Wednesday, March 31, 2010

The Paper Dragon...

...more of an Oligarchy than a Communist State. We see the angular momentum of power at work here. It does not change the world over unless some exogenous forces (such as term limits and other controls) the incumbent(s) to hand over the keys for the good of the system. From African warlords to Chinese revolutionaries...its all the same. Accumulate, accumulate, accumulate.

By FT Reporters
Published: March 29 2010 22:37 | Last updated: March 29 2010

New Horizon Capital is one of the most influential and successful participants in China’s fledgling private equity industry. It has billions of dollars under management and a stable of investors that includes Deutsche Bank, JPMorgan Chase, UBS and Temasek, Singapore’s sovereign wealth fund. But you would not guess any of that from its central Beijing headquarters.

The company has no nameplate in the lobby of the Golden Treasure Tower, a nondescript building near the Forbidden City, the traditional seat of imperial power. Its simple 12th floor offices are identified only by a small sign inside the door that reads, in Chinese, “New Horizon Growth Investment Advisory Limited”.

The company does not need flashy suites as it has one of the most valuable assets in China. He is Winston Wen, an MBA from Northwestern University’s Kellogg business school in the US who keeps a low profile and bears a striking resemblance to his father – Wen Jiabao, premier of the People’s Republic of China.

The younger Mr Wen and New Horizon are in the vanguard of a more aggressive generation of taizidang (“princelings”) – offspring of senior Communist party officials – who dominate the burgeoning home-grown private equity industry, where huge profits are to be made from restructuring state assets and financing private companies.

In 2009 private equity deals in China totalled $3.6bn, accounting for one-third of all such transactions in the Asia-Pacific region, according to Thomson Reuters. But industry participants say the potential market is far larger.

According to those working in the sector, the princelings’ ascendance is squeezing out less well connected operators, including foreign firms, which might have important consequences for two reasons. First, private equity could play an important role in modernising the economy, channelling funds to promising but capital-starved companies – but those benefits will be felt only if the industry is run in a professional and competitive manner.

Second, some in the political establishment fear that princeling dominance of private equity could exacerbate public perception of nepotism and misrule at the top of the Communist party. In an opaque authoritarian system lacking the popular legitimacy of a democracy, such fears are hard to dismiss. A recent online opinion poll by the People’s Daily, the party’s official mouthpiece, found that 91 per cent of respondents believe all rich families have political backgrounds.

In an interview with the same newspaper, the former auditor-general said the fast-growing wealth of officials’ children and relatives “is what the public is most dissatisfied about”. Li Jinhua, widely respected as the senior graft-busting official between 1998 and 2008, told the paper this month: “From the numerous cases currently coming to light, we can see that many corruption problems are transacted through sons and daughters.”

Many of the elite’s children are western educated and, over the past 15 years, dozens have been recruited by western companies and banks hoping to secure an entry into the Chinese market and win mandates to take state-owned companies public in New York or Hong Kong. As most foreign investors know, employing the relative of a senior party leader as an adviser or employee can help cut through bureaucratic obstruction and resistance from local interest groups.

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