Chinese investors prefer western countries with relaxed immigration laws and procedure. Currently Australia and Melbourne in particular has the right combination of laws and investment opportunities and is attracting the lions share of Chinese mainland and Hong Kong investors. In addition to ease of immigration, Chinese investors see Australia as having excellent schools, clean air and water, safety and reasonably priced properties with capital appreciation potential.
In 2010, Australia relaxed their property laws to allow holders of temporary visas the possibility of purchasing property. In addition, Chinese companies can now buy homes and dormitories for their staff in Australia. As Hu Jintao will step down and possibly be replaced by Xi Jinping, some political uncertainty is expected to follow. This is also driving many Chinese mainland investors to get a foothold in Australia.
Efficient Equity organizes tours from major cities in the PRC including Shanghai, Beijing and Tianjin. We have trusted Chinese speaking professionals in Melbourne, Sydney, London, Vancouver, Tokyo and Los Angeles who help Chinese investors to unearth the best deals and have decades of experience in Chinese immigration issues combined with a legal team that exclusively helps Chinese mainland investors to settle in the UK, Australia, Japan, Canada and the US. For specifics, contact
139 1769 3554
In a contradictory sign that the Chinese government is not serious about slowing property price growth, today Beijing has banned foreign companies and off plan buyers from purchasing villas. This is widely interpreted as insincere as foreign investors are hardly on China’s radar anymore having dropped from almost 40% of buyers in 2007 to approximately 1% in 2010.
Some are even saying that the market could interpret the move to prohibit villa sales as a green light to purchase as not many foreign companies are currently purchasing villas. The market is looking for clear direction from Beijing and this move is disappointing to those who thought that the government is trying to slow 2010’s incredible capital gains and put home ownership further out of reach to the average citizen.
Beijing Vantone Real Estate is a Beijing and Tianjin based privately owned real estate company that focuses on luxury properties. They built the popular complex Beijing Central Park. Vantone is lead by Mr. Feng Lun who also founded and heads China Minsheng Bank. In addition he created “CURA” (China Urban Realty Association). Mr Lun is quite connected politically it has been said.
China Overseas Property Development Company or “COLI” in short form is a developer whose roots formed in 1992 in Hong Kong. COLI is involved with just about every possible aspect of development and its tentacles spread far and wide in mainland China. They have received awards for design, photography contests that they sponsor, cultural events and even one from Bloomberg International Property Awards. Youthful Mr. Hao Jianmin leads this state owned behemoth.
Poly Real Estate Group Co., Ltd. is a Guangdong based state owned entity with massive scale and reach. Again, touching every aspect of Chinese real estate in top end commercial properties to residential complexes and a significant property management arm. Poly very successfully IPO’d on the Shanghai market. Poly is a significant holder of unused land in the tens of millions of square acres. I have found Poly’s top management approachable, professional and forward thinking. We hope they focus on Shanghai for future development projects. Poly also owns several entertainment firms that produce both modern manga and traditional Chinese arts materials. Mr. Li Binhai is Poly’s Chairman of the Board.
R&F Properties 广州富力地产 is a Guangdong based private developer led by Mr. Li Silian and Mr. Zhang Li. R&F Properties focuses on advanced design and architecture to differentiate themselves from other Chinese Real Estate Developers. Although a private company, they are well funded through being listed on the Heng Seng exchange in 2005. Besides advanced design, R&F also uses sophisticated financing methods for their many projects.
SOHO China, founded by Pan Shiyi and his wife Zhang Xin is the Sony of Chinese real estate. Sophisticated marketing, design and PR combine with their relaxed work atmosphere (more like Google or Yahoo) to create a very powerful balancing force against the state owned firms that otherwise dominate the Chinese real estate market. Working hand in hand with investment banks and top flight architects, we believe that SOHO has a very strong future even if there were a shakeout in the Chinese developers market. Thumbs up for SOHO.
Beijing Huayuan Group is led by the colorful Mr. Ren Zhiqiang. Mr. Ren is one of the many captains of industry in China to have graduated from an institution of the People’s Liberation Army. He is known to be opinionated and not shy about letting his views be known. Beijing Huayuan Group is known to pay the highest executive salaries of all Chinese developers and Mr. Ren tops the list at over a million usd/year salary. Ren’s favorite quote is said to be Deng Xiaoping’s “It is glorious to be rich”.
