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Shanghai United Assets and Equity Exchange Program

Shanghai United Assets and Equity Exchange Program

Donald Tang (Asia Society)

Beverly Hills
November 22, 2005

In my many trips shuttling back and forth from the U.S. to China and meeting so many incredibly motivated and talented people each time, I have learned that it is never just about one person in the room. There are plenty of stars. The Valin/Mitall Steel Deal proved that. It wasn’t my deal. There were brilliant players all around. On all sides. Without them, that deal would never have closed. Trust me.

In addition, there are some incredibly committed and gifted professionals involved in the new Asia Society of Southern California. Lisa Noshi, Nadiya Siregar, and, of course, Deborah Jordan. Without an executive of her quality and total professionalism, none of our ambitious plans would ever get off the ground. Deb, Lisa, Nadiya, we are lucky to have you.

Speaking of exceptional talent, we have a speaker here for you this morning that is a major part of a leading movement shaping new investment opportunities in China today as it was written in the Wall Street Journal article we distributed to you this morning.

Leading this delegation from the Shanghai United Assets and Equity Exchange is Xu Zhijiong, Vice President of SUAEE. In a few minutes, he will introduce his colleagues who have traveled from China to be with you this morning. . And what they will unveil for you is an intriguing, innovative and intelligently designed suite of strategic offerings for equity investment in China. It will be a great program.

Now I do appreciate your remarks, Deb, particularly about the role I find myself in these days that does give me an unusual perspective and, I suppose, some advantage, in helping cause “win win” conditions to prevail between Chinese and Western centers of influence.

I find myself in the unique position as the “bridge,” the “pipeline,” between these two worlds, so that communication and mutual understanding can flourish, which is the foundation essential for significant global deals happening.

So as I stand here with my Western colleagues and Chinese friends, who are bringing such opportunity to us here in Los Angeles, I want to say welcome to all of you and especially to the distinguished delegation from SUAEE up here with me today.

And I want to welcome you, my fellow Americans, to this important opportunity in continued understanding and cooperation between our two great nations and in the wealth creation opportunities which SUAEE offers to us here in Los Angeles.

This will be an important morning for all of us, as SUAEE will unveil for you a smart, more cost efficient, more reliable asset exchange platform for investing in China, sort of a financial eBay for all sorts of transactions involving companies, assets and the like.

But let’s start out with the obvious. Why are we here? Why have we all taken the time out of our very hectic schedules to be here this morning?

A top electronic investment exchange in China is more than just interesting, that’s why. It’s extremely important to us. Because China is extremely important to us.

In fact, China is critical to us in the West. As we are to China. A condition that will only increase as China rapidly evolves into our principal business partner this century.

This is inevitable. We can’t escape it. Neither can they. We need to engage with them and vice versa. And that requires enhanced understanding of each side by the other, well beyond superficial understanding. We have to build bridges of uncommon understanding and communication and become students in each other’s ways, systems, strengths, weaknesses. Then, and only then, will we have a clear path to strategies most likely to result in win-win’s for all involved parties. Only then will we become true stakeholders in each other’s success.

What do we know about China today -- and tomorrow? What do we think we know? Where are the gaps between assumptions and true understanding? Between “conventional wisdom” and true enlightenment?

Well, the gaps are huge and they are everywhere.

Let’s take one example. Everybody knows the Chinese manufacturing economy is gigantic. In many ways, it is at the heart of our global capacity to produce quality goods economically and efficiently. In many ways, this Chinese manufacturing economy makes the “inflationless expansion” we rely on in the West possible. In that regard, it guarantees our high quality of life. We rely on it. We perceive it as a powerful force. But it is also a fragile force. In a necessary rush to expand into the realms of production and manufacturing to shore up their economic base and to create a platform of value in world markets, China becomes a powerhouse, yes, but a powerhouse without pricing punch.

We in the U.S. are in an inflationless expansion mode. They in China are in a profitless one. They are the dominant producer. We are the supreme innovator…and consumer. But they trail alarmingly in their capacity to create brands, drive demand, and control their own distribution channels. That leaves China vulnerable to global economic downturns. A global economic sneeze could become a global economic flu in China. Which, in turn, would trigger Global Recession…or the unthinkable.

A demand slowdown would lead to factory overcapacity and unemployment at dangerously high levels. This would be devastating to China. And to us. We’re linked.

