Fraser Howie is scathing about foreigners’ blinkered views, particularly those of his financial colleagues who believe they are God’s gift to a reforming China. “Some of the management of these top firms genuinely believe that China is reforming and say ‘we will be in there and China needs us.’

“Stop right there. They may need to do it in your worldview, but why are they going to do it and why are they going to do it with you? There is no guarantee that they are going to choose you, Bank of America or Goldman Sachs or whoever. Look at Morgan Stanley’s experience with CICC very early on. (China International Capital Corp. was set up in 1995, with Morgan taking 34.3 percent, China Construction Bank 43.35 percent and China National Investment and Guaranty Corp. the balance.)

“Morgan Stanley thought it was going to get a toehold that would lead to a dominant position. Yet within a few years, CICC was partying with (Morgan Stanley’s rival) Goldman Sachs. Yet the irony is that Morgan Stanley made an absolute killing financially. They invested $37 million and they got paid that out in dividends many times over and then ultimately sold their stake for the best part of a billion dollars. And yet ultimately it was a failure.”

Howie laughs sardonically: “Only in China can you have this storming financial success and end in failure.” Morgan Stanley was the pacesetter for other foreign failures as Western banks clamored to be strategic investors in big Chinese financial public offerings. Howie explains that getting in at pre-IPO prices offers the opportunity of good returns: “It turns into a financial trade: You buy at 10, you sell at 12, so you make money.”

Making a financial killing is one thing, but Howie doesn’t see foreigners making financial waves in China, seeing few cases where the foreigners have the freedom to run things their way or make reforms. He slams foreign bank managements for throwing good business practices out of the window when they go to China. “Managements are fond of saying that they are in there for the long-term. They are very cautious about how they deal with China, keen to give the Chinese face. You are in business. Are you making money, or are you not making money? How can you go back to your shareholders and say, ‘We lost money on this deal, but don’t worry, we gave the Chinese face?’

“Are they approaching China the way they approach Malaysia, Singapore, Thailand? In an economy that is booming the way that China’s is, that allegedly has all this growth potential, are they getting above China returns or below China returns?” Howie advises foreigners investing in China to “be realistic about what you can do.” You cannot reach China’s booming 10 percent growth if your operations are confined to a small courtyard.

To objections that Goldman Sachs and others have made lots of money in China, Howie responds that, “Most money made doing Chinese activities has been based outside China, doing the big IPO underwritings for the mega-listings, the PetroChinas, the ABCs, all the big banks, things like that, all in the Hong Kong market. People have made money, but not by being in the domestic market.

He says: “I remember asking Bank of China’s management some years ago, ‘Why can’t HSBC come in, buy a Chinese bank and be allowed to expand?’ And they hummed and hawed and finally said, ‘They wouldn’t know what to do.'” Howie laughs: “Why this nonsense? Of course, you don’t want to compete with a bank like HSBC, but (why pretend) that China is different and outsiders can’t understand it? I don’t buy that. Chinese companies make bad decisions all the time in their own market, so why can’t foreigners?”

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