China’s real estate developers have exploded onto the market in the last 5 years. From the humblest beginnings, they have risen to prominence inside China with ambitions to conquer territory around the globe. The three largest Chinese real estate developers include China Vanke Co Ltd, China Overseas Holdings Limited and Agile Property Holding Limited. Together these three combined for over $3 billion usd profit in 2010. Interestingly all three of the top Chinese Real Estate Developers are public companies but they are listed on domestic market. Foreign listed Developers include E-House China Holdings Limited, China Infrastructure Investment Corporation, Xinyuan Real Estate Co., Ltd, China Housing & Land Development, Inc and China Real Estate Information Corporation which is a real estate information firm and a subsidiary of E-House China. Together the foreign listed firms account for a relatively paltry $70 million usd (not including CRIC).
These developers derive funding from a variety of other domestic sources mainly. For example, domestic loans, deposits and fund raising account for 79% of all funding for real estate developers in China. This allows Chinese developers to build projects and designs that would not be approved of by foreign institutional investors. It also means that Chinese local real estate developers are very sensitive to government restrictions as they have few other options for funding. In 2010, Beijing Central Government made it difficult for developers to raise funds and borrow money. Immediately many well known developers turned to free flowing money in Hong Kong in an attempt to circumvent the new restrictions on the mainland.
Commercial Property Management in Shanghai
Property management is one of the most neglected of all aspects of investing in the Chinese real estate market. In traditional Chinese residential complexes, the main function of “property managers” seems to be to smoke and drink tea in the entry way. Commercial and retail property management are not much better and leave many commercial properties in China with rent rolls running into the minus 40% or more of capacity. This is mainly due to the fact that a large percentage of new developments are being built by state owned enterprises with no prior experience in the real estate industry. Adding to the complications is the fact that, due to the non-existence of property tax until now, many landlords are happy to leave a property vacant waiting for the value to appreciate and are, therefore, unwilling to pay even a small fee for management of their property. Thus putting the remaining tenants in a difficult situation. Any refurbishment must be arranged ad-hoc among tenants with no manager authorized to make decisions. Therefore, the landlord who opts out of paying wins. For example, if some tenants want to refurbish an entry way the most interested party must convince the remaining lessors to the value of said reconstruction. As is often the case, one party does not agree and refuses to pay, the others have no choice but to either pay his share or discontinue the restoration.
Also, in Shanghai the nascent property management industry focuses on tenancy and simple maintenance of the property. Yet as the industry quickly develops value added services are increasingly in demand. Many foreign property management firms are hustling to find innovative security, energy conserving and sustainable while creating an environment that attracts high value tenants.
According to Marion Wu, property management specialist with Serviced China, the industry is increasingly challenging. “Chinese real estate developers are no longer satisfied with cleaning and security. They demand high quality food delivery services a level of clubhouse the rivals or exceeds the quality of private gymnasiums in Shanghai and even require organized activities for residents of the complex.”
In addition, many commercial clients are paying lower fees despite the steep increase in the quality of services. This is creating a squeeze that is especially tough for low quality, inferior management companies that do not have specialized knowledge with high value building materials. With these superior materials, the risk is higher than in older Chinese developments where things can be easily and cheaply replaced. In one designer shop in Lujiazui, windows are rumored to cost over $150,000 each and be extremely complicated to clean. This leads to longer hours and the need for specialists to be available 24-7. The high value environment also requires property management staff that have people skills as they will often meet high end clients either in expensive Chinese shopping malls, famous brand shops in ICF mall or class A commercial properties all over China.
Thus in what was recently an industry filled with standard workmen is increasingly being filled with friendly, bi or tri-lingual, university educated women with high writing and calculation ability. This mirrors many other industries in China and is leading to the perfect storm of many companies in several industries searching for the same skills sets. Serviced China has a very effective training program in which professionals from overseas hospitality experts bring new staff up to speed in quality, financial skills and even ethical behavior. Students that pass the written exam are given certificates and are eligible for further training as regulations change and new trends emerge.
Shanghai’s Best Institutional Grade Property Management Company
Efficient Equity’s partner Serviced China’s unique and exhaustive property management system help foreign investors to reduce operating costs and magnify property values while creating an excellent working environment for tenants. We combine the best of global property management firms with the flexibility and reasonable pricing of local firms. Serviced China means high tenant satisfaction, top engineering, physical and IT security, reduced energy costs and sustainability long term.
