February 27, 2005
Is It All That Rosy for Media Investments?
Attendees at a China business conference this past month showed some interest in media related investment. Let’s start off with TV and Radio, as these sectors of the industry are the most visible and influential to the majority of Chinese. Recent changes in Chinese law encourage the injection of foreign capital into TV and radio, albeit with a number of restrictive conditions.
The Administration of Sino-foreign Equity and Cooperative Joint Ventures that Produce and Operate Radio and Television Programmes Tentative Provisions, despite the unfortunately lengthy title, are nicely clarified here with delightful brevity. [Registration required.]
As therein explained, foreign private equity firms are implicitly prohibited from TV and radio investment. However, foreign firms specializing in the radio and TV business may hold up to 49% of a joint venture with Chinese firms possessing required the media permits. The foreign investor must contribute foreign exchange – no form other than cash is acceptable. Regarding the form of the Chinese investment, there is no similar constraint. In other words, the foreigner should hear it unequivocally stated: “Show us the money, baby!”
[The Provisions may be found here in Chinese. More on developments in Chinese media law may be found here.]
One might easily forget that, while just about anything goes on Chinese TV nowadays, a permit may be revoked – at times with speed that stuns. A-Mei, a Taiwanese singer who vocalized her support for Chen Shui-bian’s election to Taiwan’s Presidency by singing the Nationalist anthem, was immediately banned from performing in China. (As of 2004, she is now once again allowed to perform.) The editor personally knows musicians whose performance permits were revoked for no reason stated.
Why, then, given investment restrictions and political involvement of the one-party system, would foreigners show an interest in investing in the Chinese TV and radio industries?
Most likely, it has to do with revenue growth. According to this document, TV advertising revenue has increased from US$300m to US$2.7bn in the past decade. Without looking critically at the exact numbers – and I assume that they aren’t far from the truth, even given just the massive state-of-the-art complex Central China TV (CCTV) has been building in Beijing – they occurred during the meltdown of internet ad revenue in the West that the industry hoped would save it from a poverty of growth.
What then are the trends in advertising a China investor needs to know?
In “Ten Major Trends in Chinese Advertising,” a Chinese analyst discusses future developments in the industry. (If enough readers show sufficient interest, I will translate the document in its entirety and post it.)
1. Increased state supervision over “problem” advertising.
2. Simplification of procedures relating to increasing foreign investment.
3. Growing competition for increased customer spending among national and provincial media outlets.
4. Development of SMS (cellphone messaging) as a major business opportunity.
5. Maturity of online gaming platforms as major advertising channels.
6. “TV Anywhere” and the proliferation of advertising into all aspects of social life.
7. Multinational advertising agencies, in cooperation with local firms, to develop markets in second-tier cities.
8. Advancement of advertising into the digital television realm.
9. Growth of public relations firms as risk reduction vehicles.
10. Development of regulation should help ensure industry standardization, but the administrative wherewithal for uniform implementation may be lacking.
In other words, the analyst foresees only growth and development with minimal intrusion of the government. Naturally, an investor wishes to be somewhat defensive. Ok, call me skeptical – I tend to believe that skepticism is a healthy reaction. So, let’s ask the question: “Is it all that rosy?”
More on this at a future date.
Posted by Richard at 7:15 PM | Comments (0) | TrackBackFebruary 20, 2005
Who Owns the Equity in Chinese Listed Companies?
The Chinese stock markets are queer creatures, if only because of massive state involvement. With nationalization in the 1950s, the Chinese state became the nominal and functional owner of all commerce and industry. The reverse function – privatization – has proved to be a greater difficulty.
Roughly 1,200 state-owned enterprises (SOE) listed on these markets, ostensibly becoming firms owned by shareholders, instead of the state. Closer inspection reveals that the state remains the greatest shareholder in these firms, and they are not easily or readily divested of their interests.
About one-third of the equity in these firms are held in the form of Legal Person (LP) shares, very often owned by state-controlled entities. In contradistinction to past rules on the alienability of LP shares, the Rules on Transfer of Non-Tradable Shares of Listed Companies, which became effective on January 1, 2005, now require share transfer to be registered, conducted through the Shanghai or Shenzhen exchanges and cleared through the China Securities Depository & Clearing Corporation Limited. That is, while many clamor for a resolution of the LP share issue, Chinese law appears to increase state central control, instead of allowing the market to make its own decision.
