VICTOR ZHIKAI Gao is staying at the Langham Hotel, down the road from the Chinese Embassy. Just off a plane from Beijing, and sipping green tea to stay ahead of his jet lag, he is in London to brief an investment bank on China’s rapidly developing private equity sector. Although jaded, he manages to be simultaneously charming and provocative.
Gao started life as a diplomat, so he feels at home close to the Embassy on Portland Place. Between 1983 and 1989 he worked as an interpreter to Deng Xiaoping, before being posted to the United Nations Secretariat in New York. “I was in London in 1985 with the Chinese Premier when Margaret Thatcher was your Prime Minister. I met your Queen.”
He has spent the last two decades working in business. A former China policy adviser to the Hong Kong Securities and Futures Commission (1999-2000), he is currently an executive director of the Beijing Private Equity Association, he chairs an investment firm, and he is director of the China National Association of International Studies, a think tank affiliated to the Ministry of Foreign Affairs.
Despite his international experience, Gao retains a distinctly Chinese perspective. He is a regular guest on CNN and BBC because of his ability to explain Beijing’s true intentions to western audiences. He is back in London to talk about what he calls “the next step in China’s experiment with the market economy”. China’s financial sector has come a long way. “In the 1970s we didn’t have any commercial banks. In the 1980s we didn’t have a stock market. This year the Agricultural Bank of China was floated on the Shanghai and Hong Kong Stock Exchanges for $20bn (£12.45bn). Onshore,” he emphasises. “No US involvement whatsoever. Not long ago this would have been unthinkable.”
For the Chinese, geopolitics and business are interdependent; and at the heart of this is an obsession with America. Gao reminds me that Goldman Sachs has predicted China could overtake America as the world’s largest economy as early as 2027. He concedes that China will remain the junior power: its per capita GDP a fraction of America’s, and still no match for America’s military power. But the prospect is nonetheless a distracting one for China’s elite, and Gao suggests that many in the Chinese leadership worry whether Washington will stand idly by.
We track back to 1978, when Deng Xiaoping realised that China couldn’t get rich on its own and began to open the economy to foreign capital. Since then, Gao argues, China has survived a series of challenges which have left it stronger and increasingly self-confident. In 1989, the Chinese Communist Party survived the collapse of the USSR, becoming the world’s leading communist regime. In 1997-1998 the Asian financial crisis washed up against the Chinese economy; when the waters receded China was left relatively stronger than its neighbours. And then there was the global financial crisis. “This time it was the blue chips which suffered tragedy” says Gao, shaking his head. “The US, UK, Germany!” He accepts that China suffered seriously too, but argues that the swift action taken by the Chinese state compares favourably with western governments.
“In America the banks and the government were waving their dirty washing in public. In China the state just got on with it”. China’s bank managers received phone calls at the height of the crisis giving them a deadline in which to lend as much as quickly as they could, prioritising China’s stressed manufacturing base. The crisis left Beijing feeling vindicated that state intervention, Chinese style, trumped capitalism’s invisible hand.
Two years on, and China’s otherness is demonstrated by its $2.5 trillion of forex reserves. “Our banks and insurance companies are sitting on huge amounts of money and they want somewhere more attractive to invest it”. Which brings us to private equity. Companies like China Life Asset Management with RMB1.5 trillion (£140.65bn) under management and the Social Security Fund, a national pension fund managing RMB0.8 trillion, will shortly be allowed to invest 5 to 20 per cent of their cash in private equity funds.
There has been venture capital and some private equity in China since the early 1990s, when international firms arrived to pursue emerging technology, media and telecommunications (TMT) opportunities. The model was American, China was the playing field and the exits were all offshore (there are 125 mainland Chinese companies listed on NASDAQ). Few Chinese entities bothered to understand the intricacies of the underlying structure and the modus operandi of private equity funds. Now US and European firms are coming to China to fundraise as they build out their international and Chinese portfolios, and China is regarded as private equity’s new frontier. The Beijing Private Equity Association has more than 100 members. Similar organisations in Shanghai and Tianjin have over 100 members between them. Around 80 funds are headquartered in Hong Kong; their fund managers commute to the mainland to avoid China’s 30 per cent income tax rate. But Gao expects the centre of gravity to move to Beijing and Shanghai: “if you are based in Hong Kong you may struggle to raise a renminbi fund; you will miss opportunities.”
What we are beginning to see, explains Gao, is private equity with Chinese characteristics. China’s abundant and liquid capital is unique, as are the many, constantly diversifying investment opportunities: consumer products, TMT, health, education. “And just about anything with the potential to grow a nation-wide franchise” he adds. “As China’s domestic market just keeps growing, and there is increased integration of domestic and international markets, China will become one of the world’s top private equity centres.”
Before I leave him to sleep off his jet lag we touch again on geopolitics. I ask Gao about the pressure on Beijing to allow the renminbi to appreciate. “It will clearly be in China’s interests to one day have a fully convertible currency” he concedes, but not yet. “In China we are good at building walls, and China is not yet ready to reduce the walls around its economy.” Gao tells me about an op-ed he has just read, which estimates the massive economic, geopolitical and military price the US would pay if the dollar ceased to be the world’s reserve currency. “Isn’t that the inevitable consequence of appreciation?” asks Gao, fixing me with an owlish stare. “Why would this be in America’s interests?” And it strikes me that history’s emerging winners in the East are just as confused about what the future holds as us has-beens in the indebted, anxious democracies of the West.
Alex Hickman was a foreign affairs adviser to David Cameron, 2006-2007.
CV | VICTOR ZHIKAI GAO
Education: Bachelor's degree from Soochow University (Taiwan); Master's degree from Yale University; J.D. from Yale Law School.
Career: Gao served with the Chinese Foreign Service in Beijing and at the United Nations, and was an English interpreter for the late Deng Xiaoping. He has held senior positions with Morgan Stanley (like Goldman Sachs, one of the few western banks allowed to operate on the mainland), PCCW and CNOOC, where he served as a senior vice president, general counsel and company secretary. He is a former China policy adviser to the Hong Kong Securities and Futures Commission. He is a regular guest on CNN and the BBC.