Into the Dragon's Den - Spear's Magazine

Into the Dragon’s Den

As China’s financial powerhouse, Shanghai stands poised to become not only a playground for the rich but also one of the world’s great megacities, says Josh Spero
 
 
THE QUESTION OF why Shanghai is not already the new London — indeed, why it never became the new London — is one a lot more easily answered than whether it is or soon will be. The glamour girl of the Orient in the Twenties and Thirties was where the West came to trade and build and writhe in pleasure palaces.

The waterfront Bund is stacked with Art Deco manses, relics of a brief flourishing. Sitting on China’s eastern coast, at the head of the Yangtze, Shanghai should have continued to bloom, ships sliding into port, intellectuals and entrepreneurs talking up the town. But then came the Second World War, the Civil War and the Communist takeover, the Great Leap Forward and the Cultural Revolution, all phrases freighted with disaster.

And so Shanghai fell behind, as did all of China, leaving the cities of the West — soon to be modernised, technologised and grossly enriched — to forge forwards. Some cities became financial leaders, others cultural, and a few both. These offered to the world the chance to make money and to enjoy it in the same place.

Yet we have lately become conscious that this 60-year Western hegemony, forcibly dislodged by the financial crisis, has been undermined by China’s hybrid capitalism, massive population and explosive growth. Its GDP has just overtaken Japan’s to become the world’s second largest, and by 2027 it will be larger than America’s, Goldman Sachs’ Jim O’Neill has said. Governments’ financial might now comes from the East, trading our debt for their ready cash. The conditions are in place for a transfer of power and influence. The question is: will Shanghai, already accorded the status and burden of mainland China’s financial centre by the government, become to the high-net-worths of China and of the world what London is now?

China is certainly generating a ready supply of HNWs: 477,000, according to the 2010 World Wealth Report. At the highest end, the Forbes Billionaire List has 64 Chinese billionaires, second only to America in number, although none ranks in the top 100 and only one in Asia’s top 25. It says Zong Qinghou is the wealthiest Chinese billionaire, with a worth of $7 billion from his drinks business.

Contrarily, the Hurun Report’s China Rich List 2009 names Wang Chuanfu, worth $5.1 billion, as the richest, with over a hundred other dollar-billionaires behind him. Most of its top ten billionaires are involved in property, finance or production for domestic consumption, rather than export; their lack of reliance on the rest of the world indicates how far China has developed as a market (although the annual churn in the top ten gives pause for thought).
 
 
DAVID LIVINGSTON, A portfolio manager at Thurleigh Investment Managers who worked at a Chinese private equity firm for three months recently, says that the big decision now facing Chinese businessmen is whether they take their companies public, which could never have happened in the high years of communism. These liquidity events are turning entrepreneurs into HNWs. At the same Thurleigh round table, CIO Charles MacKinnon added that it was in some senses easier to be an entrepreneur in China, since ‘the rules are clear, very explicit. In the UK you are ground down with all the different ways of trying to make capital.’

Dr Kerry Brown, senior fellow in Chatham House’s Asia Programme, speaking down a crackling line from Beijing, says Shanghai, in contrast to other cities, is not in itself hugely entrepreneurial: ‘It is 85 per cent state business, and it is not a wealth-creating city — it has created a lot of wealth for state companies, but not really for private entrepreneurs.’


 
Private banks have not been slow to pick up on the growth in Chinese money, either from the West or in China itself. CCB, one of the ‘big four’ state-owned banks, expects to double its private banking revenues in 2010 to $586 million, general manager Wang Guiya told Reuters in May, and it trebled its clients over 2008. (Knowing that UBS’s wealth-management revenues alone are $11 billion, however, shows what a nascent market this is.)

In 2007, the Royal Bank of Scotland launched a private banking unit in partnership with the Bank of China, and BNP Paribas and Citi have major operations. Meanwhile, EFG, UBS and other banks play musical executives as they poach private bankers from one another to shore up their Chinese businesses.

