April 16, 1993

CHINA'S OWN MASTERS OF THE UNIVERSE

Eric Ellis, Hong Kong

China's leading "red-chip" company, the China International Trust and Investment Corporation, is already on its way to becoming a powerful world-wide investment force. ERIC ELLIS reports from Hong Kong, where CITIC has swapped its Mao suit for a business suit.

IF TOM Wolfe were to write a sequel to Bonfire of the Vanities, he'd find plenty of research material on the 35th floor of One Pacific Place, Hong Kong

It's here in the plush Hong Kong headquarters of China International Trust and Investment Corporation, CITIC, that today's "Masters of the Universe" are plying their skills. There are no Mao suits for the comrades in this office. Confident young men and women draped in BOSS and Chanel punch faxes and PCs, and bark orders into mobile phones.

With an average age of 35, their language is not of Mao's Little Red Book, nor even Deng's Four Modernisations, but more of Adam Smith's Wealth of Nations ... in Chinese.

"I don't think there is a word for recession in Chinese," says CITIC Pacific's executive director, Hong Kong-born Mr Peter Lee.

This cockiness seems well-founded. In the past three years, CITIC, the biggest of communist China's "red chips" - Statecontrolled investment companies - has expanded by a factor of 40, numbers inconceivable in recessionary Australia.

If it continues at the same pace of growth, it is possible that by the end of the decade, CITIC will rank in the top 10 biggest companies in the world.

Inconceivable? Perhaps, but all the more believable if China does supplant the United States and Japan as the world's biggest economy, as many Western economists expect to occur in the first part of the next century.

More than merely a company, analysts have likened CITIC to a Chinese fund manager, investing the profits of 15 years of open-door economics and, more recently, five years of double-digit growth.

"There is no way you can grow a company in the way we have by using historical trends or traditional measures. Remember this is a very special company," says Mr Lee.

In 1990, CITIC Pacific, CITIC's Hong Kong-quoted subsidiary, was worth less than $HK700 million ($A130 million).

Today it ranks as Hong Kong's 12th largest company, a Hang Seng index constituent stock with a market capitalisation of more than $HK30 billion($A5.5 billion).

Along the way it has picked up a 12 per cent stake in British-controlled airline Cathay Pacific and 46 per cent of its China associate, Dragonair.

With its non-quoted parent, CITIC HK, it has up to 20 per cent of the British-controlled Hong Kong Telecom monopoly, and 20 per cent of the Macau Telecom franchise.

It owns one of entrepot Hong Kong's biggest trading companies, Dah Chong Hong, as well as 30 per cent of the new cross-harbour vehicle and rail tunnel

Add to this power stations in China, waste-treatment plants in Hong Kong, property and a fat cache of Hong Kong-listed blue-chip shares and CITIC Pacific is the new power in the land four years before 1997, when Hong Kong will revert to the control of Beijing.

All this has been done without going to the bank. Again inconceivable in Australia, CITIC Pacific is funded 96 per cent by shareholders' funds and just 3 per cent by borrowings.

"We want to adopt a very conservative financing policy. We want to maintain a gearing as low as possible so when an opportunity comes along we can utilise our capacity," says Mr Lee.

CITIC Pacific has chosen its investments very much with an eye on what is fast becoming the inevitable borderless economy of Hong Kong and southern China.

A prime example is motor trading, which falls under the banner of Dah Chong Hong. DCH handles such marques as Honda, General Motors, Nissan and Volkswagen, which collectively account for around 33 per cent of the commercial vehicle market in Hong Kong and 23 per cent of the passenger market.

But as China, and particularly southern China develops, the potential for private vehicle ownership is vast, says Mr Lee. CITIC Pacific holds rights to sell Honda, Isuzu and Nissan, three of the most popular Japanese marques in the lower and middle markets.

Another typical CITIC deal was the 1990 purchase of a 20 per cent stake in Hong Kong Telecom from London's Cable and Wireless.

CITIC Hong Kong bought the stake for $HK10.3 billion, or $HK4.47 a share. In February this year, CITIC Hong Kong sold 12 per cent to CITIC Pacific at$HK7.80 a share.

Telecom's rise to around $HK10 has been a nice earner for both CITIC operations, but there are other benefits as well. The time gap between asset injections allows CITIC's relationship with the investment to mature away from the public gaze while also showing the market that CITIC can be a constructive shareholder and, sometimes, co-manager.

CITIC Pacific's issuing of new shares is effectively an invitation to new"friends of China" to participate in its prosperity. It now has 15,000, among them most of Hong Kong's leading tycoons.

"When the next round of asset injections comes along we want to expand it once more but not at the expense of existing shareholders," says Mr Lee.

There are propaganda benefits, too. By doing business the Hong Kong way, and then some, CITIC provides Hong Kong with tangible evidence of China's confidence in its future while reminding British vested interests there is an out should political conditions make their presence untenable.

"We assess each deal on a business-first basis, on a risk-and-return basis, not necessarily for the sake of political expediency," Mr Lee says.

"But obviously, every factor is taken into account."

This year, CITIC Pacific will earn about $A370 million, which leading Hong Kong broker Peregrine expects will jump by at least 25-30 per cent year-on-year to 1997.

