played in the United States since two thousand
Speaker 4: and nine. In that with QE, interest rate was practically zero.
Speaker 4: So you do LBO leveraged buyout. You leveraged to the hilt,
Speaker 4: like six times ev DO, seven times v DO or
Speaker 4: even more. And since money is almost like no cost,
Speaker 4: interest rate is so low, you would be able if
Speaker 4: there's good enough pass flow, generate good returns for equity investment.
Speaker 4: So in Japan that game can still be played very
Speaker 4: well because America's interest rate is now five percent and
Speaker 4: China has cut its interest rates, but the prevading interest
Speaker 4: rate is still more than four percent. Japan is zero percent,
Speaker 4: So that's what you do. LBO all the style Sould.
Speaker 1: I'd love to talk about some of your books, and
Speaker 1: I wanted to start off by talking about your second book,
Speaker 1: Money Games. You discussed your time at an American private
Speaker 1: equity firm, Newbridge Capital, and for the listeners, it later
Speaker 1: changed its name to TPG. But basically, you acquired a
Speaker 1: venerable Korean bank, Career First Bank, which collapsed during the
Speaker 1: financial crisis and.
Speaker 4: What's nineteen ninety seven, nineteen ninety seven Asian financial crisis?
Speaker 1: Asian financial crisis. Yeah, but and you were able to
Speaker 1: acquire that bank. But what really strung was that the
Speaker 1: competitive landscape was so different then. It seemed like there
Speaker 1: were very few private equity companies that you were competing with.
Speaker 1: I think for that deal, you're competing with maybe just
Speaker 1: Standard Chartered and HSBC.
Speaker 4: Now we were competing with HSBC HSBC. Eventually we exited
Speaker 4: from the investment, saw the bank to stand their charter. Yeah.
Speaker 1: But basically, like if you look at the industry now,
Speaker 1: there's so many private equity it's no longer like a
Speaker 1: new business. How has it changed in the last twenty years.
Speaker 1: How competitive is it right now to get deals done?
Speaker 4: It has changed a great deal. In nineteen ninety seven,
Speaker 4: when the Asian Financial crisis first happened, a number of
Speaker 4: Korean banks failed and nationalized by the government, including Career
Speaker 4: First bank, which we a New Bridge Capital which was
Speaker 4: affiliated with TBG. As you noted, eventually we changed the
Speaker 4: name of Newbridge Capital to Tvgation and we were one
Speaker 4: of the very few private emputy investors and we were
Speaker 4: one of the fewer buyout investors in private acuity industry.
Speaker 4: So when Korea got into trouble as a result of
Speaker 4: Asian financial crisis, there was a massive capital flight. At
Speaker 4: the end of nineteen ninety seven, Korea had only about
Speaker 4: twenty billion dollars left in its foreign change reserves. Just
Speaker 4: to put things into perspective, we now manage more than
Speaker 4: fifty billion dollars. And Korea was the tenth largest economy
Speaker 4: in the world at that time and today as member
Speaker 4: of OECD, and as the tenth largest economy in the world,
Speaker 4: it had only twenty billion dollars left in its conference,
Speaker 4: which would last them about three days. So IMF came
Speaker 4: to Career's rescue with fifty eight billion dollars financial package
Speaker 4: or rescue package, with the condition that Career would have
Speaker 4: to sell when miss banks to foreign investors. Why such
Speaker 4: a condition because the International Multinatural Institution believed the Korea's
Speaker 4: banking system failed for lack of credit culture throughout the
Speaker 4: system and that could only be brought in from outside.
Speaker 4: So Morgan Stanley was engaged to find a buyer for
Speaker 4: Careers Bank. There was another bank for sale called Sold Bank,
Speaker 4: which eventually was now sold and Morgenstandy sent out forty
Speaker 4: invitations all the leading financial institutions in the world, only
Speaker 4: HSBC and new Bridge Capital showed up. A new Bridge
Speaker 4: Capital was the only one private firm to have shown up,
Speaker 4: and Newbridge Capital at the time was only managing less
Speaker 4: than one hundred million dollars and at the time of
Speaker 4: closing the transaction, we increased our AUM that is capital
Speaker 4: under management to about five hundred million dollars and we
Speaker 4: had to raise capital in a hurry to close the transaction.
Speaker 4: So that was the early days of private equity in Asia.
Speaker 4: Today I just mentioned we put together a dual of
Speaker 4: eight billion dollars. So at the time of Asian financial crisis,
Speaker 4: it was imaginable, right. My third book, Money Machine, is
Speaker 4: a story about Newbridge Capital buying control of a Chinese
Speaker 4: national bank. That's a very unique deal. It has never
Speaker 4: happened before, has never happened after that, a foreign investor
Speaker 4: buying control of National Bank in China. We invested hundred
Speaker 4: and fifty million donors and eventually we took out after
Speaker 4: five years. Two point four billion dollars one hundred and
Speaker 4: fifty million donors was considered to be a big deal
Speaker 4: at that time yep.
