YI Huiman, the newly appointed chairman of the China Securities Regulatory Commission (CSRC), could introduce innovative strategies to boost the country’s capital markets, experts say.
YI Huiman, former chairman of the Industrial and Commercial Bank of China (ICBC), was appointed Chairman of the China Securities Regulatory Commission (CSRC), taking over LIU Shiyu’s responsibilities, as Xinhua reported on the weekend.
“As an experienced business leader, the hiring of YI Huiman is an important signal that China is continuing to push the agenda set out in the Third Plenary Session of the 18th Party Congress announced in November 2013 – allowing the markets to play a decisive role. As an entrepreneur, Mr Yi understands the capital markets more from a market perspective,” commented Andrew Methven, Head of Strategic Consultancy at Hampton Group. “Mr Yi could take action to encourage investment firms to play a more important role as a market-based and efficient way to stimulate the market.” Chinese investment firms acting as investment banks, brokers or asset managers are crucial entities in the capital markets, but face a much less favourable regulatory environment than their global competitors.
YI Huiman began his career as a junior loan officer with ICBC in Zhejiang Province in 1985, spent 34 years with the world’s largest lender, and was appointed chairman in 2016. Due to his rich experience in the financial sector, where he had to make market-based decisions in real time, YI Huiman was rarely exposed to regulatory work, which distinguishes him from his predecessors.
DONG Dengxin, Director of the Wuhan University of Science and Technology’s Institute of Finance and Securities, agrees that YI Huiman would stick more to market-oriented measures to develop the capital markets. For example, YI Huiman could rationalise bond issuance procedures and avoid excessive administrative controls to address funding issues in the private sector.
In October, YI Huiman said liquidity bottlenecks in private companies were partly due to clogged direct funding channels, including difficulties in issuing bonds.
Hampton Group offer specialist China Business Intelligence services catering towards international businesses that want to thrive in China. We provide Policy Insight, analysing changing policies and regulatory environment that can impact business approach.
From the 33rd floor of the office building has a breathtaking view. Toward the north, visitors look at densely forested hills. In the south, are the enticing sea and Hong Kong. “We want to remain attractive to our employees through our new location,” said BING Xia, Deputy Chief Executive for International Business at the Chinese startup Malong, headquartered in Shenzhen.
The company is just four years old. However, it has expanded so much that it had to move into new premises. The company operates additional offices in Beijing, Shanghai, Tokyo and Arkansas. Furthermore, Shenzhen City Government also supported the company in moving into the new premises. Chinese cities like Hangzhou, Xian and Shenzhen compete with each other and have a lot of attractive offers for innovative startups.
The company, founded by American Matthew Scott and Chinese HUANG Dinglong – the company name Malong is made up of their first names – deals with computer-aided vision, a subfield of artificial intelligence. “We are just in the early stages of development and cannot predict what computer vision will be able to do one day,” says BING Xia.
Nowadays, everyone is talking about facial recognition, in which China, with young companies such as Megiiv Technology and Sense Time, is leading technological development. Instead of identifying faces, Malong focuses on product recognition and works with retailers and consumer goods manufacturers worldwide. “Such cooperation is helpful for both sides. We understands the needs and difficulties of each industry better and our partner’s benefit from our services,” adds BING Xia.
Until now, consumers are faced with the problem that if they like a piece of furniture or clothing, for example, during the holidays, back at home, they are lacking the right words to describe shape, colour and pattern and are unable to find the item in search engines or in stores. Malong offers a solution: Consumers photograph the products and then upload the photos in an app. In a matter of seconds they can see which comparable models Malong’s partners have on offer. The product can then simply be ordered through the app. This technology also describes patterns and colours of fabrics of fashion designs without them having to manually describe them. Product descriptions can therefore be produced more efficiently and faster.
Malong has already taken new paths to gradually conquer the vast field of computerised vision. For example, with this technology, it will be possible to take less than a second to determine which parts of the brain are affected by a stroke based on computed tomography scans. According to Malong, this procedure is 308 times faster than the human eye. For patients and health insurance, the technology offers great opportunities. Diseases are diagnosed faster and more accurately than traditionally.
