Wednesday, November 9, 2005

Shipped to Shanghai! Vol. 5 -- Meeting the Locals

"A chat with a friend is worth over ten years of schooling."
--Chinese Proverb

There's a Taiwanese restaurant close to my apartment that I eat at a lot (reason: the most expensive meal on the menu costs $1.25 American). They make box lunches like bentos. The staff are all kids in their 20's. They want to talk to me, but they can't speak English. I ordered the fish meal, like I always do. The kids behind the counter tried to talk to me in Chinese again. I didn't understand, so they talked to the old lady waiting next to me for her food.

She translated: "They noticed you always order this meal. They are very honored you think their food is so good."

I smiled and bowed to the kids. They loved that.

I was surprised at how good her English was. The prevailing rule when I travel is that for English, the best bet is to talk college students. Anyone older usually hasn't studied English.

We ended up eating dinner together at a table. I thought maybe she'd teach me some quaint Chinese customs. She educated me, all right; but not about that.

Her name was Hu. She studied at the Shanghai Foreign Languages University. In those days, traveling outside China was virtually impossible. Her plan was to become an interpreter; that was her way out. You couldn't apply for whatever job you wanted, though. The government placed you somewhere, end of story. If you didn't like it, you'd be blacklisted and never work anywhere again. Hu was lucky and got assigned to work for the Bank of China . . . in their London branch! It was a dream come true because her English improved rapidly after that.

(The following paragraphs get into heavy-duty technical jargon. I couldn't talk about what Hu taught me without covering that stuff. If this gets really boring, my apologies.)

When Hu returned to China after that stint in England, she had the top pick of jobs. Companies were clamoring to have a fluent English speaker on staff. She chose a high-profile job with CITIC Group (China International Trust and Investment Corporation). It was one of the first SOEs, a state-owned enterprise. Over the years, CITIC went through several transformations. First, it was a pilot project masterminded by Deng Xiaoping to introduce free enterprise into a communist system. Then, it became a magnet for attracting foreign capital. With the money in hand, CITIC became an engine for economic development, pouring funds into infrastructure and domestic businesses. Now it's settled down into a holding company overseeing the Chinese goverment's investments. CITIC might as well be called China, Inc.

It's the General Electric of China. Hu said they have over 40 subsidiaries in four continents. Their portfolio runs the gamut from natural resources, manufacturing, construction, power plants, aviation . . . it's hard to name a business they're not involved in. Lately they've been moving aggressively into financial services.

Hu got her wish of being able to travel. She flew all over the world as an advisor to the president of the company. She also was the lead negotiator in deals with foreigners. Her proudest accomplishment was selling CITIC bonds to foreign banks eager to build a relationship with China. I was amazed; she must have raised billions of dollars for CITIC. She said CITIC used the money in two ways: 1) make loans to Chinese businesses 2) Take over companies in industries that were vital to China's growth.

I guessed that CITIC's strategy was to keep key assets from falling into the hands of foreigners. Brilliant strategy: use the foreigners' own money to keep them from buying their way in!

There was one thing I didn't get, though.

"Why bonds?" I asked.

Hu explained that the only other ways to raise money were to sell stock or borrow from the West, namely the World Bank and International Monetary Fund. Selling stock meant selling ownership and invited interference from stockholders. As for borrowing money, Western creditors attach "structural conditions" to their loans, often hijacking a country's economy. These conditions often included cutting government investment and opening markets before domestic companies were ready to compete with foreign ones. The problem with bank debt was that it was "callable," meaning the bank could suddenly demand the borrower pay back the full amount of the loan, crippling the borrower. The West could use the "call" option to force changes on a country.

It's different with bonds, Hu said. The issuer of the bonds controlled the loan. They decided what got repaid and when. Bonds were not callable, meaning that as long as the borrower made the interest payments, the bondholders couldn't force the borrower to repay. In the case of zero-coupon bonds, the borrower didn't even have to pay the interest. Bonds allowed the Chinese to borrow money on their own terms. She went into more detail, but I had gotten lost a long while ago.

She said restrictions were tight, even when she traveled. Hu always had to report to her superiors where she was going, who she talked to, the whole deal. That's why she said she would love to visit America. It was the one country she never got to visit. Smart thinking on the part of CITIC. One taste of American freedom and she might have defected straight away. Hu thought America would be so much more open and that people were more welcoming. (She found London people to be total snobs; she didn't like British food either).

She said she's jealous of young people nowadays, they're free to do whatever they want. Now Hu is retired. She plans to travel around with her husband. I told her a little about my studies and travels. Hu said I have a bright future and that I've made smart decisions. I bowed my head and denied the compliment (Chinese custom). Then she gestured for me to look over my shoulder.

All the restaurant kids were leaning on the counter, listening in rapt attention while we had spoken in English.