Our Day in the Mainland

January 13th, 2006

Today, we woke up bright and early to leave at 8:30 AM for the Shenzhen Stock Exchange. After a little over an hour, we arrived at the border between Hong Kong and China and had to go through security and passport checks. Then, we were off to the Shenzhen Stock Exchange where we heard speaker, Karon Li, discuss the future of the exchange, its rules and standards, and its growth. After visiting the exchange, we went to a beautiful  restaurant for lunch, where we enjoyed more Chinese authentic foods and dishes. The next part of the day was spent touring Wah Ming Optical Manufactory Ltd., which is a factory that manufactures largely sunglasses and optical products. Douglas Cheung, the director of the factory, provided interesting insight on what it’s like to keep up-to-date and remain innovative in the optical industry. Lastly, to end the week of business-related activities, we met with educators from the Nanshan Foreign Language School in Shenzhen, Nanshan being one of the sixth districts in Shenzhen with the most emphasis on technology and education. Liu Genping and Shana Wang, Vice Director and Director of the Shenzhen Nanshan Education Bureau took us on a tour of the Adult Education Training Facilicites. The finale of the day was a beautiful banquet that had succulent meats, vegetables, and desert dishes, and most importantly, wine and alcohol to toast to the Robert H. Smith School of Business and its fabulous honor students.


A busy street in Shenzhen
While at the Shenzhen Stock Exchange, our host, Karon Li, started our meeting by giving us an overview and brief history of the exchange. The exchange was officially set up by the Chinese Government in 1990. After a brief period of excitement and prosperity in the market, riots in the summer of 1992 (citizens felt cheated out of opportunity to subscribe to a hot issue) brought about new legislation and change by the government such as IPO lotteries. When the mainland stock market was initially set up, a company’s equity capital structure would typically consist of 1/3 A-shares (Publicly floated to domestic individual investors), 1/3 LP shares (Non-tradable, only can be owned by legal persons, usually SOE’s) and finally, 1/3 state owned shares (Also non-tradable).


The Smith contingency at the Shenzhen Stock Exchange
Currently, China’s stock market consists of two exchanges, one in Shenzhen and one located in Shanghai. The Shanghai Stock Exchange handles the listing of large companies (50 million shares and over), while the Shenzhen exchange handles the smaller listings and an over-the-counter market for delisted companies. One of the major issues concerning the Chinese stock market is non-tradable share reform. The goal of this reform is to make 100% of the shares on the market fully liquid and tradable. Two issues have resulted from the reforms: First, all new IPO’s have been halted in the mainland and second, majority shareholders have been struggling to find just compensation to minority shareholders in the transfer of non-tradable shares. Li also discussed the change in the standards of listing due to the SME (Small and Medium Enterprise) Board founded in June, 2004. Today, 50 companies are listed on the SME. Other measures have been taken to initiate growth and change for the SZSE. In the future, directors of the SZSE are trying to persuade a historically conservative Chinese government to allow derivative trading for portfolio insurance to hedge risk. Also, a future suggestion for the SZSE is to attract more companies by lowering their listing requirements to be more disclosure and less merit-based. In other words, companies would not have to have 3 years of earnings and profit data to be able to list, but would only need to show adequate financial statements that disclose their company profitability and growth. In line with this attitude, a new law was made that companies only need to have $30 million share capital as opposed to $50 million. As a result, more companies are finding it easier to list on the exchange, which makes the mainland exchanges more competitive with their overseas counterparts. Currently, the gross market cap for the SZSE is $117 billion, the average price to earnings ration is 17, and there are 35 million investors. Other major topics covered in today’s meeting were the illiquidity failure of the B-Share market, improved corporate governance, and the impact of returnees on the Chinese Securities Regulatory Commission and the future of China’s market.

Karon Li with Professor Hutchens

Our Host Poses with Professor Hutchens

Shenzhen Stock Exchange

The SZSE Building


After learning about the Shenzhen Stock Exchange, we went to a fancy Shenzhen restaurant, Huan Yu, for lunch. It was a beautiful place that seats over 1,000 customers at a time. The food was wonderful and included shrimp, chicken, beef, and rice cake desert, among other dishes. Overall, it was the third best Chinese dining experience in Hong Kong, only finishing after the food from Thursday and Friday nights.

Food at 1st Banquet

The food was AMAZING!!!