Speaker 1: But even in that transaction there wasn't that many competitors.
Speaker 1: It sounded like you were competing with a financial institution
Speaker 1: in Taiwan.
Speaker 4: But that's what we did, compete with the institution. But
Speaker 4: in Taiwaiian.
Speaker 1: Yes, if a deal like you know, Shinzhen Development Bank
Speaker 1: or Career Fast Bank came out, Now, how long would
Speaker 1: the list be of potential suitors. I'd imagine to be
Speaker 1: like massive.
Speaker 4: Not necessarily when we acquired control of this shopping mode
Speaker 4: manager I just mentioned that happened just this year. There
Speaker 4: were no competitors, So different market is very different. Maybe
Speaker 4: I should digress a little bit to explain why that
Speaker 4: is case. In China, in private, you almost never do
Speaker 4: a deal through option process. Is almost always finantial negotiation.
Speaker 4: In Japan you almost always do a deal through option process.
Speaker 4: As in the United States, as in Europe. Why is
Speaker 4: not the case? That is because in Asia, by and large,
Speaker 4: Japan is a mature market where trust level is very high,
Speaker 4: so one firm is not sufficiently differentiated from another. You know,
Speaker 4: whether it's PAG or Bain or KKR, from the point
Speaker 4: of view of the seller, they're all the same. And
Speaker 4: in China it's still a rather nascent market, and brand
Speaker 4: name in such a market becomes very important. And if
Speaker 4: you have a brand, you are differentiated from the rest
Speaker 4: of the pack. It's not just a matter that you
Speaker 4: have capital. People have to know have you done duals
Speaker 4: of this magnitude? Have you been successful? Can I trust
Speaker 4: my company to you? Even though I get out, I
Speaker 4: still care about the future of this company. So once
Speaker 4: you build a brand name there, then you will get
Speaker 4: more than your fair share of the market. So in
Speaker 4: different markets, you know, the market dynamics are completely different.
Speaker 2: We always like to ask our guests at the end,
Speaker 2: is there anything else that you wanted to highlight, anything
Speaker 2: we missed, or maybe you want to tell us about
Speaker 2: a forthcoming book.
Speaker 4: I wrote three books, and not from the perverse of
Speaker 4: just telling a story, but I wanted to feel what
Speaker 4: I consider to be voiced in the literature. My first
Speaker 4: book is about the experiences of I and my peers
Speaker 4: through the Cultural Revolution of China, when China was extremely
Speaker 4: poorant I was making one dollar a month for many
Speaker 4: years as a hard labor in the Gobi Desert, and
Speaker 4: then crossing over into a period when China opened up
Speaker 4: and the economy, of course developed very strongly. I just
Speaker 4: thought that there was no such book in the English literature.
Speaker 4: Since I lived through it, I should write a book
Speaker 4: about it. Private equity has become a major industry, as
Speaker 4: we all know. Harry Kravitz of KKAR likes to say
Speaker 4: that any idiot combined business is what happens afterwards that
Speaker 4: really matters. Whether or not you make money for your investors,
Speaker 4: that really matters. So it's important to know what happens
Speaker 4: after by a deal, you know, and there are books
Speaker 4: like Barbarians at the Gate, which talks about the deal
Speaker 4: making part of that transaction, but there was no book
Speaker 4: by the insider talking about how did you transform the business?
Speaker 4: What did you do with the business? Did you add
Speaker 4: value to that business eventually? How did you get out?
Speaker 4: And I thought, well, since there's so much interest on
Speaker 4: private equity, and I've gone through a lot of experiences,
Speaker 4: and I was in the position to write such books
Speaker 4: and I did No, I don't have a proverse anymore. Therefore,
Speaker 4: I don't think I'm going to write another book.
Speaker 2: Well, if we see consumption coming back big in China,
Speaker 2: you're going to be the first person that all the
Speaker 2: publishers will be calling.
Speaker 4: Well, thank you very much.
Speaker 1: Well, it's been a fascinating discussion on China's economy, the
Speaker 1: private equity industry in Asia, and also a discussion on
Speaker 1: your three books. Thank you Sean for coming on the show.
Speaker 4: Has to be a pleasure, and thank you.
Speaker 2: Kited Mitrieva in Hong Kong.
Speaker 1: I'm John Lee, also in Hong Kong. This podcast was
Speaker 1: produced by Clara Chen and you've been listening to the
Speaker 1: Asia Century podcast