Despite the high tenant turnover in the Chinese leasing industry, Serviced China maintains the lowest turnover in Shanghai through increased communication, market leading speed of service (24 hours a day 365 days a year) and long term personal relationships throughout the complete value chain. We maintain full staff through all Chinese holidays in order to better serve owners and to increase both value of assets but also to maximize cash flow in China’s competitive market.
Our intimate knowledge of Chinese market intricacies achieved through 20 years of experience in mainland China gives your firm the edge in increasing value. We have a team of highly experienced property managers that have built a China specific knowledge base for every emergency and we build preparedness into each program to eliminate risk. We work hand in hand with institutional investors, sovereign wealth funds and wealthy individuals using institutional grade accounting and online collaborative reporting to maximize capital investments in the Chinese real estate market.
Chinese RMB, Renminbi, Chinese Yuan
China currency is all the rage in the news today: Inflation, rmb convertibility, President Hu’s musings on the matter. It all boils down to a few things.(for now) One, despite the positive announcement, it’s important to realize that the Chinese government is not letting the currency float. The recent allowing of trade settled in renminbi and the new found ability of Chinese domestic companies to acquire foreign firms or assets using renminbi is mainly a move to allow state owned enterprises greater freedom to purchase relatively cheap assets overseas. The moves do not make it easier for foreign firms to operate in China, import capital or export profits.
Chinese firms that wish to purchase overseas assets will need to get government approval to do so. Naturally, firms owned by the Chinese government will have an easier time in getting those approvals than private firms. 2010 was the year of the rising state owned enterprises in practically every industry. And especially in the Chinese real estate market. State owned developers gobbled up prime land at an increasing rate and further solidified their position in the market as the prices rose higher and higher. Thus crowding out firms without sufficient access to capital. (private firms mainly) Although hard numbers are hard to come by, its estimated that about 80% of land purchases in 2010 were by state owned developers and financed by state owned banks.
Lost in the shuffle of news is the very bright spot of the rising Chinese yuan. In our opinion, this is a winning thing for both China and the international community. The current strength of the Chinese economy has a been a very stabilizing force during this economic downturn. Efficient Equity believes that allowing the yuan to be convertible (even if mainly only for state owned enterprises for the moment) allowing the yuan to appreciate and the steadiness with with the Chinese government is moving all add to increasing trust in the markets. Certainly a good thing for all. We applaud Mr. Hu for this move and hope that foreign firms and pools of capital will soon be able to freely invest and export profits in this increasingly international market.
I have observed some sensationalist headlines of late: Much to the effect that China’s currency rise is somehow a threat to the dollar and thus the US economy. We feel that not only is this untrue as the strength of Chinese economy has a symbiotic effect on other economies but also that it weakens Western countries ability to stand firm against currency manipulation. The real enemy of global economic balances. By making a boogie-man out of the rise of the Chinese currency, the foreign press undercuts Western credibility on important issues. Over hyping of President Hu’s comments about the US dollar denominated system being a thing of the past gravely mislead the public. For one, I don’t think there is a “US dollar denominated system” in the first place. Investors are free to use which ever currency they choose in settling payments. Also they are free to invest in any economy they wish. The current weakness of the Euro and global instability since 08′ were the causes of the flight to safety for many investors. Safety is usually seen to be found in the largest currency of the moment. In this case, the US dollar. No one entity or government has much say on how accounts are settled. Certainly there are issues that need to be addressed but in no way is the strength of any one economy a “threat” to any other. The whole monetary system benefits when new currencies appreciate and global trade and global GDP rises. Simply more money to go around. We are very happy see the unfolding of events and only hope they increase and the Chinese economy stays on a safe and steady path.
-Paul Salo Jan. 17th, 2010
How do I perform Due Diligence in China?
M&A Advisory due diligence in China and Investment Banking Real Estate due diligence in China require more than just valuation and financial skills. However, most foreign banks, REITS, Hedge Funds and investors greatly underestimate the challenges, pitfalls and ramifications of poor due diligence in China.
