APRIL 21, 2000 VOL. 26 NO. 15 | SEARCH ASIAWEEK

In Search Of Money
Cash-starved mainland tech firms try IPOs
By YULANDA CHUNG Hong Kong

ALSO:
Guangdong's Troika

Mainland technology companies are gearing up to cash in on investors' appetite for Internet initial public offerings - but will they be in time? Technology stocks of all kinds are being buffeted by wild swings on the U.S. Nasdaq market, volatility that in turn is causing problems for virtually all IPOs on Hong Kong's new Growth Enterprise Market and elsewhere in Asia.

Alex Lau, Anderson Consulting's managing partner in Hong Kong, estimates there are about 30 China-affiliated companies hoping to list in Hong Kong or the U.S. this year. Many mainland companies see the tech investing craze as a quick and easy road to cash. It all seems familiar. Three years ago, mainland red-chip firms - the Hong Kong-based affiliates of well-connected mainland companies - rushed to list on the Hang Seng exchange in the pre-handover stock bubble of 1997. Of course, the red-chip balloon burst soon after the handover.

The current crop hopes its fate is different. For one thing, they expect their Internet-connected business models will have long-term attractiveness to investors. For another, many of the current crop have their roots in rough-and-tumble Shenzhen, which may turn out to be the best hothouse for emerging technology companies in China. The special economic zone already draws 40% of its GDP from information technology-related industries, as opposed to 17% for Shanghai and less than 10% for Beijing, despite the capital city's Zhongguanchun, an area renowned for its technology start-ups.

Helping to orchestrate the charge by Shenzhen tech companies to list overseas is China High-Tech Investment Management, which is partly-owned by red-chip Shum Yip Holdings. It manages the only government-authorized venture capital fund in Shenzhen. Sun Yuyang, chairman and chief executive of China High-Tech Investment, controls a $31- million fund, which he expects will grow to $100 million within two years.

Among the companies China High-Tech has nurtured is Skyworth, a Shenzhen-based maker of televisions and household appliances that can be connected to the Internet. Skyworth started trading on Hong Kong's main stock exchange April 7. It closed its first day of trading at 37 cents a share and has bucked a trend afflicting other new listings by rising to 41 cents as of the April 12 market close.

Of three other companies funded by Sun's venture capital company, the most promising may be Shenzhen-based ChinaEnterNet.com, which is an e-commerce website for business transactions with Chinese companies. It takes a commission on each deal and seeks to attract visitors with information and statistics on more than 1 million mainland companies, which it offers free to 200,000 registered users.

Jay Ouyang, president of ChinaEnterNet.com, is a close friend of Peking University professor Li Yining, one of China's top economists and adviser to Premier Zhu Rongji. Ouyang, who says he meets with Li "every two weeks," pulls enough weight to acquire databases with critical mainland company information from relevant Chinese government departments for 5% of the normal $1-million price.

Are we watching another bubble fill with air? Lau at Anderson Consulting thinks it could happen: "Companies listed in Hong Kong are granted an Internet premium prima facie." He suggests that mainland companies should do more homework before they go public. "I met the head of [one red chip] and all he talked about was B2B concepts without any elaboration," Lau says. "I suspect that was all he knows. [Companies should do] more than hire a famous auditing firm and investment bank to do the fund-raising exercise. They need to build up a proper story line, line up reputable alliances and management, and write a doable business plan."

There is ample reason for mainland affiliates to want to raise dough in Hong Kong. Their local alternatives are often cash-poor banks or immature stock markets in Shanghai and Shenzhen. ChinaEnterNet.com's Ouyang, who has worked for Microsoft in Seattle, spent time at investment banks in New York, Singapore and Hong Kong, and started a previous computer company in Zhongguanchun, obviously has the experience to make ChinaEnterNet.com a success. He contends China's enterprises have learned their lesson from the red chip fiasco. But will they list in time to test what investors have learned?

Guangdong's Troika
The men who drive the dynamic province
By SANGWON SUH and DAVID HSIEH Beijing

The list of Li Changchun's mentors reads like a Who's Who of recent Chinese politics. The Guangdong party chief's career took off in the 1980s under the patronage of then--general secretary Zhao Ziyang. After Zhao's downfall, Li found himself attached to legislature boss Qiao Shi. Then he became a protégé of President Jiang Zemin. His knack for finding the right patron has served his career well.

It was Jiang who dispatched Li to Guangdong in 1998 to rein in and clean up the dynamic but headstrong and often unruly province. The president was not disappointed. Li cracked down on cozy arrangements set up by local officials to enrich themselves. Those busted in his anti--graft drive include a smuggling ring involving the armed police and a securities firm backed by the military. Li also shut down state--run investment firm GITIC, a haven for political patronage and nepotism. In the process, he claimed the scalp of Yu Fei, the corrupt but powerful former party stalwart who had carved out his own local financial empire .

Li, 56, has pursued administrative reform as well. To streamline the bureaucracy, he has cut nearly 50% of provincial--level jobs. Already a member of the Politburo, he is now tipped for greater things in the central government. Beijing insiders say he may be headed for the State Council and the party's Central Secretariat, both of which are in need of fresh but experienced blood.

If Li is the lawman from out of town who rode in to clean up the place, then Governor Lu Ruihua is the opposite: the local boy trying to improve his home region's prospects. A technocrat who rose through the ranks of the provincial government machinery, Lu, 61, has overseen Guangdong's efforts to become a center of information technology. Sales of electronic and IT--related goods accounted for 16.4% in 1998; by the end of last year, the figure had jumped to 50%. Lu's aim is to turn Guangdong into China's first "information province" and the south's telecommunications hub within five years. With Shenzhen's concentration of high--tech companies and Guangzhou's numerous universities and technological institutes, Lu hopes to attract both foreign venture capital and overseas Chinese talent to Guangdong.

Lu has been ably helped by Wang Qishan, 51, a protégé of Premier Zhu Rongji. When Wang was made vice governor of Guangdong in 1997, many raised their eyebrows at his lack of administrative experience. But Zhu saw Wang, with his background as a top banker, as the ideal specialist to oversee the province's tax collection, revenue--sharing with Beijing and foreign--trade earnings. Wang was also charged with overhauling the local branch of the People's Bank of China -- part of Zhu's drive to reform and restructure the central bank along the lines of the U.S Federal Reserve.

Wang has seen plenty of action, notably the collapse of GITIC and other corruption--ridden state companies. He is seeking to professionalize the finance industry. "Eventually, state sovereign credit, regional government credit and enterprise credit must be clearly differentiated," he said recently. Wang isn't pursuing financial reform for its own sake, of course. His ultimate goal: to prepare Guangdong for China's entry into the World Trade Organization.

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