Recently Malong announced a cooperation with the University of Bern. The cooperation is a result of the agreement between the Canton of Bern and Shenzhen nearly four years ago. Both sides want to promote economic cooperation. In mid-November last year, a Memorandum of Understanding was signed in Shenzhen in the presence of Bern’s Economics Director Christoph Ammann. In the future, synergies between artificial intelligence and brain tomography will be explored in two research institutes in Bern and Shenzhen.
The company’s international reputation is in part due to its hiring choices. Malong has attracted international talents such as HUANG Weilin who leads the research department. Previously, HUANG Weilin obtained his doctorate in the prestigious Visual Geometry Group at the University of Oxford where he worked as a postdoctoral researcher. HUANG listed several reasons why he was drawn back home, despite his promising academic career. “At Malong, I can help people with my developments,” he emphasises. In addition, working with Malong does not have the anonymity of universities or large companies such as Alibaba or Tencent. Furthermore, his move to Malong did not mean leaving academia. About half of the published studies come from the research departments of companies, HUANG Weilin estimates.
Startups like Malong may one day be financially attractive. The employees are involved in the young companies through stock options. If the IPO or the company is sold, a lot of money can be generated. Just over a year ago, venture capital firm Softbank China Capital invested RMB 220 million (£25 million) in Malong. In August of last year, it was announced that Accenture, one of the world’s leading management consultancies, invested in the Chinese startup and signed a cooperation agreement.
Race between America and China
In parts of the Western world, there is still the persistent misconception that China is a world champion in copying and imitating and is unable to develop and bring innovative ideas to the market. But times have changed. Shenzhen, with young companies like Malong, is a stronghold of innovative and modern China.
China has just recently started play a role in artificial intelligence research. The theoretical foundations for artificial intelligence were created in American, British and Canadian institutes. Now, the next step is to develop business models. And that’s where China is leading.
According to Lee Kai-fu, who previously headed Google China and now invests in young Chinese high-tech companies as the head of Sinovation Ventures, China leads the future in artificial intelligence.
China has more than 800 million internet users who reveal a lot about themselves on the Internet
So far the practical application of artificial intelligence has faced the problem that there were not enough data and computers with high computing performance. This has now changed. China, with more than 800 million internet users sharing much about themselves online, provides the ideal environment to test the theoretical foundations of artificial intelligence. In addition there are powerful technologies and ambitious entrepreneurs who want to fulfil their dreams.
China has a moved ahead in all these fields of foreign competition. Malong is aware of this. “In the past, China had to catch up with foreign countries on already pre-tracked paths. Those days are over. Now we pave the way for the rest of the world.”
China wants to play a leading role worldwide in the production of unmanned aerial vehicles (UAVs). In December 2017 the government has published new guidelines for the civilian unmanned aircraft industry to support UAV development. The government expects the market value of the industry to increase by an average of 40 percent by 2020 to RMB 60 billion (£7 billion). The long-term growth goals are even more ambitious. By 2025 the Chinese government aims to more than triple the UAV industry to RMB 180 billion (£21 billion).
The new guidelines already had a positive effect on China’s UAV industry. One of the country’s largest online retailers, JD.com, announced a US$ 2.5 billion round of financing for its logistics subsidiary, including investments in automation, drones and robotics. The announcement was made by Richard Liu, Chairman and CEO of the Group in February 2018.
He even got support from Google. The search engine group invested US$ 550 million in JD in June, which was a likely move to improve the company’s standing compared to US logistics leader Amazon. In August 2018, a startup accelerator was announced to support the company’s UAV ambitions.
JD’s drone delivery plans focus on China’s remote rural areas which currently incur high delivery costs. With drone delivery the group wants to be able to deliver goods faster and cheaper to these regions, Richard Liu said in an interview with CNBC. Richard Liu expects that fully automated logistics will reduce costs by 70%.
Chinese online marketplace Alibaba also has made a move towards drone technology. According to the US magazine Popular Science, the e-commerce company has concrete plans to offer deliveries via drones. In tests drones collected meals and other packages in restaurants and shops at Jinshan Industrial Park and flew them to their delivery points. From there, human drivers transported them the last stretch to the customers. “By using planes the delivery services can bypass Shanghai’s crowded streets. This can reduce the total delivery time for customers in the area by over 20 minutes”, reporters observed. In the next few years Alibaba wants to roll out this service to other cities.
This delivery robot can transport up to 300 kilograms.