M&A due diligence in China is an enormous challenge due to the fact that despite the plethora of M&A deals no two are alike. A German manufacturing firm that contacted Efficient Equity for due diligence, told us a telling story: In 2005, they were contacted by a potential joint partner or takeover candidate. Discussions moved along rapidly and the German side felt it was time to see the production facilities and meet the Chinese management. The president of the German firm and 3 top executives came to the location to meet top management for the local firm. They viewed the production facilities, which were much more advanced than expected. Everyone was happy. That evening, they went to dinner and, during the meal, the president of the Chinese side asked to see a 500 Euro note as he had never seen one before. Immediately the German president pulled one out and gave it to him. The president was very grateful and admonished him that he would frame it in his office as a sign of friendship between the two firms. The night ended hazily at a KTV and the German company picked up the tab. The next morning the management team arrived at the factory as specified the previous evening. However, to their astonishment, the factory had a different name and the previous men were no where to be found. The company had been fooled for the simple purpose of a free dinner, evening out and 500 Euros. Although we researched several takeover candidates for them, they never trusted local firms ever again and did not follow through with future firms. Thus they missed out on a very good strategic partnership which we feel would have benefited them greatly. Although I never heard this story again, the risks in China are real and varied. Efficient Equity does much more than a simple DCF for every M&A due diligence in China. In fact we don’t even start the financials until all angles have been thoroughly researched from the ground up. Much like a detective agency than a finance firm at the outset. We know how to get the information you need to start the process of financially analyzing the takeover candidate.
After the deal, it’s players, the assets, and pertinent historical are unearthed, we move to the next step of examining strategic objectives of each firm. This also requires stealth skills to get to the true objectives of your local counterpart. Often the parties strategic objectives are much further apart than realized at the outset. We help to shed light on this prior to beginning the process of analyzing both the financials or said target but also, through our legal team of both foreign and Chinese lawyers, of delving into the, often, unclear legal aspects of the deal. Our aim is to present the deal to our clients in a worst case scenario and to point out future unseen risks. Our goal is not to close the deal but to shed light on it’s true aspects many of which are often more complex and entail more risk than our clients originally anticipated. Our clients often feel we are too negative on the deal at the beginning but appreciate our true due diligence in the end. All our current clients have been recommended by word of mouth and we do no advertising currently.
Glossary of commonly used Chinese Financial Terms
Accrued interest; The interest due on a fixed-income security since the last interest payment.
Active management strategy: An investment management strategy that seeks to outperform
the market by applying various research and techniques.
Aftermarket: The public market for a security after the initial public offering.
American depositary receipt: Certificate representing shares of a foreign company that trades
in the United States.
A shares: A class of Chinese stock that is reserved for Chinese residents and has denominations
in Chinese local currency. Only certain qualified foreign investors can purchase A shares.
Asset allocation: Diversification of investments in various asset classes to achieve a return
that is consistent with the investor’s financial goals.
Asset-backed security: Securities backed by nonmortgage assets such as installment loans,
leases, receivables, tax liens, revolving credit, commercial loans, and high-yield bonds.
Asset management company: A type of company established by the Chinese government to
assume and manage the nonperforming assets of state-owned commercial banks.
Asset securitization: The issuance of securities using a pool of similar assets as collateral.
Basis point: One one-hundredth of 1 percent.
Best efforts underwriting: An underwriting arrangement in which underwriters agree to use
their best efforts to sell the shares on the issuer’s behalf.
Bid-asked spread: The difference between the price at which a dealer sells a security and the
price at which the dealer buys it.
Bid-to-cover ratio: The ratio of the bids received to the amount awarded in a Treasury security
auction. Payments by the acquisition target to the first accepted bidder if the target accepted
Bulge bracket firm Major underwriter in a syndicate.
B shares Shares in Chinese stocks that were exclusively for foreign investors.
Buyout fund Investment firms that invest in leveraged buyouts (LBOs).
Callable bond Bonds that grant the issuer the right to pay off the debt before maturity.
Capital Asset Pricing Model (CAPM) Provides a linkage between the risk of a stock and
the required rate of return investors demand.
Capital market line Shows the trade off between expected return and total risk of a portfolio
consisting of money in riskless asset and risky market portfolio.
Carry The difference between interest income and interest expense.
China Banking Regulatory Commission (CBRC) Chinese government entity responsible
for regulating banks.
China Insurance Regulatory Commission (CIRC) Chinese government body that regulates
China Securities Regulatory Commission (CSRC) Chinese government body that regulates
Chinese wall The safeguards, also called firewall, that ensure that various units of an investment
banking firm do not receive any inappropriate or inside information.
Clearing The processing of a trade and the establishment of what the parties to the trade
owe to each other.
Closed-end mutual fund One type of investment companies that offers a fixed number of
shares and the shares trade on an exchange.
Closer Economic Partnership Agreement An agreement between China and Hong Kong
Special Administrative Region that grants companies in Hong Kong special access to China.
Collateral buyer The counterparty that takes in securities and lends out funds in a repurchase
Collateralized bond obligation Securities backed by high-yield bonds.