Many private banks who operate in China seemed reluctant — even positively afraid — to comment for this article. Part of this is perhaps ascribable to the central government’s desire (implicit or explicit) to avoid highlighting the massive growth of Chinese HNWs, with the consequent social problems of relative wealth inequality and image problems for what is still a nominally communist society; but there was also clearly a desire to avoid being quoted in an article which mentioned corruption and the darker sides of China. Private banks, like most companies, tread very carefully around the Chinese government.

However, Citibank China would say that its focus for HNWs (with assets of over $1.2 million) ‘is more on offering an integrated personal and business banking relationship, given that most private banking customers are business owners’. Although most products for HNWs, Citibank China said, were similar to those available to normal customers, with some customisation, private banks are beginning to offer more unusual ways of investing, which are already familiar to the West: the first hedge fund has been officially approved, while Minsheng Bank launched an art fund in 2007 and China Merchants Bank offers a trial-or-return purchase scheme for contemporary Chinese art.
 
 
IS IT ACTUALLY worth being a HNW in China? Dr Brown says the central government has a nasty habit of ‘swooping down and taking hold of their companies’. He cites Huang Guangyu, a consumer electronics tycoon worth $2.7 billion and China’s richest man for several years, who was jailed for fourteen years last May for bribery, and Yang Bing, the ‘Tulip King’, who was jailed for corruption in 2003 after politically unacceptable dealings with North Korea.

It was not long after Huang was arrested that theories started to swirl about the motive; his playing politics and supporting the wrong faction seemed likely causes to many. ‘They are linked to patronage networks where something goes wrong — Shanghai is a fabulously corrupt city,’ says Dr Brown. It is also possible that the government is trying to enforce a higher degree of ethics on its entrepreneurs, but the case has obvious parallels with Russian ones like that of Mikhail Khodorkovsky.

Foreign businessmen fare little better, to judge by the outbursts of CEOs. Jeffrey Immelt of General Electric said: ‘I really worry about China. I am not sure that in the end they want any of us to win, or any of us to be successful.’ Even more direct were Peter Löscher of Siemens and Jürgen Hambrecht of BASF, who complained in public to Chinese premier Wen Jiabao during Angela Merkel’s state visit.
Mr Wen denied their charges of protectionism and state extortion of trade secrets, but the executives expressed concerns many have had.

Thurleigh Investment Managers have recently been exploring the Chinese market for their clients and Charles MacKinnon says he thinks that there is wariness on the parts of both HNWs and the government. HNW entrepreneurs, he said, avoid restrictions on taking their money out of the country and the problem of the inconvertibility of the renminbi by buying Shanghai real estate, then borrowing against it to buy property in Hong Kong. Furthermore, title to property in Shanghai may be more tenuous than you would hope, unlike in London, where ownership tends towards the cast-iron.

The government is similarly reluctant to get involved with the wealthy, MacKinnon says: ‘Do they want to attract wealthy people? No. They want to attract large corporations that can provide employment for the Chinese masses. Having wealthy people there is frankly an irritant: they have their own demands, their own desires.’ This tension, where the government wants HNWs to be productive but silent, is not unfamiliar from London, but there, at least, entrepreneurial freedom, the ability to move your assets and the security of your property are all guaranteed.

This rule of law has profound attractions for HNWs, and is at least partly responsible for the clustering of the foreign wealthy in London. MacKinnon mentions the ‘extraordinarily broad range of players in the market’: the Arabs, the Russians, the Europeans, as well as Britons. These nationalities do not just like London personally but also as a location for their companies’ headquarters; the mutability of the law in Shanghai makes it unlikely that companies would choose to put their back offices there.
 
