“One In Four Bentleys Is Now Sold In China”: Bentley Breaks China Sales Record, Outsells UK

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.jingdaily.com/en/luxury/one-in-four-bentleys-is-now-sold-in-china-bentley-breaks-china-sales-record-outsells-uk/

Alipay Fallout: Foreign Investors and China Risk Assessment

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )
http://www.chinahearsay.com/alipay-fallout-foreign-investors-and-china-risk-assessment/

Lots of interesting things that have happened recently with Chinese firms that have foreign investment. In short, investors have run into a lot of trouble. But will this have any effect on the China bubble, or will investors continue flocking to Chinese companies without a thought about potential risks?

I’m skeptical about foreigners’ willingness to learn lessons from the past, mostly because the problems they are having today are similar to ones I started seeing over a decade ago. A lot of this stuff isn’t new, folks.

OK, specifics. The big story of course is the asset transfer of Alipay:

Here’s what’s going on: Yahoo is a big shareholder in Alibaba, which is the biggest e-commerce company in China. Alibaba transfered ownership of its payment unit Alipay to an entity majority-owned by Jack Ma, the founder of Alibaba. This sent Yahoo’s stock diving because some investors think most of Yahoo’s value is in its Asian investments like Alibaba and Yahoo Japan.

This story hasn’t played out yet, and we don’t have all the details. As a corporate lawyer, I am confused that Yahoo’s Jerry Yang, who is on the board of Alibaba, wasn’t aware of the transfer. Alibaba CEO Jack Ma said that the board was notified. Seems like something Jerry Yang would have paid attention to if he was actually told about it.

I also don’t know any details of the transfer terms. Yahoo is demanding compensation. What did Alibaba get out of the transfer deal in the first place? How was the asset purchase booked? For one thing, it would be interesting to know what was disclosed to the tax authorities. Hmm.

I understand that this is a high-level deal involving a great deal of money, but the relationship between Alibaba’s local folks and Yahoo is really very much like a joint venture. They are basically partners.

And JV partners screw each other over every day. Sino-foreign JVs are particularly volatile, one of the reasons why so many foreign firms switched over to wholly foreign-owned entities as soon as China law allowed them to.

Some JV partners have good relationships, some don’t. Some foreign investors in China JVs have trouble, and some maintain good relationships and have healthy returns.

Whether Jack Ma used the excuse of foreign investment restrictions is beside the point. If he screwed over Yahoo, that’s on him, and by itself doesn’t necessarily say anything about Chinese investments. So in that sense, I’m not sure the Alipay deal will have much of an effect on anyone else, whether it’s a current relationship or a prospective deal.

What about all that talk of Chinese companies involved in reverse mergers, and the weak legal structures of many Chinese companies that list overseas? Again, this is all old news. I’ve been writing about those structures on this blog since 2006, and I haven’t seen most VCs or other investors seriously consider these issues when they do their risk analysis.

So has all the negative talk about the reverse merger problems led to a more conservative approach to investing in Chinese companies? The recent IPO of social media giant Renren has been looked at as a possible turning point. Off its scorching debut, the stock has slid quickly, almost coming back to its initial price. Might this be a trend?

After an initial stampede for shares in Chinese internet companies, investors are now worried that another tech bubble is on the way after recent US IPOs from China’s internet players have failed to perform in secondary market trading.

But what’s the reason for this? Sounds like a combination of things:

Some investors now fear a repeat of the late-1990s tech bubble, arguing that valuations are unrealistic given the uncertainties about these companies’ long-term profitability and sustainability. In addition, questions remain about corporate governance standards.

So how much of this newfound reticence has to do with performance and how much with risk? This is arguable, but let’s try a thought experiment: if Renren and all these other recent IPO firms were doing gangbusters and their numbers remained pumped up, would anyone really be talking about corporate governance?

Sure, some of these reverse merger companies have gotten into trouble, with some having to suspend trading, but remember that companies like China Media Express were allegedly inflating their revenues and lying about assets. In other words, their poor governance allowed them to cover up weak performance. Seems like folks are much more worried about the bottom line than anything else.

What does the Alipay situation bring to this? If anything, it’s another indication of the lack of control that foreign investors have. In a perfect world, that would factor in to future risk assessments, particularly in the China Net sector.

