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The New Silk

Jim de Wilde

Jim de Wilde is a Canadian venture capitalist. Among other activities, he teaches venture capital strategies in the MBA programme at the
Rotman School of Business at the University of Toronto.     


            The January 8th Financial Times reports that Patricia Hewitt, the U.K. secretary of state for trade and industry, stated "The China bandwagon is accelerating very fast and it is time to jump on it".   Ms. Hewitt's concern is that an historic reshaping of the global economy and capital market is taking place and U.K. business is not recognizing how fundamental this restructuring is.    The same is, in some ways, less true of Canada, where a substantial portion of Canadian business in Vancouver and Calgary has seen Canada as an Asia-Pacific economy.   However, we remain with the same set of challenges.

If this is a restructuring of historic proportions, then what are the optimal investment strategies for Canadian businesses and investors?   Right now, the global economy is in a process of reconfiguration to reflect the enormous growth potential of the Chinese market and the impact of Chinese growth on global consumption, already evident in the increasing demand for fossil fuels as a result of China's consumption needs.

 Chinese innovations like silk and gunpowder helped to transform earlier global economies.     The future commercialization of China's knowledge base and the development of an indigenous private equity and venture capital capability have obvious significance for global capital markets.     This represents an opportunity for Canadian investors and private equity strategists to play a role of increasing significance. 

For most Canadian fund managers in 2004, China is a play on Manulife, or Nortel, or any oil and gas technology with reasonable times to PetroChina.   While there are a few specific China-focused plays, including educational technologies and rare-earth mining, on the whole, the China story to date has been largely about exporting Canadian products.


What I intend to do today is (i) discuss some of   the trends which are shaping China's participation in global capital markets, (ii) assess whether there is a private equity / venture capital play for Canadians, and (iii) sketch out a way that a Canadian centre to explore venture capital and private equity strategies in China can contribute to the Canadian financial community's understanding of China, becoming in effect Bay Street's (a pan-Canadian Bay Street's) window on China.


I.  Trends Shaping China's Participation in Global Capital Markets

Let us start with three case studies:

  • CHINA GREEN BECOMES THE MOST OVERSUBSCRIBED OFFER IN HONG KONG HISTORY   (  ) (January 2004).   China Green shows the market appeal of a small vegetable growing concern from Fujian and has raised a number of questions about whether or not the current pattern of investment in China is leading to a bubble. 
  • CHENGWEI VENTURES (   DEVELOPS A PORTFOLIO OF BEST PRACTICES INTERNET AND E-COMMERCE.  The Chengwei and New Margin portfolios ( show the opportunities of applying learned best practices from  internet era venture capital strategies in Europe and North America to the emerging Chinese marketplace.   (e.g. OVAL TECHNOLOGIES )
  • CARLYLE   BUYS INTO BOTO (, ) Carlyle's investment in Boto shows the appeal of Chinese manufacturing and the strategy for participating in the manufacturing based boom in China.   Boto is an interesting Chinese leisure goods (recreational furniture) play growing from the manufacture of artificial Christmas trees.


As 2004 begins, there are four lessons we should take from cases like these. 

First, avoid the frenzy and the overheating and, like Chinese business for centuries, focus on the longterm.   This is a major economic restructuring not only of China but of roles in the global economy and the financial engineering of new players for these roles.  This is one of the attractive features of private equity and venture capital as opposed to the public equity markets in areas where overheating can easily occur.  From the dotcom era, however, we know that overheated markets can lead to disastrously short-sighted investing strategies on the private equity side;  nevertheless, in a market that is oriented towards stable financial engineering and longterm strategic thinking, private equity can be an attractive avenue for investing..


Second, understand the enormous strengths of China as a society and pool of intellectual capital.   The talent-pool which goes into the management of the Chengwei investee companies is easily a management talent pool that matches what investors could finds in any advanced economy in Europe.      The next wave of the global restructuring will see the creation of the Chinese equivalents of Nokia, Bombardier and Samsung, companies commercializing the Chinese knowledge-base as it innovates.    The question is how to discover and facilitate the development of these companies.


Third, learn to appreciate the regional strengths and diversity of the Chinese economy.    China is no more a single market than Canada, India or Russia and in understanding the economic geography and regional political economies of China, there is a potential to create investment strategies which are differentiated and avoid the "me-too" pattern of some private equity or the overheating which can lead to a bubble.   (See the superb piece by Keith Bradsher in the New York Times of January 18, 2004  "Is  China the Next Bubble?",  where he points out the economic risk of a round of U.S. protectionism  limiting China's growth opportunities).     The regional characteristics of China are shown in the different locations of value-creation.


Fourth,   the existing pattern of red-chip investments reveals a pattern familiar to veterans of earlier "emerging" markets, e.g. Russia in the early 1990s, Thailand in the mid-1990s.