Collateralized loan obligation Securities backed by commercial loans.
Collateralized mortgage obligation A type of mortgage-backed securities that separates the
securities into tranches.
Collateral seller The party that lends securities in exchange for cash in a repurchase agreement
Comfort letter A letter from accountant expressing assurance on any unaudited interim financial
statements included in the prospectus.
Commercial paper An unsecured promissory note with a maturity of no more than 270 days.
Commodity swap In a commodity swap agreement, each counterparty promises to make a
series of payments to the other, and of which a commodity price or index determines at least
one set of the payments.
Competitive bid Bid that specifies both the amount and the price the bidder is willing to
Constant growth model Assumes that the dividend growth rate is constant over time.
Convertible arbitrage Trading involves the purchase of convertible bonds or preferred
stocks and then hedging that investment by selling short the underlying equity. Another type
of strategy involves additional trading of an interest rate swap, a credit default swap, and an
options contract to hedge risks and lock in a certain spread.
Convertible bond Bonds that grant the holder the right to convert the par amount of the
bond into a certain number of shares of the issuer’s common stock.
Cooling-off period A period following the filing of the registration statement with the
SEC, prior to the issue’s offering.
Coupon pass-through The collateral holder in a repurchase transaction has to pass over to
the cash borrower any coupon received from the collateral.
Coupon roll A coupon roll trade combines two trades in which a dealer purchases from
a customer an on-the-run coupon security for next day settlement and simultaneously
sells to that customer the same amount of the recently announced new security for forward
Coupon stripping Strips interest payment coupons from a coupon Treasury and treats each
of the component coupons and the principal as a separate security.
Credit default swap A synthetic instrument in which counterparty pays a premium in return
for a contingent payment triggered by the default of the reference credits.
Credit derivative A derivative security with payoffs linked to a credit-related event.
Credit linked note A structured note in which the instrument has an embedded option that
allows the issuer to reduce the security’s payments if a specified credit variable deteriorates.
Credit spread contract The payoffs of the contract depend on the yield differential between
a credit sensitive instrument and the reference security.
Currency swap In a currency swap contract, the two counterparties agree to exchange certain
amounts of currencies on scheduled dates.
Daylight overdraft The amount a financial institution has overdrawn on the Fedwire during
Deliverable repo A type of repurchase agreement under which the underlying securities are
delivered against payment; at maturity, the collateral is returned and the loan plus interest is
Delivery versus payment Funds and securities are transferred at the same time.
Deposit agreement An agreement that sets forth the terms of an American Depositary Receipt
Depositary bank A custodian to safekeep underlying shares in an issuer’s home market.
Depositary receipt A negotiable certificate that represents ownership of shares in a foreign
Derivative security A contract with its value derived from an asset of an index.
Discounted cash flow A valuation approach that uses a discount rate to calculate the present
value of future cash flows from a company.
Due diligence Obligation of the underwriter to investigate and assure that there are no misstatements
or omissions in the registration statement.
Dutch auction This is a single-price auction; both competitive and noncompetitive bidders
are awarded securities at the price that results from the high yield.
DV01 The change in the price of a bond resulting from a one-basis point change in its yield.
Dynamic asset allocation A strategy used to ensure the value of the portfolio does not fall
below a certain level to avoid large losses and to secure favorable market moves.
Effective When the registration statement has been approved by the Securities and Exchange
Commission (SEC) and the security can be sold to investors.
Effective date Date when an offering is declared effective by the SEC. The issue can then be
sold to the public.
Efficient frontier A portfolio on the efficient frontier is one that has the highest return for a
given a mount of risk or the lowest risk for a given level of return.
Efficient market hypothesis A security price fully reflects all available information so as to
offer a rate of return consistent with its level of risk.
Electronic communications network A computerized trading system that matches buyers
and sellers of securities.
Emerging market The securities market of a developing country.
Equity swap An equity swap involves an investor receiving capital gains plus dividends in a target
market and in turn paying to the swap dealer LIBOR and any decrease in the market index.
Exchange-traded fund An index fund or trust listed on an exchange and can trade like a
listed stock during trading hours.
Exempt securities Securities that are exempt from SEC registration requirements.
Fail A trade fails to settle on the settlement date.
Federal funds market The market for bank reserves.
Federal funds rate The interest rate on federal funds.
Federal Open Market Committee (FOMC) A major component of the Federal Reserve
Board (Fed); it consists of the seven members of the board and five of the 12 Federal Reserve
Fedwire A Fed communications and settlement system that enables financial institutions to
transfer funds and book-entry securities.