But will we actually see a more conservative approach now? If this is any indication, I’m not going to hold my breath:

The Chinese government’s strict supervision of the industry also poses potential risk. For example, the parent group of Phoenix New Media, Hong Kong’s Phoenix Satellite Television, often finds itself in a difficult position.

The group, which is partly owned by China Mobile Communications and News Corp, is the only overseas TV station with similar status to a domestic broadcaster, which has made it one of the most popular sources for news and information about the outside world. But it has to tread a fine editorial line to keep both its audience and the government happy.

Even so, the company’s IPO went relatively smoothly and made a strong debut. It raised $140 million by selling 12.76 million American depositary shares (ADSs) at $11 each after initially setting the price range at between $12 and $14.

The share price increased 23% to $13.5 in the trading debut on the New York Stock Exchange Thursday and ended at $13.2 on Friday.

Second-Tier Spotlight: Kunming Quietly Becoming A Luxury Brand Magnet

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.jingdaily.com/en/luxury/second-tier-spotlight-kunming-quietly-becoming-a-luxury-brand-magnet/

Jing Daily’s ongoing “Second-Tier Spotlight” series looks at some of the key trends shaping China’s provincial capitals, often referred to as the country’s “second-tier” cities. Previously in the series, we’ve highlighted Xi’an’s surprisingly young luxury consumers, a “Goldfinger”-worthy publicity stunt in Changsha, jade fever in Qingdao, and Shenyang’s love for second-hand shops. Today, we turn to Kunming, capital city of southwest China’s Yunnan province, an area traditionally popular for its tourism and natural beauty.

Once-sleepy Kunming — long a stopping-over point for itinerant backpackers — has quietly become one of the most lucrative luxury markets in southwest China. In recent years, brands like Cartier, Max Mara and Burberry have set up shop in fast-growing Kunming, which has benefited from increasing cross-border trade with neighboring Vietnam, Laos and Myanmar (Burma). Considering the city’s Gingko Center mall recorded a respectable 2 billion yuan (US$308 million) in sales last year, and Kunming has become a destination for villa-buying Chinese celebrities, expansion into Yunnan’s capital is probably a smart move.

To get a temperature reading of a given Chinese city’s luxury market, a good indicator is always a Louis Vuitton flagship, and soon Kunming will be home to the largest LV flagship in all of southwestern China. Since LVMH maintains strict requirements as to where it chooses to invest based, in no small part, on a city’s spending power, a glittering Louis Vuitton flagship tends to be a dead giveaway that a given city has “made it,” at least in raw economic terms. While Kunming’s per capita income remains far lower than wealthier coastal cities, with annual urban income in Kunming averaging 5,726 yuan (US$882) in 2010, around half that of their counterparts in Beijing, demand clearly exists for high-end goods. Between 2009-2010, Kunming’s Gingko Center mall saw revenue increase by 500 million yuan (US$77 million).

So who are these outliers? These consumers who can afford to drop thousands of dollars in a province where rural per capita GDP amounts to only around $400 a year? This week, Xinhua speaks to the general manager of Kunming’s Gingko Center mall to find out who the city’s luxury consumers are, what they’re buying, and why Louis Vuitton chose Kunming as the destination for its largest store in southwest China. Translation by Jing Daily team.

According a Gingko Center analyst, current hotspots in Kunming’s luxury consumer market are cosmetics, designer apparel, leather goods, watches, jewelry and other personal items. As the analyst added, “Soon, luxury investment in Kunming will shift towards real estate, red wine, automobiles, contemporary art and other areas.” Luxury watches are representative of Kunming’s luxury market. At Gingko Center, all of the world’s top luxury watch brands are sold, with some models costing over one million yuan.

Who are Kunming’s luxury consumers? As Mr. Wei, manager of Gingko Center, explained, currently Kunming’s luxury consumers are mostly split between two types. One type is business owners and higher-level managers; the other is high-income, fashion-savvy white collar workers and some freelancers. Split up by age, most luxury consumers in Kunming are either between the ages of 28-35 or over the age of 40, and they’re getting younger.

As for the reason Louis Vuitton chose Kunming to set up a lavish flagship in southwest China, manager Wei said that Kunming is a stylish city, and that several years of market development has fostered a growing number of local consumers who care about quality and cultural heritage. For their part, luxury brands now recognize the spending power of wealthy Kunming residents.

