Authors: Tim Clissold
Over the coming months, after the hangover had cleared, Mayor Huang bent over backwards to help us invest in Changchun. Within the Municipal Government he set up a special
office whose only purpose was to facilitate our investments. After the disappointments up in the mountains in Sichuan, the Mayor’s enthusiastic support was a welcome change. So we decided to
focus on Changchun and than gradually spread out to cover China’s major cities: Tianjin, Wuhan, Shanghai and Beijing.
In the 1950s, the central planners had located the main truck factories in China’s larger cities and, thirty years later, when the foreign passenger-car companies started to arrive in
China, the Government encouraged them to go into partnership with the big truck businesses there. We thought that the component factories in those cities should have a bright future, given the huge
new demand on their doorsteps. So we trawled round the government bureaux and investment offices in each of these cities, visited factories and gradually built up a picture of the overall industry.
From these first trips, we found leads to other factories in more distant locations across China and patiently expanded the net.
During the late spring and the summer, we visited almost every part of China in our search for good factories. The contrasts between the different landscapes and local customs that we saw and
the vast distances that we travelled were all so great that, if it hadn’t been for the language, it would have been difficult to believe that they were in the same country. In Zhejiang and
Jiangsu, the two provinces either side of the mouth of the Yangtse near Shanghai, we crossed vast areas of dreary flat-lands, where each town looked like the last with their monotonous rows of
modern two-storeyed buildings covered in cheap white tiles. The water-table is high in the whole area and there are thousands of interconnected canals and lakes. The hulks of boats loaded with vast
piles of sand or gravel passed along the canals in an endless, doleful procession, taking building materials to the next new factory town. Everywhere, the lakes were covered with bits of
polystyrene and empty plastic bottles which I thought must have been rubbish dumped into the water. But I soon discovered that they were floats in the oyster beds. Jiangsu is the world’s
largest producer of freshwater pearls.
Further north, the Shandong peninsula juts out towards Korea between the Bay of Chihli and the Yellow Sea. The coast there becomes more rocky and mountainous. Inland, out from the dusty plains
and the orchard groves, China’s sacred mountain, Taishan, rises to the smoke-filled temples at its peak. Nearby, in Qufu, the ancient home of Confucius, the family’s ancestral graveyard
still sits in a woodland surrounded by high walls and filled with ancient knotty pines and grassy burial mounds. The inscriptions on the headstones stretch back seventy-eight generations.
We travelled to the various points of the compass: Guangdong in the south, Jilin in the north and Urumqi in the far west. The scale of the industrial zones, especially around Shenzhen in the
south where Deng had planted his tree, were enough to strike fear into any foreign businessman. As we drove through the region, mile upon mile of multi-storey factory buildings flashed past the
window, each one churning out clothing and cheap manufactured goods for export throughout the world. In the north, the conditions were at the opposite pole: the forgotten rust-belt cities, with
their shattered factories, broken chimneys and vast crowds of people milling around in the streets with a lost look in their eyes.
By the end of the summer, we had visited more than a hundred factories all over China. We’d seen every type of business that I could imagine: huge iron foundries, steel-rolling mills in
workshops a mile long, badly lit shacks near Shanghai with row after row of young women assembling tiny electrical motors. One thing was for sure; there were plenty of factories that needed
investment and seemed poised for expansion as the foreign passenger-car companies nudged China towards the next century. And more to the point, the factory directors wanted American investors.
Looking back on it, the frenetic pace and the tremendous extent of those travels, as we lurched across China from one grubby hotel to the next, now seem rather fanatical
– even manic – unless they are set into the wider context of what was going on in the country as a whole. In the months following Deng’s Southern Tour, whole swathes of the
Communist Old Guard in Provincial Government offices across China had been swept aside and replaced with younger and more reform-minded cadres. These changes set off a chain of events which led to
local officials all over China, especially along the coast, scrambling to set up new ‘investment zones’ and dispatching trade delegations across the seas in search of foreign partners.