The public capital markets focus on privatization and large holding companies.    There is nothing wrong with this as an investment strategy. It leads to both the development of acquisition currency for an emerging market multinational (the evolution of Chaeron Pokphand ( is an example of this).  But this is precisely where markets like China can become overheated, and, for a variety of uniquely Canadian reasons, it is also a market where we are just figuring out how to play.

              There are a couple of generalizations about doing business in China which are always worth repeating: (i)one needs to know the local historical networks (the same is true about international business everywhere) and   (ii) long-term relationships matter (although the same is true in Switzerland and almost everywhere outside of a gold rush market-frenzy driven economy).  

 There are also some other characteristics of contemporary China which are worth exploring as we start to formulate and assess investment strategies in China.  These will enable the identification of key trends in the development of the Chinese economy from which we can learn and with which we can define an investment strategy:

  • China is, like every country a nation of regions, just much more so. The economic geography band political economy of the rustbelt states of Liaoning, Jilin and Heilongjiang has different growth opportunities than the entrepreneurial characteristic of Anhui or the     commercial globalization of Guangdong.
  • The commercialization of knowledge is a global opportunity.   The Soviet science base in advanced industrial materials, rare-earth based metals for the Soyuz and MIGS proved a real technological advantage, but one which was difficult to commercialize except as part of a global manufacturing strategy. The search for a diagnostic of the Chinese technology base is a first step toward venture capital strategies being customized for the Chinese market.
  • Venture capital in an overheated market or an emerging market (China is both) requires the backing of individual management teams.  A portfolio strategy for China which seems to be followed by the major venture capital firms in China or with a Chinese presence is to back individual entrepreneurs and let them develop their ideas.    Investors in Canada are, essentially, talent scouts.
  • The current business and investment models in both public and private equity for China are broadly a combination of: 
    • Beer & Cement: traditional emerging markets portfolio ("beer and cement" consumer products and infrastructure). From previous knowledge of emerging markets portfolio strategy (and China is both an emerging market like Brazil or South Africa) and a burgeoning economic superpower, like Japan in the 1970s, or Germany in the 1960s), there is a portfolio strategy which is based on infrastructure + consumer products.  This fits the "standard" rapid growth formula for fund managers who look for some mixture of these formulas in Russia, Thailand, and Mexico in previous periods of hyper-growth;
    • Maquiladora:  the maquiladora strategies similar to the post-NAFTA investment strategies in  Mexico   (privatized companies with manufacturing capabilities,  financial infrastructure to manage manufacturing in the new global economy); and
    • Best practices Internet business models:  venture capital strategies applying best practices e-commerce and enterprise management to the Chinese information infrastructure).

           The best way to start is to look at some best practices investment strategies in the venture capital and private equity markets in China.  I used a Chengwei portfolio company as an example earlier.   Chengwei focuses on replicating successful information technology, enterprise software and e-commerce models from the playbook of U.S. and European venture capital during the Internet boom period.     Other Chengwei companies ( like  build the architecture of the Chinese web. 

            W.I Harper   ( has a mixture of internet infrastructure (e.g., on Chinese-language book publishing),  gaming plays ( and  "beer-and-cement" investments like Beijing development (restaurant chains).

            In the Hambrecht and Quist Asia portfolio, there are examples of maquiladora manufacturing ( and a battery-manufacturing to complement the development of a semiconductor industry in   It also invests in the Beijing Starbucks and Sinogen, an attempt to become a lead biopharmaceuticals firm for China.  

            Intel Capital has a number of content plays, including, , and computer infrastructure and manufacturing plays like Beijing Golden Human Computer Company.    


The following is an attempt to organize the discussion regarding a potential private equity/venture capital play for Canadians by outlining some possible investment strategies:

1.  The Chengwei and New Margin approach is one that  imports best practices of e-commerce and information economy business models for the Chinese marketplace.   Chinese venture capital firms are adapting the expertise of European and North American trained MBAs to the experience of contemporary China.   Arguably, this is what most of the venture capital strategies to date have been.

2.   To the extent that generalities can be applied to a market as complex, sophisticated, regionally and sectorally diversified as China, the "beer and cement" rule for rapid development in emerging markets still applies.     Financing infrastructure plays and financing consumer brand building in China then becomes a significant approach to the way in which growth can be anticipated, facilitated and invested in the Chinese market.   Investment bankers looking for opportunities for IPOs will congregate on this strategy.   China Green is such a play and exemplifies the building of a Chinese private sector in consumer products,   export-oriented agriculture and primary resources and the construction of industrial infrastructure.