As we’ve seen in other second-tier cities, where wealthy consumers have already bought their luxury watches and stocked up their wardrobes with high-end brands, watch for Kunming to become a hot market for wine, jade and art collecting. As Xinhua points out, wine is likely to become the first big new investment area in Kunming, as an ever-growing number of wine stores look to procure popular brands like Chateau Lafite for their clientele. As one wine store owner recently said, a bottle of Lafite now retails for around 20,000 yuan (US$3,080) in Kunming, and “it’s not uncommon for people to drink more than 10,000 yuan worth of red wine at dinner.”

Yacht Maker Jeanneau Courts Chinese Market With Prestige Series

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.jingdaily.com/en/luxury/yacht-maker-jeanneau-courts-chinese-market-with-prestige-series/

With the recent conclusion of the Hainan Rendez-Vous and the China International Boat Show, China’s “boat season” has officially come to a close. Among the dozens of international yacht makers that streamed in to China for these events, hoping to pave the way for more China sales in the future, one in particular, France’s Jeanneau, has already seen results. Since the beginning of April, Jeanneau sold seven boats and yachts in China — not bad for a yacht market still in its infancy.

At the recent Hainan Rendez-Vous, Jeanneau presented its second-generation PRESTIGE 5000 yacht, selling three yachts and two sailboats over the course of the weekend-long event. The positive reaction received by Jeanneau was seen as a reflection of the increasing value of the consumer market in China, as the Chinese yacht market continues to develop and grow.

The second-generation PRESTIGE yacht series has generated a great deal of interest at recent international shows due to its clean lines and spacious interiors. This has been especially true in China, where Jeanneau’s PRESTIGE 60 was awarded the “2011 Best Power Yacht” award at the Shanghai International Boat Show, confirming Jeanneau’s rising status in the Chinese yacht industry. Having only become available in mainland China last year, the number of PRESTIGE 60 yachts now in operation there has increased to six, impressive sales performance for a power yacht.

As Jing Daily has previously reported, luxury-focused events such as the Hainan Rendez-Vous have given brands an opportunity to market directly to the well-heeled Chinese consumer, a demographic that’s becoming very rapidly educated on yachts and private aviation via an ever-increasing array of niche magazines. With Jeanneau’s success so far this year providing a sort of validation for the market, and interest in nurturing the yachting industry as far north in China as Tianjin, we can expect even more events to continue to focus on yachts and private aviation, reflecting the growing demand for these secondary luxury categories among affluent Chinese.

Boutique Hotels “Gotta Have Art” To Stand Out In China Market

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.jingdaily.com/en/luxury/boutique-hotels-gotta-have-art-to-stand-out-in-china-market/

With the number of hotels under construction in China skyrocketing in the last few years, and virtually all of the world’s top chains digging into Beijing and Shanghai for the long haul, one trend that seems to only be picking up steam is that of boutique hotels attempting to fill a niche by stocking a nicely curated supply of Chinese contemporary art. While few can do opulence quite like Shanghai’s Peace Hotel or the Fairmont Beijing, in an effort to brand themselves as a place for the hip and worldly, boutique hotels like Yi House, The Opposite House, and Langham Place have found that Chinese art can be the missing ingredient.

Jing Daily has previously profiled Yi House, a small “art hotel” in Beijing’s 798 art district, which owner Shauna Liu says is designed to emulate the slower pace of European life and the mix of traditional and ultra-modern that defines Asian cities like Hong Kong. Since opening last year, Liu has tried to integrated Yi House into the broader arts environment that surrounds it, recently announcing that Yi House would be teaming up with ChART Contemporary on a “monthly Insiders Guide” created to introduce guests to Chinese contemporary art and the 798 district. Though the roster of artists stocked by Yi House can’t quite measure up to The Opposite House, owner Liu regularly brings in new pieces and artists, keeping the vibe of Yi House as airy as a well-lit gallery. The Langham Place hotel, near Beijing Capital International Airport, while not as much of a boutique as Yi House, takes a similar messaging approach, calling itself “an art gallery masquerading as a hotel” and featuring exhibitions curated by local art experts.