Students at 1st Banquet

Smith Students at Lunch

Huan Yu Dining Floor

Huan Yu’s Massive Serving Capacity



The Wah Ming Optical Manufactory Ltd. was the next stop on our agenda. Douglas Cheung, director of the optical factory, took us on a tour too see how sunglasses are made and to discuss how he manages his workers and keeps his products innovative. The factory, set up in 1968, employs 3,300 workers, the majority of whom originate from Hong Kong. Hong Kong supplies Wah Ming with an abundance of sales persons, marketing managers, engineers, and designers that are not available in China, due to the competition for labor that manufacturing companies face. Recently, the minimum monthly wage has been increased from 480 RMB to 580 RMB, which is about $60 to $72.50 per month. The dormitory facilities, food, and utilities that the workers receive provide them with incentives to work at Wah Ming, and it seems as if the workers are like one, big family. In regards the workers, the average age of production personnel ranges between 18 to 26 years old. The age is a little older for the engineers and designers who are usually university educated and make higher wages. The final class of workers mentioned is the line managers who typically are in there forties. The factory promotes efficiency by using state of the art technology and using Six Sigma principles. In addition, efficiency is measured through the monitoring of a daily quota for various production lines. In the cases where the quota is missed, that particular production department would have to work overtime to get back on schedule. On our tour around his beautiful facility, Mr. Cheung mentioned the use of landscaping (using plants and creating hillsides) and various recreational activities such as basketball leagues to make the workers feel more comfortable at the factory. In order to keep ahead of the game, the company is constantly coming up with new prototypes for the market in case some of their current products are copied by other manufacturers. Since competition is fierce, Wah Ming needs the top engineers and designers to make prototypes, handle computer graphics, and make molds for new sunglass models. On average, 500,000 pieces are made per day, with a capacity of 8 million pieces per day. Thus, Wah Ming has a lot of opportunity for growth, especially with a newly built factory addition to its already booming manufacturing business. According to Douglas Cheung, the biggest challenges for a company are to remain dedicated to your goals, set priorities and attack problems by order of importance, be passionate about your work, and enjoy what you do. Visiting the factory was eye-opening and educational in learning about what it takes to run and operate a business, how to keep ahead of the industry, and how to conquer challenges that arise in the workplace. For being the ripe age of 25, Cheung looks poised to maintain and even expand the success of his manufacturing operations.

Smith Students at Wah Ming

Smith Students at Wah Ming Optical

Tour of Facility

Mr. Cheung takes us through his facility

Davian and Mr. Cheung





Davian presents a gift to Mr. Cheung

To end the week of educational business ventures and delicious food, we met with Directors Liu Genping and Shana Wang of the Nanshan Foreign Language School in Shenzhen to discuss possible future programs with the R.H. Smith School of Business. The school has wonderful facilities and programs for their students to learn other languages, as well as travel to different countries. The school focuses on foreign languages, as well as music, art, and computer learning.

Historical meeting between Smith and Shenzhen

Imortant meeting between Shenzhen and the Smith School

Art at Nanshan

Art featured at the Nanshan Facility

More Food!!!

More Food!!!

After touring the Nanshan Adult Education Training Center facilities, we had our dinner banquet to end the day. The food was amazing, including tofu, meat dishes, and snail. Surprisingly, most people ate the snail. There were multiple toasts to the Nanshan directors for hosting us, and to the wonderful R.H. Smith School faculty and students. Visiting China was a great experience and allowed us to see the different culture and lifestyle in Shenzhen, and embrace their way of life and especially, their food!




The ICAC and the U.S. Department of Agriculture

January 12th, 2006

We first heard from Yvonne Mui, the Deputy Executive Director of the Independent Commission Against Corruption (ICAC), about the challenges of fighting corruption and the current strategies employed. The ICAC was created in 1974 when corruption was at one of its highest levels, especially within the police. Since its creation, the ICAC has succeeded in mitigating the level of corruption in Hong Kong. The ICAC approaches corruption with a $7 billion budget and a three pronged approach: operations development, corruption prevention, and community relations department. The ICAC investigates about 4,000 corruption reports yearly, with a conviction rate of 18%. When the ICAC was first formed, over 50% of the corruption reports received regarded the police compared to 14% today. The ICAC contributes its success to its great track record, its independence from the government and other entities, sufficient investigative powers, its system of checks and balances, and the ability to publish to the public. Its two key strategies include mass media publicity such as TV shows and education through face-to-face contacts.  