Feng shui A Chinese practice that configures office or home environment in ways that promote
health, happiness, and prosperity.
Filing date The day the underwriter turns in the registration statement with the regulator.
Financial engineering The development of new financial instruments such as derivative
contracts using sophisticated mathematical and statistical models and computer technology.
Firm commitment A type of underwriting agreement in which investment bankers risk
their own capital by purchasing the whole block of new securities from the issuer and then resell
them to the public.
First-price auction A Treasury auction technique in which each accepted bidder pays his
bid price for the security awarded. This is no longer in use in the United States. The U.S. Treasury
has changed the auction mechanism to Dutch auction.
Flight to liquidity When investors use the foreign money that flows into the United States,
as a result of flight to quality, to purchase the most recently auctioned Treasury securities
which generally provide a higher level of liquidity.
Flight to quality The purchase of U.S. Treasury securities by foreigners whenever there is a
financial or political crisis overseas.
Floater A security with interest rate tied to LIBOR or T-bill rate.
Floating risk Consists of waiting risk, pricing risk, and marketing risk during the underwriting
of a security.
Flotation cost The total costs of issuing securities.
Foreign direct investment A long-term investment by a foreign direct investor.
Foreign exchange reserve Foreign currency deposits, often as a result of international trade
surplus, held by a central bank or a monetary authority.
Foreign invested enterprise A company that receives funds or capital from a foreign company.
Front-end load The amount that purchasers of mutual funds pay when they buy the fund
Fundamental analysis A technique that bases a stock price on corporate and economic
General obligation bond Municipal securities with the full faith and credit of the issuer
backing the scheduled payments of principal and interest.
Glass-Steagall Act of 1933 Separates commercial and investment banking activities.
Global depositary receipt (GDR) The underlying shares are held with a local custodian
and the depositary issues certificates, GDRs, to foreign markets.
Gramm-Leach-Bliley Act of 1999 Removed restrictions that had been imposed on the financial
services industry by the Glass-Steagall Act. The Gramm-Leach-Bliley Act permits affiliation
of banks, investment banks, and insurance companies.
Green shoe option An option allowing investment bankers to purchase up to a specified
number of additional shares, typically 15 percent of the issue, from the issuer in the event they
sell more than agreed in the underwriting agreement.
Gross settlement Transactions are settled on a bilateral, trade-for-trade basis.
Gross spread The difference between the price offered to the public and the price the underwriter
pays to the issuer.
Growth investing An investment style that focuses on companies with higher than average
growth rate in the industry.
Guanxi Relationship or connection.
Haipai Shanghai style, meaning hospitality and generosity.
Haircut A margin required when borrowing money in the repurchase agreement market.
Hedge fund A private investment fund that employs investment strategies in various types
of securities in various markets and whose offering memorandum allows for the fund to take
both long and short positions, use leverage and derivatives.
H share A Chinese company stock listed in Hong Kong.
Impact cost The cost of buying liquidity.
Implied repo rate The calculated return in a short sell in a fixed-income security.
Implied volatility The variability in an underlying security implied by the current option
Indenture A bond contract that sets forth the legal obligations of the issuer and names a
trustee representing the interests of the bondholders.
Indication of interest Investor’s interest in purchasing a new security that is still in registration.
This is not a formal commitment to buy.
Indirect quotation The amount of foreign currency per unit of domestic currency.
Initial public offering A company’s first equity issue in the public markets.
Interest rate swap A contract between two parties in which each party agrees to make a series
of interest payments to the other on scheduled dates.
Inverse floater A floating rate security whose interest rate moves inversely with a specified
reference rate. A fixed-rate bond can be separated into a floater and a reverse floater.
Investment adviser A person who engages in the business of providing advice or issuing reports
about securities to clients for compensation.
Investment Advisors Act of 1940 Requires registration of investment advisers and compliance
with statutory standards.
Investment banking Underwriting and distribution of new issues of securities, as well as
financial advice and execution of mergers and acquisitions, divestures, and restructurings.
Investment Company Act of 1940 Governs the activities of investment companies.
Issuer safe harbor A safe harbor that addresses offers and sales by issuers, their affiliates, and
securities professionals involved in the initial offerings of securities.
Junk bond High-yield debt instruments with credit ratings below investment grade.
Lead manager The investment bank that acts on behalf of the entire syndicate.