Chinese drone logistics isn’t solely focused on the last delivery stretch, which can account for more than 50% of the total delivery costs. Long-range drone delivery is another fiercely competitive development area.
According to a report, Alibaba subsidiary Cainiao is working with the University of Beijing on a long-range drone which has a payload of one tonne and a delivery range of 1,500 kilometres. First tests have been scheduled for 2020 and it is scheduled to be put into services by 2025. Meanwhile JD is developing a similar project with a 300 kilometre flight radius and a payload of one tonne.
UAV delivery on the road is comparably easier to design and implement. Traveling delivery robots are long commonly used in China and are part of the automated supply chain: JD’s carry a payload of up to 300 kilograms in 30 parcels, drive 15 km/h on bike lanes, stop at red lights and orientate themselves with their radar sensors.
The start of a new year often serves as a point for reflection and forecasting. What will happen in China’s capital markets over the next 12 months? What is the next big thing in China’s venture capital sector? Hampton Group has followed 9 leading Chinese venture capitalists. Over the next weeks we will find out from China’s leading experts what in their eyes important developments of 2018 were and what we can expect of 2019.
SHENG Xitai, Founding Partner at Hongtai Capital Holdings
Before even talking about the buzz topics “science and technology”, we have to focus on the fundamental basics: “What is the core purpose of a capital market?” The capital market has two core functions:
The first one is in plain words: “to make money”, also known as financing.
The second is to increase the wealth of the people participating in the capital market.
Without liquidity, companies cannot “make money”, entrepreneurs cannot increase their wealth, and the core functions of the capital market are gone. This is the core issue. To increase the liquidity of the capital market, the most important strategy is to reduce the threshold for new investors to enter.
According to reports the current investment threshold for Science and Technology is set around RMB 500,000 (£57,000). I think this threshold should be lowered down to RMB 300,000 (£34,000), RMB 200,000 (£23,000) or even RMB 100,000 (£11,500). A reasonable investor threshold is an important condition for ensuring market activity. If you can’t help small and medium-sized enterprises to “make money,” the market eventually won’t be able to sustain itself.
A functioning capital market is reliant on a sound legal system. Therefore, there are two prerequisites for creating a strong capital market in the science and technology sector:
First, increase penalties for fraudulent enterprises, and impose severe penalties on issuers who have obtained significant benefits through fraud;
Secondly, more mature markets have a comprehensive information disclosure procedure.
The primary importance of the registration system is to improve the legal system. Therefore, full information disclosure key component. Disclosing sufficient information, stating the business model clearly, and disclosing suppliers and customers truthfully, are key decision making information in the capital market.
The registration system must be combined with penalties. Currently China’s securities supervision, after financial fraud in listed companies is found, severely penalises intermediary agencies, while the penalties for issuers and actual controllers is very mild. In practice, if a company is fraudulent, it can be difficult to even find their accountant. Channels and methods of investigating such companies are limited. This makes the risk of listing a fraudulent company worthwhile to some individuals.
From a regulatory perspective, it is also unpractical to use a company’s “net profit” as the main listing indicator. Companies have some flexibility in their accounting methods and can easily adjust them to reach their desired “net profit”. Some companies that are in their early development stages require continuous investment as they are not yet profitable, yet they may be the industry leader in their area.
In the past China’s science and technology enterprises were “forced” to look at overseas capital markets. There were no adequate provisions for them in China. I believe Alibaba’s listing in the US in 2014 was a great achievement in China’s development. Since its listing, the company’s market value doubled. However, because Alibaba is listed in New York, China benefited little of the listing. It is a shame that the Chinese capital market has missed a whole generation of internet technology.
This year, after the reform of the listing system by the Hong Kong Stock Exchange, a large number of new companies, including Xiaomi, went public in Hong Kong. Having worked in the venture capital over the past few years, I discovered that this group of unicorns was cultivated in the past ten years. If we miss out on them, we risk waiting another ten years.
Science and technology is a major opportunity for the revitalisation of China’s capital market. It carries the historical mission of leading China’s industrial transformation, and bridging entrepreneurial enterprises, venture capital and capital markets.
What kind of business will matter in the future? First, we need to change our mindsets, especially our regulatory environment. All companies must strive to catch up with the leaders in the stock market.