Investors up against China's Great Wall

BY JOHN GARNAUT

A few weeks ago, as Macquarie Bank leapt to the top of the Chinese big league by underwriting one of the largest floats in corporate history, its Shanghai boss, Daniel Phillips, ran headlong into a Chinese wall.

The investment bank had patiently and strategically built a China team. It had taken care to provide lucrative jobs to eminent people and their associates, to open doors.

It had gone from nowhere to lead the float tables in the world's biggest marketplace, Hong Kong, for two years straight – crowned now by its appointment as joint underwriter for the last of China's mega-bank listings, the Agricultural Bank of China.

And with Melbourne firm SEEK, it had poured US$110 million ($153 million) into a Chinese online recruitment agency whose website receives more unique visitors each month than the number of people living in Australia.

And yet on the morning of July 23, Mr Phillips and a director from SEEK turned up for boardroom duties at the Beijing headquarters of their recruitment firm, Zhilian Zhaopin, to find their chief executive had locked them out, say Chinese media reports.

The pair returned with lawyers and three days later SEEK told the stock exchange that Zhaopin had fired the CEO and was "putting in place transitional arrangements".

In China it was viewed as a corporate bloodbath, replete with imagery of World War II.

"Pearl Harbour has been attacked," the former CEO of Zhaopin, Zhao Peng, told a journalist at midnight on July 23, after a day in which he and seven of the top managers had sacked each other or been sacked by the Australian directors.

Macquarie and SEEK initially did their best to kill the story. But those efforts were bound to struggle in the face of internal Zhaopin emails posted on the Chinese language internet.

Allegations in those emails included "improper conduct" towards a female staff member, managers "defaming" other managers and a management clique that benefited itself at the expense of the company.

Then it was the turn of Zhao Peng to be physically shut out.

"The gate at headquarters has been locked and guarded by lots of people with dark suits and earphones on," he told the China Business News.

Ever since the early 1990s, when Chinese language student Tim Clissold helped Wall Street banker Jack Perkowski burn US$400m in a spectacular trail of cross-cultural accidents, the travails of foreign investors in China have been well documented.

The non-Chinese-speaking Mr Perkowski has since brushed aside his expensive accidents with other people's money.

"How can you anticipate somebody transferring land out from under your nose from your joint venture into their company?" he explained. He is still spruiking the China dream.

Mr Phillips, of Macquarie Bank, is known for integrity and caution, and his bank has arguably invested more resources and talent in getting to know the Chinese market than any institution in Australia.

"The China market is hard to crack ... even big multinationals ... can struggle here," says Antony Dapiran, an Australian partner at Freshfields, Beijing, who is probably the only foreign lawyer to advise on three of the big four Chinese bank listings.

These days, as China flexes its muscles and nationalism creeps towards arrogance and protectionism, even some of its most profitable and high-powered foreign boosters complain the country is getting too hard.

Harsh words have come this year from GE, Siemens, chemicals giant BASF, and Google, as well as the key American and European business groups.

"I really worry about China," said Jeffrey Immelt, the chief executive of General Electric, lashing out at rising Chinese protectionism recently.

"I am not sure that in the end they want any of us to win, or any of us to be successful."

If the world's biggest and brightest keep running into trees in China, the naive and unprepared don't stand a chance. Australian executives who made the journey in the 1990s know that narrative well.

The beer icon Foster's landed in Shanghai in the 1990s, bought into three breweries and limped out of those businesses four years ago with almost nothing to show for hundreds of millions of dollars invested.

Since the 1990s Australian export trade to China has risen to stratospheric heights but the investment dollars have never followed.

Since early last year China has been the lead buyer of Australian exports, the lead supplier of Australian imports and the lead supplier of foreign direct investment into Australia, at least on some measures.

But less than 1 per cent of Australian foreign direct investment has been heading to China.

Australian investments in China look almost trivial compared with the seemingly endless flow of multibillion-dollar Chinese resource investment deals coming the other way.

David Olsson, chairman of a newly proactive China-Australia Chamber of Commerce, says Australian investors might be small and few, but they are learning.

"We are seeing Australian companies adopting a more sophisticated and realistic approach to investment strategies," he says.

Companies are no longer salivating only at the size of the market but looking at ways in which they can create niche operations or provide services that are in increasing demand.

Australia's lone success story in China was Sino Gold, the Sydney-listed gold explorer and miner which thrived in a space BHP Billiton recently abandoned and Rio Tinto has never cracked.

Investors tipped A$100 million ($150 million) into the company in 2002 and last year pulled out A$2.5 billion, when the company was sold to Canadian miner Eldorado.

A former Sino Gold chief, Jake Klein, said there was not any great secret to how they did it.

"Every part of our business was run in Chinese, whether by highly accomplished Australians who could speak Chinese or Chinese nationals," he says.

"And we listened to people."

With Sino Gold in Canadian hands there is now no Australian business in China worth more than A$1 billion.

The largest and most successful is WesTrac, Kerry Stokes' Caterpillar machinery franchise in North China, and Channel 7's associated US$250 million cornerstone investment in the Agricultural Bank of China.

Then there is Bluescope, followed by banks ANZ and Commonwealth Bank, which are making considerable inroads, and funds manager AMP.

But with rare exceptions, major Australian companies are resigned to serving China's customers from the safety of Sydney and Melbourne.

Macquarie Bank has had its false starts in China, but in 2004 it finally found a foothold by buying the Asia business of ING Barings.

Since then its China workforce (including Hong Kong) has surged from 50 to more than 750.

In August last year it became one of only a handful of foreign companies to enter into a joint venture trust company in China.

In the same month it set up two infrastructure funds with China Everbright and took a one-third stake in a securities company from inner Mongolia.

That company owns Beijing's financial street, with the Beijing government, which gave Macquarie access to a licence to underwrite and trade in mainland securities.

Nor has Macquarie Bank given up on getting a return on China's booming jobs recruitment market.

Traffic to online recruitment sites in China is up a staggering 70 per cent this year, according to Apple Su at the Beijing internet research firm iResearch.

Zhaopin is receiving more than 26 million unique visitors a month. And yet Zhaopin had been burning money.

Paul Basset, co-founder of SEEK in Melbourne who also sits on the Zhaopin board, said last week that half of the sacked managers had their jobs back.

"The business achieved profitability and cashflow profitability this year and we're happy with the trajectory."

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