The Opposite House, operated by Hong Kong hotel powerhouse Swire, is at once similar and quite different than Yi House and Langham Place, with an expertly curated mix of Chinese contemporary artists that is geared more towards complementing the hotel, rather than acting as its single defining feature. Designed by Japanese architect Kengo Kuma (who more recently created the interior of Shang Xia’s inaugural boutique in Shanghai), the Opposite House is arguably the most active and engaged of China’s art hotels, and regularly hosts exhibitions loaned by local galleries like F2 and Red Gate, as well as solo exhibitions by local artists and independent film showings. As Philip Tinari, editor-in-chief of the Chinese art magazine Leap, told the Global Times this week, “Turning the central space over to different galleries has made for an interesting succession of installations; my only regret is that these often clash with the actually very nice ‘permanent’ art on display in the lobby.”

As Tinari added, Yi House may have more direct competition from the Opposite House sooner than it might like: “Swire Hotels, the Opposite House parent company, has been particularly smart about playing the art card, a trend that will expand with the opening of a new location near 798.”

However, it’s not just lesser-known hotels that want to tap into the booming Chinese contemporary art market. Late last year, the French luxury hotel chain Le Meridien announced a partnership with Chinese artists Yan Lei and Chen Wenbo in which Yan and Chen would not only provide artwork for the hotel chain but would also become the first Chinese inductees into Le Meridien’s “LM100″ creative community.

Ralph Lauren’s China Adventure: Too Little, Too Late? Or Right Time, Right Place?

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.jingdaily.com/en/luxury/ralph-laurens-china-adventure-too-little-too-late-or-right-time-right-place/

Jing Daily has previously noted Ralph Lauren’s plans to open 15 new stores annually in China over the next several years as part of an extended rollout. Considering the popularity of Americana-infused style — and the ubiquity of the classic polo shirt — in China, Lauren’s prospects in China have appeared more or less rosy. However, recently we’ve noticed an increase in the number of Chinese-language articles that have called Ralph Lauren a “late mover” and questioned his potential for success in China.

Compared to other fashion brands like Burberry and Mont Blanc, which have, in the last few years, abandoned the brand owner-agent model and set up dozens of new wholly owned stores throughout China, Ralph Lauren currently has only three stores (and one outlet) in mainland China, split between Beijing and Shanghai.
In the United States and Europe, Ralph Lauren has been ranked among the top premium brands for over 40 years. In 2010, Ralph Lauren beat out luxury giants like Louis Vuitton and Burberry for the top 2010 Luxury Marketer nod, one of the most prestigious awards in the luxury marketing industry. However, in Asia the New York-based lifestyle brand is typically considered a mid-level brand. This is particularly in China, even though the brand is, in many ways, just now reaching that market. According to local Chinese media, due to less-than-successful brand management over the past few years, Ralph Lauren has missed an opportunity to position itself firmly as a luxury brand among Chinese consumers. Chinese-language news sources have additionally called attention to the company’s notoriously sharp public conflicts with local brand agents.

As Jing Daily previously pointed out,

Usually, in the early days, foreign luxury brands owners would completely cede a given market to an agent when first entering the Chinese market. These agents, in order to push higher profits, would then commonly set prices for these luxury goods at 4.2 times cost.

However, it appears that the era of the luxury agent is in a state of steady decline, as many major luxury brands — having gained greater consumer awareness in China — have recently decided that they’re no longer willing to share a piece of the pie with extraneous (and expensive) agents. As a result, these brands have seen profits rise steadily, and have plowed this revenue into their expansion efforts.

Having encountered serious speed-bumps in its China expansion efforts, Ralph Lauren has taken a number of measures designed to improve the company’s image and raise consumer awareness. From the Chinese-language portal JRJ Finance (translation by Jing Daily team):

In mid-2009, in order to re-establish a new business model for the Chinese market, Ralph Lauren spent several million dollars employing a prestigious global consulting firm to research and re-evaluate the market. However, after nearly two years, the plan has not yet been implemented, which is an incredibly slow response for a well-known fashion brand in such a fickle market. The main reasons are probably due to irreconcilable conflicts between the brand and its agents.
Ralph Lauren’s three major product lines in China are his Purple Label, Black Label and Blue Label, and each of them occupies a different market segment, such as luxury, the relatively expensive high-end business segment, and more youth-oriented fashion. However, each of these product lines has simply been mixed together by Ralph Lauren’s local brand agents, with pricing being chaotic and irrational. As more low-end items were sold with other higher-end lines, Chinese consumers became confused, a development that has further damaged Ralph Lauren’s brand image.