3.  The pattern of Chinese growth is, however, different from the conventional new market "beer and cement" days.   Given the global restructuring of manufacturing, another appropriate strategy is to focus on the supply-chain that facilitates the Intel, Nokia, Lucent, Motorola capacity to operate in China or builds on it to  create Chinese plays within this expertise by developing  brands in China to do the manufacturing of cell phones, component parts and automotive products for the global export market.     This is a unique Chinese strategy, borrowing from the economic geography of the Mexican post-NAFTA maquiladora days, but dramatically different in the capital market strategies which underlie it.     As Chinese manufacturing develops a greater financial and organizational sophistication, companies will emerge in an opening market that can grow to develop strategies that are autonomous from the functional role that they play within a Nokia, Intel, Motorola, cost-efficient manufacturing strategy.    This might mean that China's automotive industry emphasizes a productive efficiency in manufacturing eco-cars, either with hybrid fuels or other innovations.


Two additional approaches are made possible by the degree of social networking which has emerged in the new private equities world, lubricated by millions of emails between MBAs from major world business schools.   The first flows directly from this new reality:

4.    The talent-scout approach to investing is another approach.    Find 100 entrepreneurs in China with global networks and ask them to invest in start-up opportunities.   This approach is, in reality, what other investors have done in less significant markets than China.   It means betting on the entrepreneur's local knowledge, local networks, and local market intelligence.  If a local entrepreneur's judgment is that value can be created in food-processing, then that diagnostic of the economy is more appropriate than any general theory or "comparative" investment strategy.   If a skilled entrepreneur with global knowledge sees a market opportunity in restructuring a machine tools company in the northeast of China, then the same logic applies.    This is a venture capital strategy for entrepreneurial growth in a rapidly-changing economy.

5.   Another new strategy is to look at Chinese inventive sources and attempt to commercialize them. This builds on a diagnostic of Chinese excellence and competence in science, medicine and engineering to design a venture capital strategy that would be similar to that of any knowledge-rich expanding economy with a smaller domestic base (e.g. Switzerland or Finland) and see how that knowledge can be commercialized as in any strategic venture capital model.      Where are the Chinese Nokias or Bombardiers of the year 2014?

            Canadians looking for investment opportunities in China have usually asked what blue-chip and red-chip   investment strategies exist for Canadian fund managers wanting to position their portfolio for the expansion of the Chinese marketplace.    This leads to the accumulation of a public portfolio of Chinese stocks like China Green or the red chips in the U.S.China Index (see Appendix 2).     Or we can look for "China plays", Canadian companies with significant room for growth because of their local knowledge of China.

            We can continue the China play concept of following Manulife, Nortel,  Husky and Canadian blue chips with  expansion strategies that target Chinese accelerated growth.   On a limited scale, the Chinese market can be accessed by Canadian entrepreneurs who convince our venture public markets that their activities are worth some higher-risk financial engineering.  That has happened in the educational services cluster (, and one can argue that this is a case study of the entrepreneurial Canadian capitol market functioning well.

            Beyond these approaches, how should Canadian investors and business schools approach the growing China marketplace?   A Canadian Centre for Private Equity in China would be a first step, both as a window for Canadian investors on China, but also to extend the Canada-China economic partnership.   Questions to be addressed include:

§         Is there a strategy for rust-belt investing which involves partnerships between Canadian manufacturing companies and investors and the Chinese northeast states?

§         What is the state or original research in, e.g., biosciences in China and how can that be commercialized more effectively?     Can Canadian venture capital firms help prospect for the leading technologies in China

  • Are there sectoral collaborations (e.g. environmental technologies) in which Canada-China investing consortia make sense?
  • What kind of investment strategies exist in China today to capitalize on the explosive pattern of growth and the concentration of intellectual capital which exists in the Chinese economy today and how can this be translated into a public or private equity investment strategy for China?
  • How does one create an entrepreneurial financial engineering strategy for the emerging China market, given our global experience with venture capital portfolios in periods of rapidly-growing economies?

The immediate proposal is that CIPEC do two things.

1. Case Studies:  We need a series of case studies for teaching in China and about China the way private equity and venture capital work.    The case/course package attached here as Appendix 1 constitutes a potential framework for looking at private equity in China.   The case studies include new innovation areas like biosciences and computerized gaming, and business models and investment portfolios of the maquiladora and beer-and-cement strategies discussed above.     They cover the themes discussed above and as a package represent  a coherent pattern of  story-lines both to inform Chinese investors of how market opportunities in China could develop and be a "course"  (in the broadest sense of the term) to inform Europeans, Latin Americans and North Americans of investment opportunities in China and how they might  be accessed.

2. Commercialization of Innovation:  We need to address the question of innovation in China and to identify where the financial engineering exists to create the Chinese version of Lego, Bombardier, Bausch or Sony, commercializing appropriate innovative skills in engineering and research  to create a global multinational.      This is where the next stage of venture capital and private equity strategies for China become the most exciting and where Canadian experiences and knowledge can be the most valuable.    It begins with a diagnostic of the Chinese technology and research base to see, as any national venture capital strategy must, which areas are closest to commercialization.   As such, it would mirror many of the activities which have taken place in recent experience in Canada and Europe, by attempting to identity scientific competitive advantage.


