The diary of a rainmaker in China

Some practices of Chinese IPO aspirants are said to be comical, even disturbing, but IPO managers have now wised up

By JAMIE LEE
29 May 2010

With the shocking withdrawal of the New Century Shipbuilding initial public offering (IPO) and the recent corporate scandals in the S-chip space, the focus has turned once again on Chinese firms – and the journey that bankers undertake to bring these companies to list in Singapore.

BT’s peek into the diary of some rainmakers with dealings in China reveals some Chinese practices that are comical at their best, and disturbing at their worst, as interviews with bankers and other corporate finance professionals showed. All declined to be named.

For starters, the Chinese take their alcohol very seriously, with drinking sessions often taken as an initiation exercise for potential business partners, with less than sober results.

Rainmakers who can’t treat wine like water are known to avoid actually downing the drinks by knocking them back onto the very wet carpet under the disguise of clumsiness.

Then there is the ruse of switching copious amount of alcohol served with water or Chinese tea.

Bankers would place their bets on which alcohol type will be chosen for the meal, which mostly depends on the part of China that these companies originate from.

The trick is to also keep non-alcoholic drinks that have the same colour as the poison of choice on the table. Each sip of rice wine or whisky taken from one glass is then spat out into the cup of water or Chinese tea.

This spitting switcheroo is slowly being found out, said one investor relations manager, who noted that some hosts now have their guests throw out their Chinese tea or water before the ‘bottoms up’ decree.

These drinks over dinner, and later at sessions at a nightclub, are usually all-expenses paid.

The red-faced raucousness tends to serve a function for strangers sizing each other up, however, said a businessman who sources his products from China.

‘In the North, they believe that if you get drunk, you are more yourself, and if you behave badly, your character is no good,’ he said.

Unfortunately, the stories of doing business in China go beyond inebriety and entertainment. For some, the hurdle emerges even before there is a chance for any wine to be spilled.

An economist with a foreign bank in Singapore said that simply getting a meeting with a Chinese executive or official is a feat.

‘It’s very difficult to get an appointment with anyone high-ranking there. They always send someone more junior than your own level to meet you,’ he said, adding that in times like these, he has to fall back on his office in Singapore or the European headquarters to pull the requisite strings for a meeting.

Even after some face-time is arranged, the plot is liable to rapidly thicken, as some bankers find out the hard way.

Some IPO aspirants would arrange for auditors and IPO managers to meet bank staff at the branches of Chinese banks, who would then verify that the cash stated in the accounts is intact.

But as some IPO managers have encountered, these bank staff may have been paid to masquerade as officers of the bank.

‘The namecard of the bank manager might be real, but that guy you met isn’t that bank manager,’ said another IPO manager, adding that they rely on introductions through the companies because they have no personal contact with the Chinese banks.

IPO managers have now wised up, showing up impromptu at the banks and requesting an immediate meeting with real bank officers.

In other cases, auditors and IPO managers have sent letters to the banks to verify the accounts. These letters are sent to the companies, rather than to the banks directly.

But instead of sending these letters to banks, some Chinese companies have taken to forging letters from the banks – some of which do not have letterheads in their letters – with fake bank seals.

And because Chinese companies use the company seals instead of signatures of staff on documents, it’s not difficult for staff to make some unauthorised transactions with a fake seal too.

What compounds the corporate governance issue is that some owners of Chinese listings believe that it is their right to withdraw money kept in the companies’ accounts for their personal use, said one banker.

He noted that a handful of Chinese chief executives had taken out money from the companies’ coffers to invest in the booming property market over the last few years, with the genuine intention of returning the money to the company when they have profited from the investment.

‘The CEO might actually want to return the money. But when the market tanked, he made losses in his investment and he was suddenly left with no money,’ the banker noted.

IPO managers have, for many years now, employed private investigators to check up on IPO aspirants from not just China, but Singapore and other parts of the region, bankers said.

‘Their charges are cheaper than lawyers’. And lawyers qualify too many of their statements,’ said one banker.

And private investigators have been asked to find out not only how these tycoons made their private wealth but also if the operations of these companies are genuine.

By now, bankers are all too familiar with Chinese companies setting up tours to factories that they’ve rented for a few days as proof that their operations exist.

Bankers have started to quiz employees at the factories to verify that their operations are not a ruse. It is not uncommon to have ‘staff’ who were paid to pretend to man the machines for a few hours when there were guests.

Over the years, private investigators have saved IPO managers from going into some dodgy deals, with one banker estimating these to be at least one-third of total transactions that they review, as they’ve uncovered doctored pictures of shop signs and unsavoury sources of revenue.

The government’s recent move to attract more foreigners to settle here has had some positive externalities for the IPO market. Bankers now bring families of Chinese CEOs leading IPO aspirants to Singapore to visit schools and flats, in the hope of getting them to settle here.

The assumption is that if they are based here, it’s less likely for them to run away, one banker quipped.

Additional reporting by Joyce Hooi

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