Up ’til now, many Chinese consumers have confused Ralph Lauren’s products for counterfeit Polo shirts, which have been rife in the China market for years. Also, Ralph Lauren’s local agents have failed to be restrictive when choosing locations in China. They failed to take golden opportunities available in top-tier cities, instead blindly selling in second- and third-tier cities. As a result of this vague positioning, the brand has found that it’s difficult to gain a strong customer base.

The case can be made that it’s not the responsibility of a brand’s local sales agents to build a brand’s image, but rather just to sell as many products as possible. But the case can also be made that Ralph Lauren has been very sluggish to take more direct action in setting up stores in China, especially compared to quick-moving competitors. However, it’s better late than never.

Beijing to recruit 3,000 village officials next week

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

By Zhao Hongyi

As the schedule of this year, Beijing Human Resources and Social Welfare Bureau is to recruit 3,000 university graduates, postgraduates and doctor degree graduates to work for three years as the assistants to the party secretaries and chieves of villages in the remote suburbs, sources from the bureau says.

The recruiting campaign is set to start on university campuses next week. The newly recruits will replace the 2,800 assistants who have already spent three years working in the countrysides.

As the capital of China, Beijing has hundreds of universities, institutes, thinktanks and reserch centers which have hundreds of thousand university graduates every year.

As the economy is growing sophisticated in China, the huge amount of graduates are facing difficulties in finding jobs in cities. Meanwhile, the millions of villages in the great vast area in China is still backward, poor and conservative. Fresh bloods are badly needed in these villages to change minds and find ways to break out in economic development.

The central government and local ones hit the idea to help the young graduates to work in the villages for three years after graduation and promise to help them settle down in cities after that.

Beijing authority says they are trying to find 300 village officials qualified for further promotion in government bodies which are the best jobs in China.

As officials, the village officials’ salary is fixed at 2,000 yuan per month in the first year, 2,500 yuan second year and 3,000 yuan in the third year. It is fluctuated based on different villages and academic background.

I personally believe these jobs and chances should be also available to foreign young people who like to stay in the Chinese countryside for years. The bureau’s website www.bjld.gov.cn has the application forms and notices for the tests. Interested individuals can log on to their website and have a try to “settle down into the grassroot” (Chairman Mao quote) in China.

Second-Tier Spotlight: Chengdu Catching Wine Bug

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The Blogger column aims to introducing foreign media’s interesting stories and expat blogs in China to more Chinese readers, as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Authors who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories.)

http://www.jingdaily.com/en/luxury/second-tier-spotlight-chengdu-catching-wine-bug/

The wine investment fever sweeping through mainland China, which has seen new collectors head in droves to Hong Kong looking to get their hands on cases of Lafite and Yquem, is now finding its way to Chengdu, capital city of southwest China’s Sichuan province. While Chengdu — a UNESCO “City of Gastronomy” — is known more for spicy food than wine appreciation, the Chengdu Evening News notes this week that the increasing wealth that’s pumping up the city’s luxury market is now attracting some of the world’s top wineries.

From the Chengdu Evening News (translation by Jing Daily team):

Compared to Beijing and Shanghai, Chengdu is an emerging market for red wine, but we’ve already seen more overseas high-end wineries entering this city. At the moment, Aussino and other mid-range wine brands, as well as France’s “Eight Famous Estates” (Lafite, Latour, Chateau Margaux, Petrus and others) can be found in Chengdu. On March 25, Grand Court International Wine Co. and a new cuisine-focused media company organized the “Four Bordeaux Fengyun 2011″ at the Chengdu New Century Exhibition Center. At the event, four major Bordeaux wine merchants joined up with Grand Court to present their wines to the burgeoning Chengdu wine consumer.

Chen Zhibin, deputy general manager of Grand Court International, said that with the cooperation of these four brands, his company has its sights set on becoming one of China’s top high-end brand operators. At the same time, the four French wineries who took part in the event will be able to increase their popularity and consumer base in China. The layout and atmosphere of the event reflected the strong culture and spirit of French wine, which garnered a great deal of praise from attendees.

Chengdu is regarded as a relatively new market for many foreign wine merchants. However, with the increasing spending power of local consumers and more favorable polices being enacted by the local government, more foreign wine producers are likely to target Chengdu as a major market among second-tier cities. But Chengdu isn’t without its difficulties. According to some reports, many fake wine brands are streaming into the Chengdu wine market. As more high-end foreign brands make their formal entrance to the city, though, and local wine lovers become more sophisticated, hopefully the market can become more mature and consolidated and eventually squeeze the counterfeiters out.