The economy expanded rapidly and in the first half of 1992 the Shanghai Stock Exchange rose more than tenfold. News of the paper millionaires in Shanghai who had started with nothing and earned
fortunes by speculating on the stock markets spread across China. People all over the country fell into the grip of an investment fever and started buying shares, pushing up prices even further. On
one day in August of that year, half a million people queued to buy shares in a newly listed company outside the Stock Exchange in Shenzhen. When the application forms ran out, rumours spread that
officials had grabbed all the forms for themselves and their relatives. There was a riot which left cars overturned and windows smashed; it took the police several hours to bring it under
control.
In many ways, the reaction inside China was to be expected. People were fed up with the austerity programme; it had lasted for nearly three years after Tiananmen and they wanted change. They
immediately grabbed onto Deng’s lead and quickly became caught up in the new mood. But the excitement in the domestic economy was nothing in comparison to the delirium sparked off outside
China. Chief executives from all over the world stampeded into China in a cavalry charge waving chequebooks under the noses of their smiling but slightly bemused hosts. For a time, it looked as
though many of them had abandoned conventional business logic in the search for the mythical ‘billion-plus market’ while money poured into the country. The investment frenzy soon gained
a self-sustaining momentum that probably surprised even Deng, its hoary old instigator.
The real detonation, however, occurred in the financial markets. With the China investment frenzy at its height, in early 1993 an obscure Hong Kong-registered car company with assets on the
mainland applied to list on the Stock Exchange. It wanted to raise about eight million dollars, but it received application monies for just under four billion! Encouraged by these wild successes,
the Chinese Government authorized nine domestic Chinese companies to list in Hong Kong. The first one was Tsingtao, China’s biggest beer company, and the share issue was massively
oversubscribed. The Hong Kong stock market was in the ascendant; it went up 35 per cent in the first few months of 1993. Gradually, the news that ‘something big’ was happening in Hong
Kong floated across the Pacific towards America.
In the third quarter of 1993, while we were completing our factory tours in China, the huge American institutional investors started moving into Hong Kong. They wanted to get in on the act and
the ‘money allocators’ were in town, the hugely powerful analysts who advise the markets where to put their dollars. That was when Barton Biggs, one of the most influential voices on
Wall Street, had made his famous remark about being ‘maximum bullish’ after a six-day banquet marathon up in the Middle Kingdom. In the months following his visit, the stock markets
soared and investors scrambled over each other to grab whatever investment in China they could get hold of. At the end of the previous year, a small bus company called Jinbei had gone public in New
York and raised millions of dollars; it was the first listing of a Chinese company on the New York Stock Exchange, but now investors wanted more. The only way to access more deal-flow was to invest
in Hong Kong or, even better, in China itself. So it was in this heady atmosphere towards the end of 1993 that Pat went back to America to raise money.
Throughout the year, Pat had been warming up some Wall Street heavyweights. He said, ‘I know it can be difficult to raise money on your own and we need someone with real
firepower behind us.’ Through some old contacts, Pat had been introduced to IHC, a huge money manager with offices in midtown New York. ‘They’re one of the best money managers
around,’ Pat had said. ‘If we can get them on our side it’ll make the whole process of raising money much easier.’ He’d also been talking to one of the biggest New
York stockbrokers and, although investing in factories in China hardly came within their normal sphere of business, they seemed interested as well. ‘It’d be good to have a big broker
behind us,’ he said. ‘It’ll help when we go public in New York.’
IHC, the money manager, routinely raised hundreds of millions of dollars from the big corporate pension funds and other institutional investors in the States. There were also some individuals
who invested with them, but you had to be rich; they weren’t interested in anyone with less than fifty million. Pat wanted to persuade IHC to take a ‘China Fund’ to their
investors. IHC’s name would add credibility and they were always on the lookout for new and intriguing investment ideas for their clients. China was flavour of the month, so Pat was hopeful;
if we could attract IHC’s interest and get them to raise capital for us, we could then buy up the factories that we had found in China. ‘If we can get IHC to take it to their clients, I
think we’ll raise enough money to keep us busy for a while,’ he said.