Approximately a further one-third is held by the state (guojia gu), which may not be traded. Indeed, they aren’t even listed. For somewhat more detail on shareholding, see this article by Wang Jiangyu.
In other words, only about one-third of the market actually trades (as “geren gu”) over the various exchanges. Professor Stephen Green:
"The large proportion of non-tradable equity means that China’s liquid stock market is relatively small, worth just RMB 1,317.9 bn (USD 158.8 bn), less than 17% of GDP, at the end of 2003. This is small in comparison to other markets, even other emerging markets. The markets of Indonesia, Malaysia and Thailand were all more developed, with only the likes of Argentina and Poland behind."
For elaboration, see his report here.
More on China investment in our next posting.
Posted by Richard at 8:24 PM | Comments (0) | TrackBackPrior Posts Still Available at Salon
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Posted by Richard at 6:10 PM | Comments (0) | TrackBackFebruary 18, 2005
FDI Way Up -- China's Stock Markets Down
When the Chinese stock markets were first established, people made a lot of money. Friends tell me they not only amassed profit from their investment within days, even hours, but enjoyed far more fantastic returns. One gentleman friend from Shanghai made 36 times his original investment within only a few weeks.
But those days are long gone. Now, investors, Chinese and foreign, complain about the performance of the Chinese stock markets, and with good reason. At six year lows, both the Shanghai and Shenzhen benchmarks have, as the Asia Times notes, put in “disastrous” performances.
Ostensibly to rally the markets, the Ministry of Finance cut the tax on transactions in shares by a full 50%. And a minor rally was created, at least in Shanghai, which has since disappeared. In truth, the tax, beginning on January 24, 2004, decreased very slightly to 0.1% from 0.2% of A-share and B-share transactions.
This was window dressing, to say the least, and one hesitates to posit a reason for the implementation of this tax cut. Even Xinhua, the state media organ, had nothing positive to report about this latest attempt to bandage a gaping wound. For more background, see this article [Pay site.]
Apparently, there must be some contradiction somewhere. For while the stock markets flounder, inbound investment has soared to US$60 billion and 2004 M&A activity has grown by 50% over 2003.
Where is the money going and why not towards the purchase of the shares of publicly-listed companies? Several reasons are the cause of this amazing phenomenon, which we’ll discuss in our next post.
Posted by Richard at 6:31 PM | Comments (0) | TrackBackTwo China Business Events in New York City
Asia Business Intelligence is pleased to blog once again. Asian business, and especially that of China, is our focus.
This address http://www.asiabizblog.com replaces http://blogs.salon.com/0001319, which still receives a substantial number of hits per month and remains accessible.
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Two events to be held this spring by the China Institute, New York City.
RSVP to William Krents, (212) 744-8181, ext. 125 or wkrents@chinainstitute.org
Mr China: A True Story
Friday, March 4, 8:30–10:00 a.m.
NB: Held at the Institute at 125 East 5th Street in Manhattan.
Free to corporate members / $20 member / $30 non-member
Continental breakfast included.
Based on the author Tim Clissold’s own experience, Mr. China tells the tale of a western capitalist’s foray into China with $400 million to invest and dreams of getting rich. He finds himself humbled by the experience and gains profound respect for China and its people. Lecture followed by a book-signing.
China Private Equity Update
Friday, March 18, 12:00– 2:00 p.m. * Lunch included
NB: Held at Allen & Overy, 1221 Avenue of the Americas, NYC
Free to corporate member / $35 member / $45 non-member
Reservations required. No-shows will be billed.
Jonathan E. Colby, Managing Director of Carlyle Group, the world’s largest private equity firm, and Mitchell Silk, Partner in the Hong Kong office of international law firm Allen & Overy, will discuss the current environment, structures and exit strategies for foreign investors in China.
Posted by Richard at 6:28 PM | Comments (0) | TrackBack
