Wednesday, August 26, 2015

          Magazine Preview: Feeding China's Growth With U.S. Capital

          Despite the Chinese market correction, William Uchimoto '81 sees prosperity in a new stock exchange. By Vanessa Hua. 

          Sample alt tag.

          When William Uchimoto ’81 takes his turn at the karaoke microphone in China, he belts out “My Heart Will Go On,” the stirring ballad from the blockbuster romance Titanic.

          “I mastered that one,” Uchimoto said with a chuckle.“But I always want the host to sing Chinese songs. I don’t understand the words, but they’re more beautiful than Western songs.”

          After-hours karaoke sessions and deals brokered over banquets are standard business practice in China, where Uchimoto has begun advising companies and wealthy individuals seeking to invest in the United States. Uchimoto, with expertise in securities regulatory and compliance matters, builds upon nearly a decade of experience working in the Middle Kingdom, where he helps small and midsize enterprises raise capital in the United States, in industries ranging from agriculture to manufacturing to automotive parts.

          Lately, he’s been working with Richard Fuld, the chairman and chief executive who presided over the 2008 implosion of Lehman Brothers. A few months later, Fuld founded Matrix Advisors, a financial services firm that advised the buyers of the National Stock Exchange last year. Uchimoto advised investors to the 130-year-old exchange, where Chinese companies—as well as small and medium-size companies based in the U.S. or elsewhere—will soon be able to offer their shares for sale. “Certain strategic investors are China based and see this as a key opportunity,” Uchimoto said.


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          In China, the capital markets tend to favor big state-owned companies. So too, the banks. Small and medium-size enterprises account for about 60 to 70 percent of China’s economic output, so they are an important driver of the country’s economic growth, said UC Hastings Professor Keith Hand. If unable to borrow from commercial banks, some smaller companies turn to unlicensed lenders. However, local Communist Party leaders can halt such quasi-legal lending if angered. “If the institution isn’t licensed to lend, it’s at risk,” Hand said.

          Leaders at the highest levels of the Chinese government have recognized that their funding mechanisms have not been adequate for companies of this size, said Hand, who called Uchimoto’s efforts “quite timely.” For nearly four decades, the Communist Party has been introducing market reforms. These have opened the country up to foreign investment, encouraged entrepreneurs, and launched a booming private sector with Chinese stock exchanges in an economic system known as “socialism with Chinese characteristics.”

          Chinese companies are setting their sights on U.S. capital markets, attracted by the depth and breadth of institutional and retail investors, as well as world-class accounting standards. U.S. investors have already prized Chinese giants such as Alibaba, the e-commerce site that raised a whopping $25 billion in its initial public offering on the New York Stock Exchange last fall.

          “The U.S. has the best capital markets in the world, and China is the biggest growth engine of the world,” Uchimoto said. “China should be our closest ally. We can help each other achieve prosperity.” However, small to midsize Chinese firms have struggled to get listed in the United States, after an initial wave of public offerings burned investors. AgFeed Industries, a Chinese animal-feed and hog-production company, faked invoices and inflated sales to boost its stock price. Eventually, the company filed for bankruptcy before paying $18 million to settle allegations by the Securities and Exchange Commission last year. Likewise, in 2010, Puda Coal raised $116 million in two public offerings on the New York Stock Exchange. Its shares collapsed and were eventually delisted, but the Securities and Exchange Commission—which charged Puda’s executives with fraud—has had trouble collecting from the defendants in China. As a result, U.S. exchanges have been reluctant to list Chinese companies. And Chinese companies stopped applying because they believe they won’t be accepted.

          “It’s self-perpetuating,” Uchimoto said. He has thrice-visited the Wuhan Equity Exchange, a burgeoning exchange in Hubei province in central China, where he discussed how to connect small to midsize enterprises to U.S. capital—including a trip in August 2014 with Fuld.

          After gaining experience on the Wuhan Equity Exchange, the firms could then raise additional capital in America by offering shares on the National Stock Exchange. Historically, Chinese companies of this size had little understanding of how difficult it is to go public, Uchimoto said. They’re used to running their own companies with an “iron fist” with no shared governance. “Corporate governance and public disclosure obligations are new and difficult concepts to grasp for Chinese companies. The Wuhan companies will get exposure to these concepts prior to a U.S. listing with very stringent obligations in these areas."

          “Access to American stock exchanges such as the National Stock Exchange is very important after the recent volatility and dramatic stock declines experienced in China,” observes Uchimoto. “The hard lessons learned over 225 years of U.S. stock market self-regulation could enlighten Chinese stock market regulators as to how to deal with this crisis and create certainty that beckons Chinese companies to America’s capital market.”

          Chinese companies listed on the National Stock Exchange will expand their reputation both in China and U.S. markets and get financial help from American investors, and may thereby sell more products in overseas markets, said Bo Gong, the exchange’s chairman, who described Uchimoto as “kind, friendly, and enthusiastic about China.”

          Read more in the forthcoming fall issue of UC Hastings Magazine, out in early September 2015. 

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