Pat sparked enough interest for IHC to look at the idea seriously and in August the president of the company, Myron Rubel, had come to China together with Bob Smith from the brokerage firm. They
flew to Hong Kong in IHC’s jet, grumbling about having to ‘go commercial’ into China; at that time, the Chinese Government was not too keen on private planes whizzing around in
its airspace.
The trip was a strain. I found Rubel a nightmare to deal with. Thin and wiry, with frizzy white hair, he was a hyperactive man who could never sit still. He was about fifty when I met him and he
had only just become president of IHC. Managing sixty billion dollars was bound to entail a lot of pressure, but Rubel was the archetypal stress-junkie; an erratic eater, constantly fidgeting
around, shaking his legs up and down on the balls of his feet under the table, taking out his diary, looking at it for a split second, putting it away and then taking it out again. He had a
concentration span measured in a couple of picoseconds and seemed to have a hundred things all jumbled up in his head at any one time, things that seemed to fall out in no particular order.
He’d fire off questions about exchange controls and halfway through the answer suddenly ask for statistics on the auto market that we’d already given him the previous day. He was
exhausting company.
Cheerful, red-faced Bob Smith from the brokerage firm could not have been more different. He was far more rounded than Rubel in both personality and physique. He was a jovial man who would talk
you to death if the chance arose. His breakfast meetings in America were legendary for lasting well past lunchtime; sometimes whole days were consumed in the process as one meal merged into the
next. At first I suspected that his slightly absent-minded manner might have been a ploy to put you off guard; given his high position on Wall Street, it was not wholly convincing. However, after
his secretary told me that she once found a bonus cheque for nearly a million bucks in the pocket of a suit jacket that had been hanging on the back of his door for months, I began to have my
doubts.
I was only convinced that Smith’s eccentric manner was genuine after I saw his office. It was famous throughout the brokerage and I was once taken in for a viewing by one of Smith’s
analysts who’d previously checked to make sure that Smith himself was out of town. I could hardly get through the double doors. Piled from floor to ceiling, on desks, under chairs, blocking
the windows and stuffed into bookcases were thousands and thousands of documents: prospectuses, contracts, offering documents, long form reports and financial statements stacked in great tottering
piles right up to the ceiling. A path had been trodden through the middle of these disorganized heaps and towers of paper across to the corner of a desk. The desk itself was piled three or four
feet high with binders and magazines, but a small space, about a foot square, had been cleared on the corner where there was a battered plastic telephone next to a collection of bottles containing
pills and vitamin tablets, and a pair of knackered old training shoes. Apparently, Smith sometimes locked himself in there for hours on end, bumbling down the phone and rummaging around, looking
for his headache tablets. Most of the documents were years old; his secretary told me that some of them dated back to the 1970s but that whenever she tried to clear up he yelled at her. Bob Smith
insisted that he knew where everything was but of course he could never find anything; we always made several extra copies for him, knowing that most would end up being tossed into the vortex.
I never really figured out what made Bob Smith tick, but one thing was for sure: his slightly shambling walk and amiable manners were the perfect antidote to Myron Rubel’s hyperactive
volatility, and he progressed sedately on his tour through China unperturbed by the whirlwind raging around him.
Before their trip, Ai Jian had fixed up meetings for Rubel and Smith with the ministries in Beijing. We had also arranged to take in the best factories in Beijing and Changchun
but Rubel didn’t want to see them.
‘Nah, I’ve seen enough factories for one lifetime,’ he said. ‘If the guy wants our money, get him to come and see us.’ So Ai Jian called around and the factory
directors duly trooped in to see us. Fortunately Mayor Huang was in Beijing anyway, so that avoided the embarrassment of telling him that we weren’t coming up to Changchun.