After hearing from the ICAC, we were privileged to have David Wolf from the U.S. Department of Agriculture Foreign Agricultural Service. Hong Kong ranks as the 8th largest export market for United States agriculture, which is not surprising since Hong Kong imports about 90% of its food. The ICAC defines its role as part of market intelligence and reporting, market development, market access, and representation. They service trade through promotions, such as in store and at trade shows. David projects the main challenges for the Department of Agriculture are the growing competition from China, the declining promotional budget, maintaining Hong Kong’s autonomy, and balancing public health and food safety concerns. Addressing the public health and food safety issue could also be classified as an advantage, along with the growing tourist trade.

Gordon Cleveland, husband of Dean Cleveland, presented next.  A USDA Veterinary Services official, Gordon has spent the trip reassuring us that we will not come home with bird flu.  In his presentation, Animal Diseases and Implications to Trade, he explained why.


Gordon’s career has placed him on the front lines of the endless war against animal disease.  He has witnessed firsthand their often gruesome spread and has fought hard to prevent, contain, and eradicate them.  He has an expert’s perspective into the potential devastation that an epidemic could wreak.  Yet despite all of the panic surrounding avian bird flu, SARS, and “mad cow” disease, Gordon feels that we have little to worry about. 

Gordon deals primarily with foreign animal diseases (as opposed to endemic ones) and their impact on international agricultural trade.  If a disease emerges within a country, that country must report it to the Organizationes Internationales Espoisetes (OIE) as soon as possible.  OIE immediately halts all potentially infected exports from the country in order to regionalize the disease.  As efforts are made at containment and eradication, OIE does surveillance to ensure the disease does not spread.  Once the threat has been dealt with, trade can finally resume.

Gordon presented the details of four foreign animal disease outbreaks, each which caused enormous loss.  Foot and Mouth Disease is the most highly contagious disease; its outbreak in the United Kingdom in 2001 cost the country anywhere from 14 billion to 18 billion pounds.  Exotic Newcastle Disease spread to California from Mexico via infected parrots.  It soon became rampant throughout Los Angeles backyard flocks and fighting cocks.  The government would not halt the movement of birds—Gordon submits this was a political move so as not to lose the Hispanic vote—and the estimated damage done equaled $68 million.  Veterinary Services was able to turn the tide, though, through public outreach.  BSE, or “mad cow,” has a 100% mortality rate, and spurred the UK to destroy millions of livestock.  Avian influenza is the current scare, though the disease has existed for more than a hundred years.  There is concern that it could become transmissible from human to human.

However, the real focus was not on the diseases themselves.  Rather, Gordon emphatically explained that most of the panic surrounding foreign animal diseases is a product of media sensationalism.  The media tends to exaggerate figures and imply that unlikely worst case scenarios are probable.  But nobody realizes that, for example, probably millions of people have eaten infected beef products for years, and yet only 150 people have contracted the disease.  Similarly, the H5N1 strain of bird flu only infects people who handle live birds, a small majority of overall population.  The probability of contracting these diseases is minute, yet the impact on trade can be immense.  Gordon


All the talk of infected meat and poultry whetted our collective appetite.  After bidding farewell to our speakers and the Clevelands, we headed to upscale Hutong for our first official banquet.  Hutong is a beautifully modern and authentical restaurant on the 28th floor of a Kowloon skyscraper. Thankfully, Professor Hutchens was in charge of ordering the meal—it was a luxury to eat with someone who actually knows what to get.  The food was absolutely incredible, all 4000 courses of it.  We had heaping servings of prawns and chilies, fried eggplant, bamboo crab, rice noodles, and a whole fish, among many other dishes.  It was a great introduction into the banquet culture we have been hearing about so much, and the food tasted even better because Bob Smith picked up the tab.  After what seemed like hours of eating, the wait staff came with stretchers and escorted us to the elevator.     