BUT it is likely such estimates will err on the side of caution, for CITIC Pacific's political charter, and the looming Hong Kong takeover, suggest it is not to be analysed in the traditional way.

Indeed if Hong Kong market gossip is right, CITIC Pacific could more than double its figures simply by taking out Hong Kong Land, the jewel in British-controlled Jardine Matheson's crown and Hong Kong's biggest commercial landlord.

As Jardine has made no secret of its support for Governor Chris Patten's democratic reforms for Hong Kong, CITIC has similarly hinted strongly it is a buyer of Land if Jardine is a seller.

CITIC has allied itself strongly with Cathay parent Swire Group, Jardine's traditional commercial enemy, and the two have cooperated in trading and property deals. CITIC occupies offices in a Swire Properties complex.

Beyond Hong Kong and China, CITIC is spending billions in North and South America, Australia and Asia through separate entities, all reporting back to CITIC Beijing. In Victoria, CITIC has made one of Australia's biggest individual investments, the Portland aluminium smelter. Last week CITIC, chose its "independent" Australian offshoot as the vehicle to buy 10 per cent of Hong KongJapanese retailer, Yaohan.

Theoretically, each of these international divisions could be like CITIC Pacific, with local staff and a listing on the respective stock exchanges, says Peter Lee.

CITIC Pacific has less than 20 mainlanders in head office. Most are go-getting Hongkongers and two are Western expatriates, both ex-Chase Manhattan, including the finance director, Briton Vernon Moore. Group chairman is Mr Larry Yung, an eight-year Hong Kong resident and son of CITIC Beijing's founder chairman - and now China's Vice-President, Mr Rong Yiren.

Indeed, Peter Lee himself is representative of Hong Kong's swirling economic/political power structures. Now in his mid-30s, he first worked for the late Sir Y.K. Pao's shipping group, then a British bank, then a US bank and now, with 1997 approaching, he is with CITIC.

With the elevation at last week's National People's Congress of Rong Yiren to the post of Vice-President, CITIC's authority in crypto-communist China is not to be under-estimated.

In the years that immediately followed the implementation of Deng Xiaoping's open-door economic policy, CITIC Beijing and its patriarch, Rong, were held out as examples of the delicate struggle of the New China, the battle between the economic moderates gathering around Deng and the hardliners espousing Maoist dogma.

Rolls-Royce-driving Rong, the "red capitalist" as the Western Press liked to portray him, was designated directly by Deng to help modernise the Chinese economy.

In effectively creating the State's investment bank, Rong's mission was to import technology and management expertise and promote foreign trade and investment, very much at the coal face of China's modernisation, as Peregrine Investment's boss, Phillip Tose, puts it.

CITIC established an office in Hong Kong in 1980, a year after establishing in China, and by the mid-1980s it had developed a low-profile portfolio.

More importantly, CITIC Hong Kong was given wide authority and autonomy to raise China's profile in the colony, and move further into the mainstream after 1984 when China and Britain ratified the Joint Declaration on Hong Kong's future.

Here was proof, the pro-China lobby argued, that Beijing would honour its"one country, two systems" pledge to maintain Hong Kong's economic status quo after the British left.

Indeed, 76-year-old Rong's appointment is evidence enough that his pragmatic tongzhi (comrade) attempts to create a "socialist market economy"may have reached the point of no return.

Sycophants across China have been quick to welcome Rong's appointment and the signals it sends from the centre. The past week has seen reams of adulation to Rong spew from the official news agencies, one even quoting a"military officer" from Baoji in Shaanxi Province who remarked that Rong was a "notable figure both in China and abroad".

The same soldier, no doubt an economics graduate, was fulsome in praise of Rong, hailing him as "beneficial to the pushing forward of overall economic construction and national reunification" - a reminder perhaps that in the New China, business power now also grows out the barrel of a gun.

POLITICAL power is never far from CITIC's agenda. Hong Kong shuddered when CITIC said it would curtail investment in the colony while the current Sino-British stand-off on Hong Kong democracy was under way.

"It affects everybody," says Mr Lee. "Quite a number of our investments are infrastructural items and the infrastructural development in Hong Kong has virtually been at a standstill since the beginning of last year because of this dispute.

"Not until the dispute can be settled amicably, do we see there will be much progress in this area."

Could CITIC make an investment in Taiwan, fraternal enemy of the mainland communists?

"Obviously we will not rule out that possibility, but we have got to be aware of the political sensitivity - whether on the Taiwan side they would like to have this type of investment," Mr Lee said.

"It would be subject to the usual parameters of the public endorsement of the parent and the State Council in Beijing. But we have a lot of flexibility and independence."

As 1997 approaches, Hong Kong is periodically swept by rumours that CITIC has secret agreements with the big British concerns such as Cable and Wireless, Swire and Jardine to buy out the rest of the shares in companies like Cathay and HK Telecom.

"Not true," says Mr Lee. "We have no post-1997 agreement with anyone about anything."

So it is always business first, then politics? Peter Lee chews over the question with a long, thoughtful pause before answering.

"Primarily, yes."