Softbank portfolio 

H&Q Asia  new maquiladora investing HD Biosciences                  What is the structure of the Chinese biosciences research base?                 What are the linkages with financial investors (global life sciences investment firms?                 How does the scientific research fit into the global structure of research in life sciences? What alliances produce the most benefit for the Chinese inventive sources?                 How does one create global market reach for these areas of Chinese science as they are                      commercialized? New Margin portfolio   (short-range wireless connectivity),  (Laijing multimedia, broadband content),  (smart card manufacturing), (ERP solutions), (Linux applications for Chinese companies), (e-versions of Chinese literature)      CASE STUDIES OF SUCCESSFUL COMPANIES BUILT FROM ENTREPRENEURIAL ENGINEERING Ningbo Bird  - commercializing Chinese technology and exporting to SE Asia

Ctrip    -  IPO ( first of 87 Chinese IPOs offered in U.S. markets. W.I. Harper and Youle CRITICAL CASE STUDIES REGARDING THE ECONOMIC GEOGRAPHY AND POLITICAL ECONOMY OF PRIVATE EQUITY IN CHINA AMR Technologies   - a Canadian case study  ( ) Carlyle and Boto - private equity strategies for China.   ( ) Stimul   - Chinese investing in Central Asian and Russian oil. ( STIMUL joint venture producing oil in Russia near Kazakhstan) . FINDING THE NEW SILK-- COMMERCIALIZING THE CHINESE CREATIVE BASE Zhuing Guan Cao   -  Tsinghua Silicon Valley Huayan   -   Silicon Valley Entrepreneurs    Silicon Valley backed Chinese entrepreneurs     networked and leading to NASDAQ IPOs or venture-backed financing: Viador, GRIC Webex,  SINA, Oplink  (   


1.USX China Index 
 The following 22 public companies comprise the inaugural Index:
     Aluminum Corp. of China Ltd. (NYSE: ACH)

     AsianInfo Holdings, Inc. (NASDAQ: ASIA)

     ASAT Holdings Ltd. (NASDAQ: ASTT)

     Brilliance China Automotive Holdings Ltd. (NYSE: CBA)

     Sinopec Beijing Yanhua Petrochemical Co. Ltd. (NYSE: BYH)

     China Eastern Airlines Corporation Ltd. (NYSE: CEA)

     China National Offshore Oil Corp. (NYSE: CEO)

     Chindex International, Inc. (NASDAQ: CHDX)

     Chinadotcom Corporation (NASDAQ: CHINA)

     China Mobile Hong Kong Ltd. (NYSE: CHL)

     China Unicom (NYSE: CHU)

     China Yuchai International Ltd. (NYSE: CYD)

     Huaneng Power International, Inc. (NYSE: HNP)

     Jilin Chemical Industrial Co. Ltd. (NYSE: JCC), Inc. (NASDAQ: NTES)

     PetroChina Co. Ltd. (NYSE: PTR)

     Sinopec Shanghai Petrochemcial Co. Ltd. (NYSE: SHI)

     Sina Corporation (NASDAQ: SINA), Inc. (NASDAQ: SOHU)

     Qiao Xing Universal Telephone, Inc. (NASDAQ: XING)

     Yanzhou Coal Mining Co. Ltd. (NYSE: YZC)

     China Southern Airlines Company Ltd. (NYSE: ZNH)
Initially, 22 public companies will be represented in the USX China Index. To be included in the USX China Index, companies must meet the following criteria:

o         Their primary business is conducted in China.

o         Their common stock is traded on U.S. exchanges

o         Each company's market capitalization is more than $50 million

o         The company is approved by the USX China Index selection committee which considers additional factors such as trading volume, public interest and shares available to the investing public.  (As defined on USChina Index web-site)

As of December 1, 2003, the 10 principal holdings of Mathews China Fund were:
o         Denway Motors (automotive parts) 4.2 %
o         Zhejiang Expressway (roads)    3.4%
o         China Merchants Holdings   (paint, glass)   3.3.%
o         China mobile   (cellular)   3.2%
o         Cheung Kong infrastructure   (roads)   3.2%
o         Tsingtao breweries  (beer)  3.1%

o         Legend Group (computer brand)   3.1%

o         BYD (batteries)      3.1%
o         Huaneng Power International   (coal-fired utilities)   3.1%
o         CNOCC   (oil technologies)   3.0%
Best performance on Hang Seng 2003 until December:

o         Aluminum Corporation of China 391%

o         Maanshan Iron and Steel 357%

o         Anhui Conch   327%

o         Jiangxi Copper  292%

  • Angang New  Steel  268%
Last Updated ( Monday, 20 June 2005 )