Level I ADR The easiest and least expensive way for a foreign company to gauge interest in
its securities and to begin building a presence in the United States.
Level II ADR Listed on one of the national exchanges and must comply with the SEC’s full
registration and reporting requirements.
Level III ADR Similar to Level II ADRs except that the issuer is allowed to make a public
Leveraged buyout A buyout of a company with a large portion of the purchase price financed
LIBOR London Interbank Offered Rate.
Limit order An order to trade at the specified price or better.
Managing underwriter Lead investment bank of an underwriting syndicate.
Market impact Market impact is the difference between the price at which a stock trade is
executed and the average of that stock’s high, low, opening, and closing of the day.
Market order An order to trade at the market price.
Merchant banking An investment bank commits its own capital on a long term basis by
taking an equity interest or creditor position in companies.
Monetary Policy Committee (MPC) The main policy body in the making of monetary
policy and macroeconomic management in China.
Mortgage pass-throughs Securities backed by pools of mortgage obligations in which payments
of the underlying mortgages are passed over to the security holders.
Mutual fund An investment management company that pools funds from investors who
have similar investment objectives.
Net asset value The total value of a fund portfolio divided by the number of shares issued to
Official statement A document provides material information to investors on a new issue of
municipal securities. An official statement describes the issue, the issuer, and the legal opinions.
Open-end mutual fund A type of mutual fund structure that continuously offers new
shares to the public and accepts redemption based on the net asset value of the fund.
Open repo An arrangement in a repurchase transaction in which the repo is rolled over until
terminated by either party.
Portfolio company After a venture capital sourcing a perspective deal, satisfactory due diligence
leads to an investment, the invested company then becomes a portfolio company.
Preliminary prospectus The preliminary prospectus is filed with the SEC and provided by
underwriters to prospective purchasers. It does not disclose the offering price, underwriting
spread, or net proceeds. This is the red herring.
Primary dealers Banks and securities broker-dealers that bid at the auction and trade government
securities with the Federal Reserve Bank of New York.
Prime brokerage A suit of services providing hedge funds with custody, clearance, financing,
and securities lending.
Private equity fund A fund established to invest in private equity, including venture capital
Private placement The sale of new securities to a few qualified investors instead of through
a public offering. Privately placed securities do not have to be registered with the SEC.
Prospectus Part I of the registration statement is the prospectus that contains detailed information
on the issue and on the issuer’s condition and prospects. This is distributed to the public
as an offering document. Before the final prospectus is completed, securities firms generally
distribute to perspective investors the preliminary prospectus.
Quiet period Begins with the signing of the letter of intent and ends 25 days after the effective
date if the security is listed on an exchange or quoted on NASDAQ. During this period,
the company is subject to SEC guidelines on publication of information outside of the
Qualified foreign institutional investor A foreign financial institution that meets certain
requirements and has received permission to invest and conduct permitted businesses in China.
Qualified institutional buyer An institution that has at met certain requirements to trade
privately placed securities.
Real estate investment trust A trust that pools capital from investors to acquire or to provide
financing for real estate.
Real estate swap The property owner agrees to pay the counterparty a rate of return linked
to the performance of the real estate market. In exchange, the counterparty pays the property
owner another type of return.
Red herring The preliminary prospectus.
Registration statement The document companies use to register with the SEC new issues
of securities. Disclosed in the registration statement are various kinds of important information
for investors when making investment decisions, including the business of the issuer, purpose
of funds, description of the security, risk factors, and the background of the management.
Regulation S Provides two types of safe harbor exemptions for securities offered overseas
without registration and it applies to global depositary receipts.
Renminbi (RMB) Chinese currency.
Renqing Personal favor.
Repo rate The interest rate the collateral buyer demands for this type of loan.
Repurchase agreement A financing tool in which a dealer sells the collateral for cash and simultaneously
contracts to repurchase the same securities at a future date at a higher price that
reflects the financing rate.
Resale safe harbor A safe harbor under Regulation S that addresses re-sales by securities
professionals such as brokers.
Restricted securities Securities purchased in a private placement directly from an issuer are
subject to a one-year holding period restriction. Restricted securities frequently will have a legend
printed on the back of the certificate stating that the shares cannot be sold or disposed of
Right of substitution The rights of the collateral seller in a repo transaction to take back the
security and substitute other collateral of equal value and quality for it.
Road show The meetings in a various cities during an underwriting period for the purpose
of increasing interest in the offering.
Rule 144 Governs the sale of restricted securities acquired in a private placement.