Further, the growth China has enjoyed, and the massive move to urbanization it has fostered, is eliminating arable land. So now, they look overseas for foodstuff and other natural resources and are being squeezed as those costs continue to rise in what was already a profitless expansion.

And with a Chinese personal savings rate of over 40%, building domestic consumer markets is daunting. Spending doesn’t come naturally. Spending, like we Americans spend, is founded on consumer confidence. And consumer confidence is in short supply in China. China has not found a way to unlock the potential of these savings…so far.

Lastly, we are in the 26th year of China’s remarkable economic expansion. But how much longer can that be sustained? Everything in economics is cyclical. Where are we now? In the 7 th inning of this Chinese expansion? What happens when it cools? What happens to us here? And how can we help extend the shelf life of this expansion since we’re all in this together? How do we engage with Chinese business today and tomorrow in new ways that benefit us all?

Words are powerful. 26 years ago, Deng Xiao Ping changed the paradigm for China-- and for all of us -- with his proclamation for China that “to get rich is glorious.”

That was the beginning of China’s rapid climb into Modernization, Urbanization and Globalization. “MUG.”

Now, with inequalities in wealth distribution and excessive urban development at the expense of the countryside along with some resistance of late in the West to China’s ambitious global plans, the vision has recently been updated. “Common prosperity” is the new proclamation as Chinese leadership attempts to balance huge growth against other key issues affecting a modern economy – such as weakness in the banking system, inequalities in income, uneven development between different regions and the like.

26 years is a long time. The Japanese expansion cooled in 25. So did South Korea’s. Will it in China?

Maybe it’s time for a third paradigm…to extend the boom for the next 5 – 10 – 15 years. This is in the best interests of all of us in this room. Maybe the new proclamation could be something like, “Widespread Prosperity Driven by Entrepreneurs from China’s Center.”

Maybe that’s too wordy. Maybe something simpler like:

“From making iPods to creating the next iPod.” I think that sums it up nicely.

What areas within China offer the most promise? Well, China is not a monolith. China is almost unimaginably immense. Certain regions and sectors will falter. Others will thrive. Where are the best opportunities moving forward?

Specifically, where are the pockets of this entrepreneurial spirit that will stoke these growth engines in New China as we face the maturation of the Coastal Cities? We would do well in this room to discover them first. Because that’s where the rich returns will be….for all of us here in the U.S. and especially in Los Angeles.

One strategy for discovering these opportunities I call “Deep China.” The concept of “Deep China” calls for investors to shift there focus from the Coastal Cities where China’s economic renaissance began and to China’s inland Centers, like Hunan Province, where that expansion has been slower to develop…so far.

Though places in the countryside and what are called the “hinterlands” have their difficulties -- lack of experience for one -- they have that entrepreneurial spirit and the motivation to work hard think innovatively and create new business models.

Skills can be learned. I certainly didn’t have any when I came over here to the U.S. 20 plus years ago from Shanghai. I couldn’t even speak much English. But I had spirit and ambition. And so do the people in Hunan. They have what can’t be taught.

Hunan has a Super Spirit and an entrepreneurial, “Can Do” approach with an abundance of energy and core talent as do other provinces in China’s hinterland.

The Deep China concept is not limited to Hunan alone, or to the center of China for that matter, though the Central/Western Region is certainly fertile ground. No, the concept of Deep China is rooted in deep understanding and a shift, to a significant degree, from the Coast to the Center; from Manufacturing to Consumer Based Businesses; from Large State Owned Enterprises to High Growth Mid-Sized Privately Owned Companies.

So whether what’s ahead for us is a great Chinese business climate or a not so great one, or, most likely, a mixed weather pattern, there is a sweeping shift in the nexus of influence - from a Euro/U.S. to a U.S./Asia economic hub which is quickly forming this century. And the importance of the two main power centers in this new world of global business – China and the U.S. – becomes the single biggest issue of our time.

This is especially critical now, as “Deep China,” embodied in new pockets of enterprise that will fire up the Chinese entrepreneurial engines, is on the rise, and as the more enlightened segments of U.S. business and investment leadership are waking up to the opportunities it presents.

This is why I am so intrigued with the model SUAAE presents to us here in the Western Investment world, as you will learn in a moment. As a national platform, the Shanghai United Assets and Equity Exchange plays a central role in optimizing capital return and asset allocation for all Chinese based financial opportunities. So it gives me such great pleasure to welcome our distinguished speaker this morning, Xu Zhijiong, Vice President of Shanghai United Assets and Equity Exchange.

Thank you.