For new wine investors and collectors in Chengdu, wine experts say that not every foreign wine has the potential for collection and investment. Often, the wines that are worth collecting are those that have more limited production. Facing a vast array of imported wines, new investors and collectors should do their homework to become more product-savvy. As some wine experts have pointed out, it is imperative that Chinese wine enthusiasts become more familiar with well-known wine producers and overall market conditions.

Think Locally About Your China Blogs

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

http://www.chinalawblog.com/2011/04/think_locally_about_your_china_blogs.html

Every so often I get emails from readers asking what I read on China beyond the blogs in our blogroll. This post on China regional blogs is going to be the first in what is likely to be an erratic series to answer that question.

I define a China regional blog as a blog that focuses on one particular China region or city written by someone who lives in that particular region or city. 

Right now I have the following regional China blogs on my blog reader:

•Shanghaiist
•Notes From Xi’an 
•Qingdao(nese)
•Xinjiang Far West China
•Chengdu Living

Shanghaiist is on our blogroll because though it does somewhat focus on Shanghai, it writes at least as many posts that go way beyond that.

I strongly suspect I am missing some good ones. What other good China regional blogs are out there?

Buddha Steel, VIEs and Legal Ethics: Part II, Man Discovers the WFOE

(Beijing Today website’s blog section does not represent any view of Beijing Today or its reporter. Anyone interested about the story can find the original text from the link above the article. The site’s blog section aims to introducing expat blogs in China to more Chinese readers as 50 percent of Beijing Today readership remain young Chinese who have experience of living abroad, white colors or school students. Blogger who does not want his or her story linked at Beijing Today’s website, please email to info@beijingtoday.com.cn to take down the stories. )

http://www.chinahearsay.com/buddha-steel-vies-and-legal-ethics-part-ii-man-discovers-the-wfoe/

Last time I talked about how some canny lawyers and their venture capital overlords came up with a sneaky way to get around China’s foreign investment restrictions during the Internet boom years. The structure involved an offshore company and a series of dubious contracts between that foreign company and the Chinese entity that held various Internet-related licenses.

But time marches on, and wily attorneys adapt to changing circumstances. Let’s rejoin our heroes, Everyman Wang and Generic Zhang. When last we saw our intrepid entrepreneurs, they were busy pissing away 12 million dollars of investment on the dubious venture ‘EZ Cheez,’ a PRC-based cheese straightening company. It’s now 2006, and the boys have called up CEO Capital with a new pitch:

Wang & Zhang: Hi, Mr. CEO. We feel really bad that EZ Cheez went under, but that’s how the cookie crumbles.

CEO: Yeah, that’s life. We lost a ton of money on shitty deals, but lucky for us, we were bought out of some others and even managed to ride a couple to public listings.

Wang & Zhang: Congrats. We have a new company that needs investment.

CEO: Great. We invested once, so you guys must be OK. Gimme the pitch.

Wang & Zhang: Through our government contacts, we’ve once again secured a monopoly position in a highly restricted industry in China: sneeze insurance.

CEO: Come again?

Wang & Zhang: You know, when you sneeze, you involuntarily close your eyes and several different muscles can contract. This leads to a lot of accidents. Consider what happens if you’re operating heavy machinery and you sneeze at just the wrong time.

CEO: Never worried about it before.

Wang & Zhang: And with sneeze insurance, you won’t have to.

CEO: You guys never cease to amaze me in your ability to create new markets.

Wang & Zhang: Our new company, iSneeze, has been promised the only license to underwrite sneeze insurance policies in the PRC, but we need 50 million dollars to capitalize.

CEO: Consider it done, but let me talk to my lawyer first.

Since the EZ Cheez deal, CEO has fired its previous lawyer, Merc, for being too old (32). This is a young man’s game, and they now get their advice from Tyro, a 28-year-old VC lawyer with several years experience “in the Valley.”

CEO: Well, young Tyro, what can you tell me about iSneeze?

Tyro: Yep, it’s in a restricted area, but don’t worry, I’ve got you covered.

CEO: You’re not going to set me up with one of those offshore company/service contract setups, are you?

Tyro: Well, yes, what’s wrong with that?

CEO: It’s just so six years ago. Can’t you give me something a bit more fresh?

