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Capitalism Lessons the Chinese Can Skip

Wednesday, 4 Jun 2008 | 1:26 AM ET

I have spent the day at the Boao Forum in London, the first of its kind outside Asia, attended by some 200 Chinese businessmen and businesswomen.

The forum was about private equity, M&A, and IPOs. It was also well attended by executives from the Western financial community, who in a symbiotic exchange, were dispensing deal-making wisdom in the hope of picking up a few clients. They have seen the trend and the trend points to significant year-on-year growth in deals involving Chinese capital.

Last year Chinese investment reached a tipping point. Outbound investment at $30 billion exceeded inbound investment by some $8 billion. While Chinese companies are busy consolidating in the domestic market, they are also keen to use the capital raised from IPOs to buy foreign assets.

Top of the shopping list were investments in energy, technology, real estate, natural resources and financial institutions. Of that $30 billion at least $10 billion could be considered private-equity investment.

Sensitive to further political backlash the money has gone into strategic stakes, or companies that are much smaller and less public than previous acquisition targets. The Chinese are still buying, but they are doing so more discretely, with little of the media fanfare that usually accompanies a Western corporate's M&A activity.

The Chinese are also buying without leverage. There isn't a tradition of bringing significant debt to a transaction, and the "rules" still don't allow Chinese private equity to employ the same financial engineering that has created unnaturally big profits for the Western private equity industry.

It is ironic that as the equity markets fell sharply Tuesday on another bout of credit-crisis induced fear, we are keen to encourage our friends in Asia to employ the same techniques that got us here.

China avoided the painful bust of the Asian currency crisis in the mid 90s because its capital account was closed. Again this time round, Chinese banks appear to have avoided most of the damage wrought by subprime and our addiction to leverage because they are not fully integrated into the Western banking system.

What about next time? Well that depends on how closely China's emerging investment banking and private equity industries come to mirror our own.

There are obviously some positive aspects to the cleansing and rejuvenating performed by efficiently-managed capital. And Chinese managers will do well taking that message on board -- but when western bankers start invoking the impressive powers of leveraged equity, let us hope they are given less attention.

Financial education is a good thing, but there are some "lessons" that are worth skipping.

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