 
DESPITE ALL THIS new money across the nation, if Shanghai is to acquire true global status it needs a critical mass of foreign residents, the status of a stop-off for the jet-set who come (like they do to London) for an art fair or a fashion show or to catch up with friends. These issues are largely tied up with quality-of-life factors, such as the availability of desirable property (for those immigrating), appealing cultural events and a lifestyle of luxury comparable to that available elsewhere.

At a fundamental level, geographical distance may make weekend breaks unappealing for Westerners, but major business and travel centres are relatively close at hand for residents: Shanghai is 500 miles from Seoul, 800 from Hong Kong, 1,100 from Tokyo and 2,500 from Singapore. (London is 200 miles from Paris, 500 from Geneva and 3,500 from New York.) For Asian HNWs, of course, Shanghai may well already be a regular destination for their private jets.

Shanghai does not lack prime property, but buying it is another question: residential properties tend to come with a 70-year lease, rather than freehold, a remnant of the era when there was no private property. (The government is also considering a tax on those who do buy luxury properties to halt the racing market.) Instead, one rents: villa compounds in Jinqiao and Kangqiao, suburbs of Pudong (the east side and financial heart), may be $15,000 a month, and penthouse apartments in the former French and International Concessions of Puxi (the west side), with their avenues of plane trees and older buildings, can be $22,000.

There are international schools in Shanghai once you settle, and the Minhang district is filled with them. Whether Shanghai can reach the variety and spread of London — let alone the security of a 999-year lease — is doubtful, and another one of London’s key charms — handy country retreats — is absent. (As Ross Clark explains on page 50, the Chinese see plenty of charm in London.)

There is much in Shanghai which might seem indigestible to the new Western transplant, and indeed Rana Mitter, professor of the history and politics of modern China at Oxford and a broadcaster on BBC Radio 3, says the two strands find it hard to integrate: ‘There is a Westerner’s Shanghai, and it stretches to everything from literary festivals to various types of business meetings, but it is often indicative that many of those meetings don’t have many Chinese people at them.’

Equally, however, there is a sphere of luxury which is understood by HNWs from across the world: you can buy a Vuitton handbag on Century Avenue as easily as a spring roll from a street vendor. Indeed, Shanghainese restaurants are also gaining recognition: Zagat highly rates Hanagatami (a Japanese in the Portman Ritz-Carlton), Guyi Hunan and Din Tai Fung (both Chinese), and Michelin, while not yet offering a mainland Chinese edition, has crept that way with a Hong Kong/Macau version.

Xintiandi, an entirely renovated district, is now fashionable, with multicultural bars, restaurants and boutiques in restored Shikumen (tenements unique to Shanghai which are a mixture of Western and Eastern styles). Five-star hotels from famous chains are popping up everywhere. Entrepreneurs are snapping up Porsches and Bentleys; Rolls-Royce sales were up 300 per cent in the first quarter of 2010 across China.
 
 
THE ART WORLD has both an underground scene and more formal galleries, although neither Christie’s nor Sotheby’s is open in Shanghai (both are in Hong Kong). Beijing is more vibrant by reputation, but the 14th Shanghai Art Fair, held in September, saw sales volumes rise by 40 per cent on 2009, and the ShContemporary fair has a strong reputation. (The art world is in fact hindered in China because art is treated as a luxury good, and thus is subject to 33 per cent tax; most deals, then, are actually made in Hong Kong.)

James Moores, part of the family that founded Littlewoods, has followed in the footsteps of his grandfather, who created the John Moores Contemporary Painting Prize, and set up a Shanghai edition of the prize after Shanghai University approached him. (Shanghai and Liverpool are twinned cities.) He says the Chinese appreciate the democratic aspect of the prize, in that submissions are anonymous, judged without reference to name or reputation. Technology is not left behind: the Expo 2010 Shanghai has showcased innovations in national pavilions, although to a largely local audience.

Consequent on this luxury sphere, of course, is that London and Shanghai also share one very important thing: the gulf between HNWs and everyone else. There is just as much distance between the Prada-toting, jet-flying class and the great mass of the population in Shanghai as there is in London.

