Fraser Howie is one of the most astute observers of China’s banking and financial systems, and his book Red Capitalism: The Fragile Foundations of China’s Extraordinary Rise is required reading for anyone who wants to understand China’s transformation from an impoverished backwater into a powerhouse of authoritarian capitalism. Fraser has spent over two decades trading, analyzing, and writing about Asian stock markets and has worked for companies including Bankers Trust, Morgan Stanley, CICC, and CLSA. He is a regular commentator on Asian financial markets and monetary policy for international print and television outlets.
MarcumBP’s Drew Bernstein caught up with Fraser recently to understand his views on how the economic and business environment is changing and the challenges that Chinese policymakers face.
After months of sparring on twitter, the two opponents were to face off at a recent conference on Fraud in the Bull Market organized by the Berkeley Center for Law and Business. Is activist short selling the best hope for cleansing the stock market of bad actors? Or is a plague of shadowy short-report gunslingers destroying worthy companies and fleecing retail investors?
I thought it would be useful to share key takeaways from the recent Bloomberg Invest Asia conference, an invitation only event for international business leaders to exchange ideas regarding China’s role in the investment community.
Drew Bernstein interviews long-time China expert James McGregor, the author of One Billion Customers - Lessons from the Frontlines of Doing Business in China, on the challenges that multinationals face doing business in China today and the state of U.S.-China trade relations. Currently the Chairman of APCO Worldwide, Greater China, McGregor has spent three decades in the region as a journalist, venture investor, author, and now public affairs consultant to major corporations with operations in China.
Judging from the headlines, you might think Chinese technology companies are on the ropes. The Justice Department has been investigating and indicting telecom giants Huawei and ZTE. Rising U.S. tariffs threaten to displace China’s dominance in the global supply chain for electronics. And Chinese internet Goliaths Alibaba Group (NYSE:BABA) and Tencent saw their market values shaved in 2018 by investor jitters over government policies and a softening economy.
If you only read the newspaper or watched TV, one might think that the economic relationship between China and America was on the verge of an irreparable split. But as I shared in a recent interview on Bloomberg television, I actually remain fairly optimistic that, despite the many bumps in the road, the world’s two biggest economies will continue to find ways to work together and that deals will get done.
The role of a Chief Financial Officer for a Chinese company listed on the U.S. stock market is intensely challenging. While the job of CFO generally has become increasingly complex due to the growth in regulatory oversight and the pressure from institutional shareholders, Chinese CFOs need to also bridge two very different business and legal cultures.
Tencent Music’s (NYSE:TME) $1.1 billion IPO on the NYSE last week put a shiny bow on a banner year for Chinese IPOs on U.S. stock markets, with over $8 billion raised year-to-date, twice the IPO haul for Chinese companies in 2017. With 30 Chinese companies having listed on NASDAQ or NYSE it’s the best year since 2014, when Alibaba’s (NYSE:BABA) $25 billion IPO broke all previous records. What’s more, there is a sizable pipeline of China “unicorns” with multi-billion dollar private valuations hoping to score listings in the near future.
Given the deteriorating trade relations between China and the U.S., why are so many of China’s most innovative and valuable private companies still seeking to ring the opening bell in New York? And can this blistering pace of new IPOs be sustained?
NYU accounting and finance professor Baruch Lev is one of the most incisive contrarian critics of current accounting practices. In his recent book, The End of Accounting (written with Feng Gu) and his blog, Lev argues that current accounting methods have become hopelessly out of step with how value is created in the modern economy, and that an accumulation of new accounting regulations have only made things worse. Professor Lev backs up his critique with reams of market data and regression analyses to demonstrate how flawed accounting measurements have caused earnings and book value to become nearly meaningless to investors and now create very serious managerial biases and errors in how capital is allocated.
MarcumBP’s Drew Bernstein met with him to understand his views on where the principles of accounting went awry and how the structure of accounting might be reformed.
"If the trade war continues to escalate as Trump has threatened, there's going to be a big impact on the capital markets... I expect that we're going to see a winter in IPOs next year."
Paul, you've gotten to this point where you've become this guru for all issues related to accounting in China. How did that journey come about?
I came to China 21 years ago. I was transferred here by the international accounting firm PriceWaterhouseCoopers. It was Price Waterhouse at the time. I was in China with them for seven years. Then I took early retirement from PwC and I tried playing golf for a while, but got bored with that. So I went back to school. I first studied theology. I enjoyed the academic side of it, so I decided to get a PhD in accounting. I chose, as my topic for my dissertation, the development of the accounting profession in China.
One of the things that I discovered in my research was that there were gaps in the regulation of Chinese companies that were starting to rush to U.S. stock exchanges in the early 2000s. Those gaps in regulation were likely to lead to an environment where there might be a lot of fraud. I predicted it would happen in my doctoral dissertation. About the time I finished it, it all came true. There were over 100 cases of fraud brought against overseas-listed Chinese companies. My work came to the attention of the Public Company Accounting Oversight Board (PCAOB), which asked me to serve on their standing advisory group. And also a lot of hedge funds and other market participants got interested in what I had to say.
My blog, The China Accounting Blog, got quite a bit of attention. After a while, basically, everybody who was following the China stock market was reading what I was writing. That has led to me being, probably, the leading Western expert in Chinese accounting and auditing problems for overseas -listed Chinese companies.