Interview #3 - Infrastructure Outbound Fund Associate

Here is our third of five China Finance interviews. It's with an associate at an outbound investment fund, though not physically located in mainland China.

Alright. Let's get going. How did you get in to finance?
I went to a top, or target, or leading, however you want to say it, school in the U.K. From there continued on and got my masters degree in finance in [Singapore/Hong Kong.] Recruited straight from there to my current position. I’ve been with the firm for three years.

What sort of projects are garnering interest from the China outbound perspective?
Transportation projects are getting lots of attention these days. Chinese investors are interested in ‘going out,’ or putting their capital to work outside of China. These moves can be challenging to finance with RMB-denominated funds, but the central government is actually supportive of this because it strengthens ‘soft power,’ so there are a lot of factors at play here.

I was just reading that the two largest train manufacturing companies in China, CSR and CNR, have secured contracts for something like 250 new bullet trains across China but also Europe and these deals are worth something crazy, upwards of US$7 or $7.5 Billion.

Because of recent graft and bribery charges against members of the Department of Rail and Transportation, as well as deaths that have occurred because of unsafe conditions, there has been more serious oversight into the building of China’s domestic network. The operation has slowed, although the country will still install more kilometers of high-speed rail in 2014 than the rest of the world combined.

I think it comes down to how well the other projects abroad are viewed by governments. The first foreign project that Chinese high-speed rail completed was in Saudi, I think. And that’s either just opened or is about to open in 2014. So if that’s a success, especially safety-wise, for the first 6 months or so of operation, I’m sure you’ll see even more contracts being awarded to CSR and CNR.

One last thing on transportation, although mainly rail here: The Chinese government requires some form of tech transfer when foreign companies come in to China and wish to start a built-out. The same is also true for auto, though. So firms that are experts in designing green buses or other municipal transportation systems, for instance, are going to need to share a good part of their IP with Chinese firms. The Chinese companies refine that technology, then turn around and sell it to second and third-tier countries. Pretty shrewd.

Could you please give an example of a recent transaction you worked on.
Sure. Without being too too specific here, I recently helped a financing project with local Chinese funds going out to Southeast Asia to purchase a forest. Basically, the natural resources are going to be used as supply for a manufacturing company that needs a certain type of wood. The holding company for this manufacturing company brought us onboard to look at the feasibility of a few different sites and see which one made the most sense for them to purchase. I didn’t have the opportunity to do any of the DD, but I helped put together the deal on paper and was the second guy on the numbers, so I reviewed it all and added my two cents here and there as to the model. The whole deal took about four months from start to finish, which I think was pretty good on our end.

What concern do you think is most overblown when you read about China’s financial system?
To be honest, and this may seem like a cop-out answer: statistics. Armchair economists and China-watchers alike seem to live and die by PMI numbers or banking ratios. Big spoiler alert! I don’t think any of those numbers are right. I think they’re probably close to the truth, or at least representative of the actual number, but the financial system in China is wildly complex and intricate, the whole time analog technologies are sometimes still used in rural banks and most of the equipment is wildly outdated.

As a brief anecdote, I went to the bank, I don’t know, maybe a month ago. It was a local bank. This is in Chengdu, a big mid-Chinese city. In the back of this bank, I notice that there are guys counting red backs. Which, I might add, they do absurdly quickly. But there were two guys, overseen by a manager, physically counting that money. I ask the teller what was going on, and she replied that the computer was broken and they were double checking the amount of money in the bank. And I was like Holy [Moly!]. This is not real. I just don’t have faith that the entire [freaking] country can find any sort of remotely accurate banking deposit ratios, for instance, when individual banks are doing this sort of Monkey Business. Like, how do you not have more than one central computer? Blew my [freaking] mind, man.

But yeah, so I know that might not be the best or most illustrative story to share, but my point is is that the country is so huge, with so much going on, that I think these numbers are really just well-educated guesses. If you talk to anyone in China whose job it is to do market research, they’ll give you the same story. Get close to what you think the answer is and call it a day.

If that is true, and so many people as you say, ‘live and die’ by these numbers, how do you think the best way to gauge the health of the Chinese economy is?
I mean that’s an awesome question and a super tough one to answer. I guess I kinda have to eat my words from the last one, but import/export numbers are generally what I look at to gauge the overall health of the economy. Although net exports can be fudged a little bit because of some circular trade with Hong Kong, they’re a good indicator for me if we’re going in the right direction. I think investment-led growth on the mainland is usually quite inefficient.

Circular trade with Hong Kong? Are you referring to physical trade there or bond sales?
In this case, physical trade. So some Chinese companies have been known to have their Hong Kong entities purchase goods from the mainland entities and sometimes sell them right back, either at a discount or for promissory notes for a closing of the purchase at a later date. This can fudge the numbers either way and act as a form of transfer pricing. To be honest, I’m really unsure as to the legality of it, but it definitely goes on, and in a big way. Companies can basically falsify sales or export numbers in bad months or quarters and then reign in more robust growth in subsequent months. This might help for revenue smoothing around the holiday periods as well.

Any specific career lessons you’ve learned in your time in banking and then outbound infrastructure investing you can share?
Hmm – I guess the first is that you gotta be willing to take risks, but make sure that you really think about if your next move is going to position you well for what you’re trying to do. In my case, I’m looking at business school next, most likely. In my case I think this is a pretty ‘safe’ bet, because it will differentiate me from a number of other applicants while still maintaining my focus in finance. Some of my friends whom I met in banking are now out working for startups in Silicon Valley.

I think they have great backgrounds and they’re all talented and motivated, but I also think that it’s not an uncommon move these days. Not to say they won’t be accepted into top schools, but I think a key factor is to have something that makes you unlike any other applicant out there. If an admissions officer talks about you to another person and says, “You know, the investment banking guy who’s out at the startup in San Francisco,” you’re not particularly unique. I might not be, “You know, the guy who turned around his family business into a multi-billion dollar enterprise” unique, but I feel like I have an edge on most other applicants.

I wish I had a more unique background. For business school, but also in general. Maybe I just don’t like how the word ‘traditional background,’ sounds. Or maybe I should have gone all out and started a charity that teaches handicapped kids how to skydive.

Well, that would be something. Let me know how that goes.
Yeah, unlikely that’s coming any time soon. You get my drift though, right?

Certainly. Differentiation.
That’s ultimately what makes you memorable.

Great. Thanks for your time.
Yeah, any time.

[Interview edited for content and length.]