Last year China Daily reported a survey from the Zhejiang Academy of Social Sciences which found that the wealth gap caused resentment among the poor and fear among the rich, with the rich reporting vandalism of their expensive cars. Even efforts at philanthropy — Chen Fashu, fifteenth on the Hurun Rich List, set up a foundation in 2009 with an endowment of $1.2 billion — may not help to bridge this or soothe angry minds.
 
 
SHANGHAI DOES NOT sit alone, and as the distances mentioned above indicate, it is in immediate competition with both Hong Kong and Singapore, which thus far have surpassed it as hubs for HNWs; both have higher millionaire densities than China. As Spear’s wrote back in Issue 11 (Spring 2009), hearing from CEOs in both places, these two cities have been battling it out, both having sophisticated financial systems and amenable environments — safe, civilised. Having a spread of offices across time zones — America, Europe, Asia — will always be important to businesses and HNWs, and these three cities are vying, among other things, for that position.

Few would argue that Singapore has much in the way of a cultural scene, but as a centre for business and raising your family it scores highly, with banks taking advantage of lower costs to set up there. Charles MacKinnon, however, thinks that the growth of Shanghai will ‘redefine what Singapore can sensibly achieve: can it really thrive, given the huge commercial weight that is going to be coming down from Shanghai and Hong Kong? Or will it just be Geneva?’

Hong Kong, once again under Chinese rule, has a rapidly growing private banking scene: an article in Asian Investor from August reported that private bankers were being actively recruited, and of course several CEOs have relocated there. David Livingston believes that the Chinese government ‘would rather Shanghai and Shenzhen became a Hong Kong-like financial centre than the other way around,’ moving Hong Kong’s offshore advantages onshore.

MacKinnon also believes that the battle for east-coast superiority will not result in Shanghai, Hong Kong or Shenzhen, a busy and profitable manufacturing and technology centre south of Shanghai, gaining individual domination, but rather that an equilibrium will result, with each city prominent in a particular sector.

What may ultimately prevent Shanghai becoming what London is — a centre of so many different worlds — is the Chinese government itself. Dr Kerry Brown thinks the lack of a free press and the centralised control of the legal system mean people and companies will refrain from moving there: there is little protection from abuses.

‘If you imagine Boris Johnson being able to control the headlines of all the newspapers and control the outcome of the courts, that is Shanghai,’ he says. Add to this the inconvertibility of the renminbi, only slowly changing, and Shanghai becomes opaque beyond endurance. This is not unknown in the politburo’s upper echelons: Dr Brown says that a senior general commented that Chinese politicians needed to cede some degree of control to succeed, and Shanghai has over the past twenty years been accorded greater slack because of its financial importance.
 
 
PROFESSOR RANA MITTER thinks that even to ask the question is mistaken: Shanghai is not trying to be the new London, but to learn from its mistakes, such as transport infrastructure, as well as those of its expanding neighbours such as Bangkok: ‘It is trying to put forward a vision of itself as an Asian city as well as a world city that has its own flavour, its own way of doing things that isn’t purely Western.’ Its difference is also embodied in its skyline, built by illegal migrant labour, ‘a very clear indication in bricks and mortar and concrete of a very different sort of social and political model.’ Finally, it lacks the self-confidence — arrogance — of major cities, their determined and forged identity, although this may come with time and success.

‘Shanghai is an aberration, really,’ says Dr Brown. Professor Mitter concurs: ‘There is a long-standing Chinese tradition of finding Shanghai completely bizarre and alien, and that is possibly one of the strongest parallels with London: they are both perceived by their own people as being something different, exciting, attractive, but also slightly dangerous, slightly perilous.’ In spirit, then, if not yet in body, Shanghai is indeed the new London — whether it wants to be or not.

Illustration by Femke de Jong



 

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