Rule 144A Addresses private sales of restricted securities among qualified institutional buyers.
Rule 415 A shelf registration rule that allows an issuer to file a single registration document
indicating that it intends to sell a certain amount of securities at one or more times within the
next two years thus minimizing the floating risk.
Sarbanes-Oxley Act of 2002 Imposes duties and penalties for noncompliance on public
companies. The act prohibits an auditor from performing specified nonaudit services
contemporaneously with an audit. In corporate responsibility, the act requires the chief
executive officer and the chief financial officer to certify various issues in periodic financial
reports. The act also requires every public company to include in its annual report an internal
control report. The issuer’s auditor shall attest to and report on the assessment of
such internal control structure and procedures. This is often referred to as the Section 404
Secondary offering A public offering of shares owned by existing shareholders.
Second-price auction A Dutch auction used by the Department of Treasury to sell its securities
in which all accepted bids pay the same price, the lowest price (highest yield) accepted.
Securities Act of 1933 Requires registration of a new security issue unless an exemption is
available, also known as “truth in securities” law.
Securities Exchange Act This 1934 Act requires timely and accurate disclosure of material
information, prohibits sales practice abuses and insider trading.
Securities investment fund A mutual fund.
Settlement The transfer of money and securities between parties to the trade so the transaction
Shelf registration An issuer files a single registration document indicating that it intends
to sell a certain amount of securities at one or more times within the next two years. This is
Short sale The sale of securities not owned by the seller in the expectation of falling price or
as part of an arbitrage.
Short squeeze Traders and arbitrageurs who short ahead of the auction are forced to pay a
sharply higher price to buy or accept a special repo rate to reverse in the security in order to
make good delivery.
Special economic zone A geographic area in China established to increase foreign investment
and to bring in foreign management expertise and technology.
Special purpose vehicle A bankruptcy remote legal entity established for a securitization
Specials When government securities trade at a lower rate than the general collateral in the
repo market, these securities are called specials.
State Administration of Foreign Exchange Chinese government entity that regulates the
foreign exchange market.
State-owned commercial bank A bank owned by the Chinese government.
State-owned enterprise A large corporation owned by the Chinese government.
Stop order An order to trade when the price reaches the specified level to stop large losses.
Stop yield The highest yield that is accepted at the Treasury securities auction.
Strategic asset allocation A value-oriented technique seeking to increase exposure to the
market when recent market performance is poor and to reduce exposure when recent market
performance has been strong.
Structured note Debt securities with interest and at times principal payments depending on
formulas and terms specific to the security.
Sunshine policy Policy in China putting all major activities of government officials under
the scrutiny of the public to curb corruption.
Systematic risk The component of risk of a security that moves with the market and cannot
be diversified away.
Tail The tail of an auction is the difference between the average yield of all accepted bids and
the stop yield.
Technical analysis Attempts to forecast a security price by using techniques analyzing past
prices and trading volumes.
Total return swap The counterparty exchanges the returns of the underlying assets for a
floating rate of interest.
Treasury auction This is the method used to issue government securities.
Triparty repo A custodian bank maintains accounts for both parties in a repo transaction
and hence the actual delivery of securities and cash can be reduced to just credit and debit
transfers within the bank.
Underwriter An investment banking firm that purchases securities directly from an issuer
and resells them to investors.
Underwriter spread The difference between the price the underwriters pay to the issuer and
the price they receive from resale of the securities.
Underwriting agreement The contract that establishes the relationship between the corporate
issuer and the underwriting syndicate. It includes the type of underwriting, the underwriters’
remuneration, the offering price, and the number of shares.
Underwriting discount The percentage of discount from the offering price that the underwriter
obtains from the issuer.
Underwriting syndicate Each member in the underwriting syndicate is committed to buying
a portion of the new security. There is also the selling group that helps sell the issue but accepts
Unit investment trust An investment company that purchases and holds a relatively fixed
portfolio of securities.
Value investing An investment technique that focuses on a company’s ability to generate
Venture capital A type of private equity that invests in new, growing businesses.
When-issued trading The when-issued trades of Treasury securities begin right after the
auction announcement and until the new issue settlement date.
Wholly foreign-owned enterprise (WFOE) A company doing business in China that is
wholly owned by a foreign entity.
World Trade Organization (WTO) An international organization dealing with rules of
trade between nations.
Yield to maturity The rate that discounts all future periodic coupons and principal at maturity
to the current asked price.
Yuan Reminbi, the Chinese currency.