Tyro: Sure, I have a fresh option for you that will make it even easier for you to get profits offshore.

CEO (laughing): ‘Profits.’ You lawyers, always with the strange jargon. Just tell me what the structure looks like.

Tyro: OK, well, as usual, we set up an offshore company somewhere like the Cayman Islands or BVI – the shareholders will be Wang, Zhang and CEO Capital.

CEO: Sounds familiar.

Tyro: Here’s where it’s different. Instead of all those contracts between the offshore company and Wang & Zhang’s Chinese company, iSneeze Insurance PRC Ltd., we do something else. The Cayman company sets up its own PRC entity, a wholly-foreign owned entity, or WFOE–

CEO: Gesundheit.

Tyro: –which provides services to iSneeze Insurance PRC Ltd.

CEO: But iSneeze Insurance is the one that has the insurance license and makes all the money, right?

Tyro: Yes.

CEO: And we don’t own any of that company?

Tyro: No. You own a WFOE, iSneeze Services Ltd., the exclusive service provider to iSneeze Insurance Ltd. The insurance company collects premiums but the WFOE will suck up all the profits and send them offshore to the parent company. The great part is that since the service agreements are between two PRC-based companies, we won’t have to get an approval from the foreign exchange authority!

CEO: Wow, that’s clever! But if it doesn’t really own anything, will that affect the listing of the Cayman company?

Tyro: Not at all. It will own the WFOE, which will have an exclusive deal with the insurance company. Moreover, in addition to service agreements between these two onshore companies, other contracts will bind Wang & Zhang, and iSneeze PRC to the Cayman company.

CEO: Such as?

Tyro: Such as: a Power of Attorney, giving the Cayman company the ability to control certain actions of the founders; an Option Agreement, which allows the Cayman Company to buy equity in iSneeze PRC; a Loan Agreement, whereby the founders state that they have borrowed money from the Cayman company to establish iSneeze PRC.

CEO: Wow, that sounds very technical. What does all that get us?

Tyro: If something goes wrong, you’ll be able to exert control over the PRC company and even purchase shares if need be.

CEO: And these agreements are enforceable?

Tyro: I’ve never had a judge strike them down, not once!

CEO: Great! Let’s do it!

Editorial Note: You probably recognize this as the so-called ‘Sina structure’ after the Net portal Sina. They were one of the first to use it, and the name stuck (I still use that name, as opposed to VIE structure).

What’s the problem with a Sina structure? Basically, it’s a fiction. When you list, you’re telling folks that you have a solid legal foundation, when in reality you don’t. The Sina structure gives you the benefits of that restricted China business while hiding the regulatory risk from everyone. Much like wearing dark pants and pissing down your leg, you get a nice warm feeling, but nobody notices.

What’s the risk? The problem here is that that offshore company, despite these contracts, doesn’t really exert control over the PRC entity. Sure, they have these loan agreements and option agreements and so on, but try going into a court in China and enforcing them. Ain’t gonna happen.

My fictional lawyer Tyro claimed that he never had a judge strike down these contracts. Probably true. I once asked a very famous China-based VC lawyer, who had done hundreds of deals, if he had ever tried to enforce any of these agreements in a PRC court. He actually laughed, then paused, then admitted that it had never happened.

The Sina structure is even more sneaky than the one I talked about last time because there is an actual PRC-based company, the WFOE, that exists. When a company lists, there it is for folks to look at. “Hey, look there, that’s what we’re getting, a Chinese company. Let’s toss in a lot of money.” Unless they read all the disclosure docs carefully AND get an expert opinion, they probably have no idea that the WFOE is probably only legally allowed to provide “consulting services” or “software development,” a far cry from the kinds of things the listed company is all about.

Ten years ago, I used to wonder what on earth people were thinking when they bought shares in these companies. Eventually I realized that they were relying on prospectuses and disclosure docs that were far from transparent. Lawyers and accounting firms, and their legislative partners in crime, have gamed the system so that the language given to prospective investors is downright misleading.

Think about it this way. Many of the China-based lawyers I know don’t even understand this stuff, much less know whether a Chinese judge would enforce these agreements. Your average investor/fund/legal counsel (whatever) knows much, much less, and yet they are expected to take that language and make an educated investment decision. This is what the “rigorous” U.S. securities laws give us. It’s kind of a joke, and it makes me wonder (since I’m not a securities lawyer) how often investors get screwed over like this.