Paul Weiss in the Financial District

January 11th, 2006

Today we looked at the business stucture of Hong Kong from a slightly different perspective. We visited Paul Weiss, a law firm in Hong Kong’s financial district. As our host Marcia Ellis detailed, the firm’s Hong Kong office specializes in mergers and aquisitions as well as in private equity funds. The firm does not deal greatly in IPO work because of its competetive nature, making the cost of this service too low for Paul Weiss’s fees. Ellis noted the specialization that the firm has taken with respect to media and telecom work. Examples of these very “sensetive in China” companies include The Discovery Channel and AOL. Because China has in recent years reverted back to its strict regulatory practices in terms of the media, the firm has seen a lot of growth in this area. Ellis went on to explain why she believes the Chinese government is tightening its control over the media. She explains that an obsession over the idea of a color revolution in China has motivated the government to strictly monitor the information that reaches the country’s citizens through the various forms of the media. This control is now affecting many internet companies as well. Paul Weiss advises its internet clients on how to deal with increased monitoring of content as well as how to deal with a growing number of regulations.


Ellis also spoke briefly about private equity funds. Using Morgan Stanley as an example, she described that the company has been very successful in its investment in basic consumer goods such as milk, and batteries. Stanley did well to focus on the growing income of the population. As predicted, the consumption of basic consumer good would grow along with the income, helping MS in “making a killing.”

We also spent time in the discussion of other topics such as the Kyoto accord, and its policy on carbon credits, the importance of relationship cultivation in Chinese culture, liscensing agreements, arbitration, etc. She also gave us some details on documentation. In terms of joint ventures, a contract must be in Chinese as one of its languages. This fact again emphasized the importance of learning Mandarin in order to do business in China. When the contracts are drafted, both language versions can be equally valid. The version not in the Chinese tongue, however, cannot take precedence.

After speaking with Mrs. Ellis we had the pleasure of meeting Andrea Richi who is in charge of the marketing and hiring for the Paul Weiss office in Hong Kong. She gave us a short history of the firm and led us in a tour of the office which had spectaular views throughout. She noted the feng shui influence observed in many office buildings in China, and she too noted the importance of speaking Mandarin in order to work in Hong Kong.

Day at the Hong Kong Exchange

January 10th, 2006

Today we continued our learning experience at the
Hong Kong Exchange (HKEx)
, where we met with the Assistant Vice President of the Corporate Communications Department, Scott Sapp. Mr. Sapp gave us a detailed overview of common transactions, operations, and statistics about the capital markets in Hong Kong. While the HKEx is currently ranked 9th in market capitalization among global securities markets, it is expected to advance in standing as large institutions such as the Industry and Commerce Bank of China and the Agriculture Bank of China look to go public.

In front of the Hong Kong Exchange

We also learned some surprising statistics about the performance of the HKEx for the fiscal year 2005. For example, there are approximately 1100 listed companies, 64 of which were new listings raising a total of HK$292.7 bn (US$37 bn). Furthermore, the average daily securities market turnover was HK$18.2 bn (US$2.5 bn) and the derivatives market turnover totaled $24.8 mn in contracts.

In the Boardroom

Since the reunification, Mainland enterprises have had a growing influence in the Hong Kong securities market. In 1997, Mainland offerings (mostly red chips) accounted for 38% of equity turnover. Currently, Mainland companies represent 29% of HKEx’s listed companies and 39% of the total market capitalization. Finally, in FY2005 mainland offerings composed 91% of all funds raised through HKEx IPOs.

This reinforced our notion about Hong Kong being one of the premier financial markets in the global economy.

Our First Day in Hong Kong

January 9th, 2006

“Location, location, location.” That was the mantra of our speaker at the U.S. Department of Commerce, Sarah Kemp. Her talk emphasized the importance of Hong Kong not only as a doorway to China, but also it’s importance in the international business community. For example, she stressed time and time again how Hong Kong was THE city where multinational companies can localize their product before entering the ever confusing Chinese market. Throughout the presentation, the speaker truly believed that Hong Kong was the place for any business to begin. She compared company registration, taxes, and the legal system from Shanghai, Singapore, and Hong Kong. From each, it was clear that Hong Kong was definitely the place to get the China strategy right.

The Gang at the US Commercial Services building

Afterwards, we enjoyed the sights at Victoria Peak and familiarized ourselves more about Hong Kong at the Museum of History. The museum offered great insights on geological aspects of this once desert, prehistoric Hong Kong, the dynasties, folk culture, the cession of Hong Kong, and the growth of the city before and after Japanese occupation.